Where do I Start?

First things first. After you've browsed through the handbook awhile ,ask yourself why you want to buy a home. To stop paying rent? To start building equity? To have a place to call your own? To move up to a bigger home?

Next, list what kind of home you'd like and where you would like it to be. Be specific. Separate the "must haves" from the "want to haves". Rate both lists on a scale from 5 (high) to 1.

Think of yourself as zeroing in on a target, going from the general to the specific. Consider area (city, suburban, country); community (north, south, east or west side); neighborhood (older and settled or sparkling new; a particular school; recreational facilities; and other community services , such as transportation, day care, library, stores, entertainments.) Ask yourself how many minutes you're willing to commute to work.

Think about home styles ( 1-story, 2-story, townhouse, condominium, etc.). How much space do you need, and how much will you need in the foreseeable future (number of bedrooms, baths; kind of kitchen; total rooms)? Consider size and kind of property. Do you want a new home, an older one to fix up? Is the community a good area for resale? Someday you or your heirs will want to sell. Consider how long you expect to live in this particular home. Keep going with whatever you want to add.

Knowing exactly what you think you want makes house-hunting and later decisions easier when you get into the nitty-gritty aspects of buying. Many people like to start a "house-hunter's notebook" to keep their requirements clearly in mid and to compare specific properties. You'll find as you return again and again to your original thinking that your preferences become clearer - and your search becomes more efficient.

Exactly how will a real estate agent help me buy a home?

Brokers and agents make it their business to provide every service connected with your home search, from expert advice in the early stages though careful monitoring of your settlement (also "closing" or "escrow" ). The more closely you work with one agent, the better your needs are known and the more effectively you can be served - saving you time and possible grief.

All agents are bound by law to deal fairly and ethically with both buyer and seller. You benefit from an agent's services in many ways such as:

• Helping you set up a plaon of action through an analysis of your need and your finances, the current housing market, homes available in your price range, and lenders' mortgage options.
• Personally conduction your search to find neighborhoods and homes that fit your requirements
• Guiding you through the intricacies of making an offer on a home and presenting your offer to the seller.
• Providing leverage with solid negotiating skills from the start through end of escrow
• Ensuring you receive proper disclosure regarding all known facts about the home

What do people mean when they say home ownership is the key to financial security?

The benefits of home ownership are both financial and psychological:

• Home ownership is a durable (real) investment. Historically, housing has appreciated in value for decades. Although no one can say a specific home in a specific location will increase in value, generally speaking the odds favor most homeowners. Also, monthly mortgage payments (the part that reduces the principal loan balance) becomes a solid form of savings.
• Numerous unique tax advantages are available to homeowners. Unlike other investment tax shelters, home ownership works for you even as you live in your investment. Fore example, the thousands of dollars you pay in mortgage interest (discussed below) are deductible. The tax deduction alone can sometimes make owning your own home cheaper than renting with "after-tax" take-home dollars.
• By accumulating equity in your home, you can later "move up" to another home, with a good down payment on hand.
• Home ownership offers you the opportunity to take control of your housing costs. Mortgage payments (even on adjustable-rate mortgages) are more predictable than rent.
• Owning your home allows great freedom of choice in choosing yoru community, architecture, interior décor, appliance selection, plus whatever method of financing best suits your situation.

What Price Home Can I Afford to Buy?

The easy answer to this all-important question of price is simply adding how much you can afford to borrow to how much you have available for you down payment investment. The total is your maximum affordable home price. (Remember to keep enough cash or credit left over for move-in expenses and an emergency reserve.) The harer answer is how much you are qualified to borrow.

For starters, you can put the most frequently used lenders' rule-of-thumb to work: the 28% and 36% formulas. This is the test many lenders use to qualify applicants for conventional mortgage loans (though some lenders and mortgage plans apply stricter codes, such as 25% and 33%, especially if your down payment is less than 20% of the sale price).

The 28% test permits you to spend no more than 28% of your gross monthly income on your total monthly housing costs, including principal, interest, taxes and insurance (P.I.T.I.) and condominium fees, if any. For example: 28% of a $3,600 gross monthly income would qualify a buyer for a $1,008 per month payment.

