Ten Steps To Homeownership (Part 2)

Added April 11, 2003 by Ilyce R. Glink

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Summary: For those with poor credit, or renters just out of college, homeownership can seem like a far-off dream. And while it's good to be focused, it's helpful to have a few simple steps get you on the path to achieving that dream. Do your research to decide what neighborhood you want to be in. Location is everything. Choose the right financing for your mortgage, and set up your closing to make sure you'll have enough cash in the bank.

With interest rates as low as they've been in 40 years, more renters are taking the plunge and buying their first homes.

In last week's column, I went down a list of five steps you must take if you're going to buy a home this year, including: decide whether renting or owning makes more sense for your financial situation; figure out how much you can afford to spend; get your cash together for your down payment and closing costs; build credit credit; and, get your legal issues in order.

Here are the final five steps that help get you over the threshold:

Identify where you want to live. Most home buyers have either a very narrow, specific idea of the community, neighborhood or even the block on which they want to live, or they have absolutely no idea at all.

Where you choose to settle down will make a big different to your family, both emotionally and financially. Finding the right community means thinking about a number of factors: commute to work, house of worship, family and friends; school district; crime rate; type of housing and land you can afford; recreational opportunities; shopping and services that are easily accessible; and the ages of the families who live there.

If you have little kids, for example, you'll want to find a community with a good school district, low crime, and plenty of families so your children will have playmates their own age.

How do you figure it out? Spend time in the neighborhood. Drive the commute during rush hour or take public transportation. Visit local shops, walk around the schools, go to the local library. By taking the time to know the neighborhood before you start looking at individual homes, you increase your chances of finding a community of which you can be a part.

Choose the right agent or broker. Most home buyers will do better if they use a buyer's agent. A buyer's agent or broker has a fiduciary responsibility to you, the buyer, rather than to the seller.

But more important than whether you're using a buyer or seller's agent, is the personality of the agent you've chosen. You'll want to find someone who understands what you're really looking for in a home and who listens to what you're trying to say. The right agent should also be familiar with the homes in your chosen neighborhood, and should work regularly with clients purchasing the same type of homes in the same price range.

Spend some time interviewing agents. Ask questions about their sales statistics, but also get to know them as people. When you buy a home, your relationship with the agent is like a short-term marriage. Your goal is to make is as honeymoon-like as possible.

Compare homes carefully. In a fast-moving market, the true value of a home can change rapidly. That's why figuring out how much a home is actually worth is a tricky process.

Since today's housing market is more balanced, with a roughly equal number of buyers and sellers, home buyers no longer need to jump at the first available home. When you find a home you like, make sure you see others in the neighborhood to compare condition, price, size and amenities.

Don't forget about things like property taxes and ongoing maintenance costs, because some homes will cost more going forward. Location remains a key. You may get the suburb you want, but don't pay more for a house with a less desirable location within that suburb.

Choose the right financing. With interest rates as low as they are, many home buyers are simply hopping on the 30-year fixed-rate bandwagon. That isn't a bad choice, but if you know you're only going to stay in this home for 5 to 7 years (the average American family moves every 7 to 10 years), you could save thousands of dollars by choosing an adjustable rate mortgage (ARM) that is perhaps fixed for the five or seven years and then converts into a one-year ARM.

While conventional lenders will still limit you to spending 28 percent of your gross monthly income (GMI) on your mortgage, insurance and taxes, and up to 36 percent of your GMI on total debt, there are plenty of ways to borrow more and put little or nothing down.

These creative loans can lead to "over-borrowing," a situation where you become trapped by your house payments. Should something happen, such as a job loss or someone gets sick, you could quickly find yourself in hot water if you've borrowed a lot more than you can comfortably carry.

Spend some time playing around with the calculators at an online lender like E-loan.com or Quicken.com to see how comfortable you'll be with different mortgage payments.

Close in style. After all the hard work you'll do to get ready to purchase your first home, you don't want to muck up the closing.

When you get ready to prepare your offer to purchase, your agent will ask you when you want to close on your new home. Before you write down any old date, think through your current rent obligation, how much cash you'll need for prepaid interest on your loan (more if you close earlier in the month, very little if you close at the end of the month), if you have the opportunity to close in this year (and potentially take a tax deduction) or next, and if you'll need extra time for your move.

Closing on your home means you'll need to start utility accounts at the new property, put in change-of-address labels, pack up, and prepare to shift your lifestyle: homeownership requires a reordering of financial priorities. For example, you may have to put aside cash for future maintenance on your property rather than take a fancy vacation to Bermuda.

Sometimes the shifting of lifestyles can cause a bad case of buyer's remorse. That's the sinking feeling you get in the pit of your stomach when you realize you're in over your head. You've gone down the wrong path and don't know how to get back.

Buyer's remorse can make your closing unpleasant, so nip it in the bud by following each of these steps and taking all the time you need to make an intelligent decision on your new home.

After all, the house, townhouse or condominium you buy isn't just a place to live, it's also an investment in your future.

Published: Apr 11, 2003

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