Introduction

Buying a home is at once an exciting and challenging venture. With commitment, planning, and learning, you can become a successful homeowner. This program will cover everything you need to know in order to start the home-buying process off right, including:

• The Pre-purchase Process–Your Finances
• Understanding Mortgages
• Preparing for the Payment
• Credit Reports and Loan Qualification
• Finding a Home and Getting a Loan
• Resources

Chapter 1: The Pre-purchase Process–Your Finances

The pre-purchase process begins with analyzing your financial picture in detail. While you may be able to qualify for a large loan, you will want to make sure the monthly payments fit into your spending plan so you don’t become “house-poor” – a situation where your housing costs are more than you can comfortably handle.

Income
The first step in examining your finances is to look at your income. Write down the amount of money you make on a monthly basis. Be realistic when it comes to non-guaranteed income, such as overtime and bonuses. If your income fluctuates, use a conservative figure to make sure you don’t overestimate. Compare your gross (before tax) and net (after tax) income to see if the correct amount is being withheld. If you neither owe nor are owed a tax refund, you are on the right track.

Expenses
List and total all of your expenses. Make sure you include those costs that come up every once in a while, such as gifts, travel, and car maintenance. You may need to track your spending for a few months to obtain accurate numbers.

The Bottom Line
Subtract your current monthly expenses from your current monthly income. If you are spending more than you are making, or you aren’t able to set aside money for future goals, consider reducing your expenses, increasing your income, or both.


Savings
Setting aside money on a regular basis is an important part of every spending plan, but it is particularly important when you want to purchase a home. It can cost many thousands of dollars just to walk in the door. There are several major expenses to save for:

• The Down Payment – The down payment is often the most significant outlay of a pre-purchase expense. In the past, homebuyers needed to put down at least 20 percent of the purchase price. Today you can buy a home with as little as zero to five percent down. If your down payment is less than 20 percent, you may either purchase mortgage insurance until you build up 20 percent in home equity, or obtain a second loan to cover the remaining 20 percent. Many financial institutions offer special lending programs that can help you meet the balance.
  
  
• Earnest Money – Earnest money is a cash deposit you make when you submit your offer. It proves to the seller that you are serious about wanting to buy the home. Your real estate broker will deposit the money into an escrow account, and if your offer is accepted, it will be applied toward the down payment. If the offer is rejected, it will be returned to you. Typically the earnest money deposit will be about two percent of the price of the home.
  
  
• Closing Costs – Closing costs include all fees required to execute the sales transaction, such as attorney fees, title insurance, appraisals, points, and tax escrows. Typically these fees are paid up front. The average cost is three to five percent of the purchase price.
  
  
• Post-purchase Reserve Funds – You may need to prove to the lender that you have funds in reserve to protect against potential cash flow problems. This not only is assurance for the mortgage holder, but is also for your own peace of mind. Post-purchase reserve funds should be at least two months’ worth of housing payments (though you may want to have more for greater personal security).
  
  
• The Extras – If you plan to buy a fixer-upper, a home that doesn’t come with major appliances, or if you know you’ll want or need new furniture, include these costs into your savings plan.