Home Buyer Checklist
Whether your dream home is new construction or an existing home, you will want to know what to look for as you begin your home search. You will need a checklist for buying a home to serve as your roadmap with criteria for buying a home.
Use the home buyer checklist below to prevent errors and to stay on track:
- Determine your wants and needs; Style of home, size, price, location.
- Seek out an exclusive Realtor that you are confortable with and that understands you. Compare the services of different agents and look for good personal chemistry.
- Search for homes in the Multible Listing Services and For Sale By Owner (FSBO). Sign up for daily email notification services and stay on top of all new FSBOs coming to market.
- Check out the neighborhoods, schools, crime rate, traffic, zoning, and work commutes. Rely on your real estate agents expertise and in-company resources. Check the web for helpful information.
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The above rates are national averages. They are published by a 3rd party and not compiled or guaranteed by Best Mortgage and Loan.
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Do the due diligence and research on your property of interest. Visit or have your agent visit the town or city hall to learn of any zoning changes, liens, easements, or other restrictions.
- Prepare the offer and negotiate. Have your real estate agent prepare a property value study and ask the seller if there are any other offers and his motivation for selling, deadlines, etc.
- Conduct the home inspections and other inspections. Take advantage of the inspection contingencies in your offer and get thorough inspections to eliminate any surprises after you move in to your new home.
- Final negotiations and sign the Purchase and Sale Agreement. Use the inspection report to re-negotiate, if necessary and sign the Purchase and Sale Agreement after review.
- Final Mortgage Application Process. Stay on yop of your Mortgage Lender, do not be afraid to shop around for a better rate or term on your mortgage loan.
- Walk-through inspection prior to Closing. Visit your new home before you sit down at the closing table to make sure everything is as you expect it to be.
Closing
You many find that you need to add some steps, based on your special situation, to create a customized home buying checklist for yourself.
How Much House Can You Afford?
To determine how much of a home you can afford, you need to calculate your expected monthly payment. Most of your payment will go toward loan principal and interest, also called P+I. However, your monthly payment is also likely to include amounts for property taxes and homeowner's insurance. Because of these extra payments, your monthly P+I payment is sometimes called your P+I+T+I (PITI) payment. If you plan to make a down payment of less than 20% of the home purchase price, you will also have to add an additional amount for private mortgage insurance ( PMI). Lenders require PMI to insure against the higher risk of default that occurs with loan-to-value (LTV) ratios greater than 80%. ( An LTV of 80% is equal to a down payment of 20%.)
Your housing ratio is your total monthly payment divided by your monthly gross income. Generally, the ratio should not be more than 28%. For example, if your monthly P+I+T+I payment is $1,400, your monthly gross income should be at least $5,000.
Your debt ratio is the sum of your P+I+T+I and any other credit card or loan payments, divided by monthly gross income. Debt ratio will obviously be a higher percentage, since most people have other loans or credit card debt. Generally, your debt ratio should not be more than 36%. In this example, with monthly gross income of $5,000, your total loan payments (including the proposed mortgage loan payment) should not be more than $1,800.
Mortgage lenders regularly use these 28% and 36% ratios as guidelines. The ratios change over the course of the economic cycle. When the economy is strong, lenders tend to raise the ratios, making it easier obtain a loan. When the economy is weak, lenders tend to lower the ratios, making it harder to obtain a loan. A weaker economy leads to lower interest rates, which makes it somewhat easier to qualify.
You may wish to limit a home search to home prices that allow you to obtain a mortgage loan amount that is conforming. A conforming loan amount is within the annual limits set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that focus on investing in residential mortgages.
For 2004, the conforming loan amount for Fannie Mae- and Freddie Mac-sponsored loans is $333,700. For Alaska and Hawaii, the limit is $500,550. A conforming loan allows you to avoid private mortgage insurance if you make a down payment of at least 20% on the home purchase price.
If your mortgage loan is conforming, you will likely have an easier time finding a lender than if the loan is non-conforming. (A non-conforming loan is called a "jumbo" loan.) Generally, interest rates on conforming loans are lower than on non-conforming loans.
How much of a home you can afford also depends on the amount of down payment you have saved. If you don't have one saved, consider these alternatives:
Federal government mortgage-financing programs. The U.S. Dept. of Housing and Urban Development (HUD) and Dept. of Veterans Affairs (HUDVA) run loan programs for first-time homeowners and veterans of the armed forces. These programs require little or no down payment.
Obtain private mortgage insurance. Private mortgage insurance, discussed above, allows you to make a down payment of as little as 5% of the home purchase price.
Borrow against the value of your investments. Some financial institutions offer mortgages that are backed by the value of your investments. With these programs, your investment portfolio serves as the collateral for your mortgage.
Borrow from your employer-sponsored retirement plan. Most employers allow you to borrow against the value of your 401(k) plan. (The IRS does not allow you to borrow from an IRA, however.) Remember that if you leave your job, you'll likely have to pay back the full amount of the loan immediately.
Withdraw funds from an individual retirement account. While the IRS does not allow you to borrow from an IRA, it does allow penalty-free withdrawals of up to $10,000 for first-time homebuyers. However, you will owe income taxes on the amount of the withdrawal.
