A Guide to Buying a Home

6 Steps to Buying a Home

Purchasing a home will most likely be your largest and most important purchase. Home ownership offers many benefits, but comes with certain responsibilities. You need to determine the pros and cons of owning a home to make the best decision for you and your family.

Home ownership offers five advantages over renting:

1. It can be a sound investment

As you make mortgage payments over time, you accumulate equity — the term used to refer to your net financial interest in the property. It is the difference between the amount still owed on the mortgage loan and the fair market value of the property. In contrast, rent payments never earn equity.

2. Increasing value

Throughout recorded history, property increases in value over time. This process is known as appreciation. (Note: Real estate value depends many variables, including the property’s age, location, and market conditions. Appreciation is not guaranteed.) Any increased worth is equity you may be able to borrow against or take as profit upon the sale of the property.

3. Tax advantages

As a homeowner, you can deduct mortgage interest and property taxes from your federal income taxes. Consult a tax professional for details.

4. Offers generally fixed housing expenses

Unlike rent, which can increase annually, most mortgage loans have fixed or capped monthly payments. This can provide the financial security that comes from knowing what your maximum housing payments will be from year to year. However, property taxes, homeowner’s association fees, and maintenance costs vary.

5. Gives you control over your environment

Home ownership allows you the opportunity to customize your environment to match your individual tastes and needs. You can develop a feeling of permanence in a place that you can call your own. Of course, this also means that you are responsible for all utility costs and the cost of repairs and maintenance on the property. There is no landlord to maintain the property or take care of any problems.

Why Not Buy?

A realistic personal assessment may reveal that home ownership is not right for you or you might want to delay the process. Your personal and financial priorities will determine what is best for you.

Be aware that buying a home:

• Can be a complex, time-consuming and costly process.
• May bring unwanted responsibilities such as maintenance and repairs and additional expenses — property taxes, utilities, homeowner’s insurance, etc.
• Can possibly create financial hardship.
• May be difficult if your credit is not favorable to a lender.
• May limit your mobility if you have a career that requires frequent transfers, such as military service, and market conditions slow the sales of homes in your area.

Before you begin looking for a home you may need to ask yourself: "How much can I pay for a house and still have a life?" You do not have to figure this out on your own. Consider getting pre-loan counseling from a nonprofit credit counselor or an approved high-cost home loan counselor registered with the U.S. Department of Housing and Urban Development (HUD). Call (800) 569-4287 or go to the HUD Web site for more information on counseling.

In most cases, a potential homeowner will need to obtain a mortgage loan — an advance of funds from a lender to a borrower for the purchase of real estate. The mortgage itself is a legal document that sets forth the conditions of the loan, the manner and duration of repayment, and which pledges the borrower’s property (home) as security for the loan. The mortgage principal, the amount of the loan required to buy your home, and interest, the fee charged for borrowing the money, will typically be large enough to require mortgage payments for a significant period of time — often 15 to 30 years.

To learn the six steps to buying a home, read on.

Step 1: Shop for a Mortgage Loan

As with any major purchase, it pays to shop around when looking for a mortgage loan. Different lenders will offer different terms, have different requirements, and promise varying levels of service.

To learn more, read Buying a Home Step 1: Shop for a Mortgage Loan.

Step 2: Find a home

Everyone’s idea of a "dream home" may be different, so it is important to formulate a list of the features and benefits you would like in a home. Consider factors such as pricing, location, size, amenities and design. It often pays to attend several open houses where sellers open up their homes to potential buyers. You can see a variety of options to help you develop a list of your requirements. Your real estate professional will be able to provide guidance and help.

To learn more, read Buying a Home Step 2: Find a home.

Step 3: Make an Offer

Once you have selected a house, you need to make an offer. At this point, you may want to hire a lawyer. Many home buyers choose to be represented by an attorney during the home buying process. However, it is not expected in most western states. In other states, particularly in the east, it is practically a requirement the home buyer be represented by an attorney. Because real estate agents and brokers cannot advise you on legal matters, an attorney will be your advocate in contract negotiations and any disputes that may arise before or at a real estate settlement.

To learn more, read Buying a Home Step 3: Make an Offer.

Step 4: Home Inspection, Title Search and More

Have a qualified, independent home inspector visit the property soon after a contract becomes binding. An inspector will evaluate the physical condition of the structure, construction and mechanical systems of the home, and identify defaults or any items that should be repaired or replaced.

It is a good idea to be present for the home inspection so the inspector can address any concerns or questions you may have. You will receive an impartial written assessment report of the property. If any defaults are revealed by the inspection, you and the seller are limited to time periods stipulated in the contract as to how long you have to provide the report to the seller and how long the seller has to decide if they will cure or correct any defaults.

To learn more, read Buying a Home Step 4: Home Inspection, Title Search and More.

Step 5: Insure Your Home

Imagine if everything inside your home (clothes, furniture, appliances, children’s toys, CDs, DVDs, etc.) suddenly vanished. How much do you think it would cost to replace those things if they were destroyed in a fire? What if a thief took just one valuable possession, like a laptop computer or stereo? If your home is not protected by insurance, where will you get the money to replace its contents — or a whole new home — if disaster strikes?

You are also at risk of being asked for money, or even sued, by someone claiming to have been physically or financially hurt by something you own, or something you have done. A stranger who falls on your front steps may blame you, claiming that you ignored a loose brick or a dangerous crack in the sidewalk. Your next-door neighbor may demand money if your sewer pipe breaks, pouring waste water into his garden or home.

Even if you think you already have adequate insurance coverage for all these misfortunes, chances are you have no coverage at all for some other kinds of disasters. For example, did you know that ordinary home insurance policies won’t pay for anything that is damaged or destroyed in a flood?

To learn more, read Buying a Home Step 5: Insure Your Home.

Step 6: Seal the Deal

If you have followed Steps 1 through 5, you have now succeeded in deciding what type of home is right for you, finding and contracting for a property, securing your financing and obtaining insurance protection. Now you are ready to seal the deal and open the door of what will soon be your new home.

As you draw near to your closing date, it is recommended that you review a copy of your Settlement Statement (HUD-1).

Ask your real estate professional, attorney or lender to request this document from the title company and review it with you. The HUD-1 provides the total amount of cash you will need at closing and details how those funds will be disbursed. The HUD-1 must be given to the buyer at, if not before, closing.

To learn more, read Buying a Home Step 6: Seal the Deal.