Clare R. Okyere
Home Buying 101: 3 Steps to Make Home Buying Easy
Considering buying a home but not sure where to start? Join as we discuss 3 steps to make home buying easy: 1) Why Buy? 2) Get Prepared! and 3) Seal the Deal! Read below or jump to the video webinar.
There are various reasons people choose to buy a home. Many deal with pride of ownership and autonomy: never having to get permission from a landlord to paint, remodel, have a pet, etc. They also point out the ability to have a fixed mortgage payment and alleviate the fears of a landlord increasing the rent. While these are all important reasons, they are not the main reason many people push themselves to make home owning a reality as soon as possible.
Home ownership is a powerful way to build personal and generational wealth and to increase stability. In fact, the recent Federal Reserve's Survey of Consumer Finances found homeowners have 44.5 times more net worth than renters. Why is this? Homes are a great investment that generally appreciate and force you to save money.
Homes are a powerful investment that usually become more valuable as time goes by. Appreciation refers to how the value of a property increases over time. Conservatively, homes tend to appreciate in value by 3-5% every year. In the United States from September 2019 to September 2020, for example, homes appreciated by an average of 6.7 percent. They are projected to increase by 8% in 2021. While no one can know for certain what the future will hold, homes are considered a relatively safe investment that tend to increase in value over time. As a home increases in value, so does the net worth of the homeowner.
In addition to being an appreciating asset, homes also lead to savings through principal reduction. When dealing with home loans, principal refers to the actual amount of money borrowed. As a homeowner pays down their principal through mortgage payments, they are actually putting money into their home and paying their future self. When you pay rent to a landlord, it is an expense that gives you no financial return. When you pay your mortgage, however, you build equity. Equity refers to your net value in the home. While many people struggle to put money into a savings account each month, paying down your principal through your mortgage acts as a forced savings plan which increases your equity and net worth.
In addition to building equity, tax laws favor home owners. While you should always consult a tax accountant to discuss your specific scenario, in general one can expect to find a tax shelter when owning a home that comes with the benefit of various deductions and write-offs.
So, not only is owning a home increasing your net worth by appreciating in value and helping you to save money as you pay down your principal, it also helps you keep more of your money in your own pocket with various tax breaks and incentives. This helps to explain why many choose to make homeownership a reality as soon as they are able to do so, and why the net worth of homeowners is so much greater than that of renters.
Prefer video? Watch our recent Home Buying 101 webinar.
Preparing to Buy
As you position yourself to buy a home, there are a few key areas to which you'll want to pay attention: credit, income and employment, and cash reserves for closing. These components contribute to your debt-to-income ratio and are the main areas a lender will explore to determine the financing options for which you qualify.
When it comes to credit, both your credit score and the content of your credit affect your eligibility for financing. Content such as late payments and recent collections can adversely affect your ability to qualify for a home loan. Your credit score is also important as it is the number lenders look at to determine your level of risk before lending you money. A higher score represents a lower risk; therefore, it is most likely to lead to the best financing options. While there are a variety of programs and options available, most lenders generally prefer a credit score of 640 or higher when it comes to home loans. If your credit isn't quite where you'd like it, there are many things you can do to improve it and thus improve the financing options at your disposal when you are ready to buy.
In addition to credit, lenders look at your employment history when determining eligibility for financing. In general, they look for a minimum of two years employment history. If you are self-employed, they also generally look for two years history of your business being in existence. For recent college graduates who are now employed in the area which they studied, their education can typically count toward the employment history requirement. In addition to employment, lenders will also look at your income. When exploring your financing options, your purchasing power will generally be capped at 50% of your monthly income in most cases.
Finally, a lender will also look for evidence of cash reserves for closing. Cash for close include both your downpayment as well as closing costs. In general, you can expect your down payment to be 3.5-5% of the loan amount. There are some down payment assistance programs available; however, these are often limited by various factors such as funds available and income level of the applicant. In addition to the down payment, you will also need to plan for closing costs. Closing costs include things such as lender fees, appraisal fee, escrow/title fees, property taxes/insurance, prepaid interest, and home inspections. If you are currently saving for your cash to close, it behooves you to reach out to a mortgage expert. There can be various sourcing and seasoning requirements (i.e. verifying where money has come from and requirements for how long it must stay in a given account), and it is helpful to know this information before you begin moving any money you plan to use for a downpayment and/or closing costs into or out of accounts.
"The biggest piece of advice I would give potential homeowners," says Kofi O. Okyere, President of O Capital Group LLC, "is to reach out as soon as you start thinking about buying a house. I often get clients who have been preparing to buy a home on their own for years, but they never connected with a mortgage professional because they thought there would be an initial fee, or they weren't quite ready and they didn't want to be rushed. When we finally sit down and look things over, we find a few key things they could have been working on during that time period that would have really set them up for greater success getting approved for financing. The sooner you know where you stand, the sooner you can start working a plan so that whenever you are ready to buy, you have an array of financing options at your disposal."
Seal the Deal!
Once you have decided to buy and you have taken the steps to prepare, it is time to get house hunting. The first step of this process is to secure your mortgage pre-approval. A pre-approval gives you an accurate budget to work with during house hunting. It ensures sellers take you seriously, and allows you to move quickly when you are ready to make an offer (which is critical in today's competitive seller's market!). In fact, most quality realtors will not start the house hunting process until a pre-approval is in place. When generating your pre-approval, the lender will explore the areas we touched on above - credit, employment/income, and cash reserves. He or she will use the information from the pre-approval process to generate a pre-qualification letter, which your real estate agent will use during the offer process.
Once you have gone through the pre-approval process, you start the exciting journey of looking at and visiting houses. When you find a house you like, your real estate agent will help you submit an offer and negotiate the terms of the contract. They will help you work through your ten day inspection period, negotiate repairs, and guide you through the closing process.
Once your offer is accepted, your lender works to ensure your financing is in line. Your loan will go through underwriting, and your lender will work with you to submit any necessary documentation to clear underwriting conditions, will order an appraisal to confirm the value of the property, and will prepare your closing package for Title.
When it is time to close, you will sign your closing package with the Title agency. You will provide Title with a wire or cashiers check for required cash to close. The lender will then send the funding wire. As soon as the Title company records this transaction, you can get the keys to your new home!
While it can seem like a daunting process for first-time homebuyers, a good lender and real estate agent will walk you through each stage so you are prepared for each step of the process.
Buying a home is a powerful step that allows you to build wealth both for yourself and generations to come. Wherever you are on this journey, we would love to connect and answer any questions you may have. Reach out today for your free, no obligation consultation. We are here to help make home loans easy!
At O Capital Group, we make home loans easy!
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.