State government housing programs. Most states have programs to help residents buy their first homes. In addition to a down payment, you should expect to pay closing costs on your home loan.
How much you pay in closing costs depends in part on how many points you pay on your loan. One point is equal to 1% of the loan amount. Generally, closing costs range from 3 to 6 percent of the home purchase price. In addition to loan points, other major categories of closing costs include: Fees to process your loan application, review your loan documents and fund the loan.
Payments to fund an impound account (escrow account). These funds are used to pay your homeowner's insurance and property taxes. Generally, you replenish an impound account as you make your mortgage payments.
Fees for legal and appraisal services, credit review, and title search and insurance. You will also have moving expenses if you buy a home in a different city. If you move to another region of the country, you may also face a change in the cost of living. If you're moving to a new city to take a job, your new employer may reimburse you for these expenses. If not, you can deduct them from your taxes.
10 ways to come up with a home down payment
You've found the perfect house. Interest rates are are still low. There's just one thing standing between you and your dream home: a down payment.
Don't abandon your homeownership quest just yet. Here are 10 ways to come up with the cash for your new castle.
- Pay off your plastic.
Paying bills is not fun, but it definitely will help in your hunt for down-payment money. When you carry a credit card balance, the ever-accumulating interest charges mean more of your money goes to the card company each month. Keep that cash for yourself by cutting your debt load. Pay the most on the one with the highest interest rate. Once that's paid, shift your focus to the next highest rate and so on. You'll get the most money-sucking credit card bills out of the way more quickly, freeing up more of your income to go toward building your savings.
- Ladder CDs to boost savings.
Once you've got a few extra bucks, put it to work making more money for you. Many investors prefer certificates of deposit. They are low risk and relatively accessible. But when interest rates are low, the return isn't always what a saver hopes for. You can maximize the earning power of CDs by buying different certificates at varying maturity dates. For example, instead of buying one big CD, parcel out your money into three-month, six-month and one-year certificates. Known as laddering, this gives you flexibility to adjust your savings as rates change. Laddering allows you to lock in when rates are high or, when rates are not so good, the process keeps you from being stuck for too long with low earnings.
- Use special programs.
There are many programs for home buyers in down-payment distress. Borrowers in a wide range of incomes, locales and professional groups may have access to aid from Fannie Mae and Freddie Mac, the government-sponsored offices that buy mortgages and package them as investments. Various nonprofit and community groups also lend a hand to buyers struggling to put money down on a home. And don't forget about assistance from state agencies.
- Tap your IRA.
If you're looking to buy your first home, let the Internal Revenue Service help. Tax laws allow you to use up to $10,000 in IRA funds as a down payment if you've never owned a house. If you're married and you both are first-time buyers, you each can pull from your retirement accounts, meaning a potential $20,000 down payment. Even better is the IRS definition of first-time home buyer. Technically, you don't have to be purchasing your very first abode. You qualify under the tax rules as long as you (or your spouse) did not own a principal residence at any time during the two years prior to the purchase of the new home. In these instances, Uncle Sam waives the penalty for early withdrawal, but you may owe tax on the money depending on the type of IRA. Many cash-strapped home buyers, however, find the long-term return of investing in residential real estate is worth the short-term tax bill.
- Borrow from your 401(k).
Do you have more retirement money in a company savings plan? Consider borrowing against your 401(k) for the down payment. There are down sides to this strategy: Unlike an IRA home-related withdrawal, you'll have to pay back any money you take out of your company plan. The repayment will cost you a bit more since the account contributions were made with pretax money, but your payback will be made with after-tax dollars. At least the interest payments on this loan will be going back into your 401(k).
- Get a gift.
Aunt Edna always liked you best. Take advantage of that favored family status and ask her to make a present of your down payment. Tax law allows gifts of several thousand dollars a year to be bestowed without tax consequences to either the giver or recipient. The gift-exclusion amount is adjusted annually to reflect inflation (it's $11,000 now), so check with the IRS to ensure guidelines are met. Many wealthy people use this tax rule to reduce potentially taxable estates while they're still around to get the thanks. Not close to your family? Not a problem. The gift exclusion isn't limited to relatives. The monetary present can be from anyone, so track down a well-off friend now!
- Ask for a raise.
No luck finding a benefactor? Then maybe it's time to ask your boss for more money. Just remember, cautions our career expert Penelope Trunk, he who establishes the pay mark first generally loses when it comes to setting a salary.
- Get a second job.
OK, so you work for the original Ebenezer Scrooge and he humbugged your raise request. Moonlighting could help you earn the extra money. This option makes the most sense for those who are young and not yet fully established in their professional lives.
- Look for lost loot.
Around $9 million worth of savings bonds are sitting around, ignored by their owners and not earning a penny of interest. Do you have any stashed somewhere? Make sure your bonds are still adding to your net worth. If they're not, cash them in and reread item two above about laddering CDs
- Auction off unwanted items.
You didn't find any forgotten riches as you were digging through the attic, but there was plenty of other junk up there. Transform it into your down payment. Thanks to eBay and similar sites, it's never been easier to prove that one person's trash is another's treasure.
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