The 36% limit cover both your P.I.T.I and long-term debts (more than 10 months) such as alimony, regular household expenses (mortgage insurance and/or condominium or association fees), outstanding loans (car, appliances, school), support for children (resident or living separately). For example: 36% of $3,600 would qualify for a $1,296 payment t per month less monthly payments on any long-term debt.

In our examples, the affordable loan payments for an income of $3,6000 per month is a range between $1,008 for the home payment alone and $1,296 a month less any debt payments. (Strict lenders may use only the 28% standard, even with no debts, or ask you meet both standards. Other lenders may use less strict standards for borrowers with excellent credit ratings.)

In addition to your loan, the cast you have on hand (plus the cash you can acquire) is an important factor. You will need cash for a down payment (ranging from 0% - 20% or more for the sales price), settlement or closing costs, moving expenses, possible immediate repairs, remodeling, new appliances or furnishings. Also be sure to budget for utilities and maintenance. This takes some figuring.

an agent can help translate your affordable monthly payment into a total loan amount. Add this loan amount to your desired down payment amount and you get the approximate range of home prices you can afford.

Your next step is to shop carefully for the loan that will keep your mortgage payments in line with your budget. Different mortgage plans can dramatically affect your monthly payment - and thus the priced home you can afford. Also other plans, especially FHA and VA mortgages, may offer you much more liberal qualifying standards - again allowing you more home for you income.

Today's Financing Techniques Can Be Confusing. What are the Basic Types of Loans I Should Know About?

Here is a brief rundown of four major mortgage plans.

Fixed-Rate Conventional Mortgage. A conventional loan is without a third-party participant, such as VA or FHA. Fixed-rate conventional loans are typically paid off in equal monthly payments spread over 15, 20, or 30 years. The interest rate stays the same for the life of the loan; therefore the monthly principal and interest payment remains constant. Shorter terms mean somewhat higher monthly payments. Shorter terms also mean more rapid equity growth, mortgage pay-off and dramatic savings on total interest payments.

Terms of a conventional loan vary among lenders, but many can be obtained with as little as a 5% - 10% down payment. When the down payment is less than 20%, it is necessary to obtain private mortgage insurance (PMI) to protect the lender from a buyer's default.
Advantage: Quick processing and stable payments.

Adjustable-Rate Mortgage (ARM; also "variable rate"). The interest rate may go up or down over the years and is tied to a financial market index (such as one-year Treasury bills). Monthly payments may also be adjusted on a periodic schedule. Most ARMs set a maximum adjustment (or "cap") on possible increases to interest rates, monthly payments, and/or maximum cap on rates for the life of the loan.
Advantage:The lower initial interest rate and monthly payment allow the buyer to pay less in the early years for a larger loan and help buyers qualify for a more expensive home than with a fixed-rate loan. Caps offer peace-of-mind rate ceilings.

FHA Loan. Strictly speaking, FHA (Federal Housing Administration) does not make loans; rather it insures loans, with increases lenders' willingness to make low-down-payment loans.

With an FHA-insured loan, a home buyer can make a small down payment, a feature particularly attractive to first-time buyers. The minimum down payment depends on the size of the loan, but it is usually smaller than other loan programs. Second mortgages are permitted within specific guidelines.

Points (prepaid interest) can be charged by the lender. The purchaser may negotiate the interest rate and points with the seller. FHA buyers of single-family homes can finance 100% of closing costs.

FHA charges an advance mortgage insurance premium (MIP) fee, as well as a monthly charge for all loans. Ask an agent how much the fee would be in your situation, and if you can borrow some of the fee and add it to the loan rather than measurable increasing your closing costs.

FHA-insured mortgages offer a maximum loan amount that varies area to area.
Advantage: Low down payment; low interest rates; long terms; many are fully assumable loans; no prepayment penalty; second mortgage permitted under certain circumstances.

The VA Loan. Qualified veterans can take out loans up to a specific limit with no down payment. These limits occasionally change; check with an agent for current rules. VA-guaranteed loans can be combined with second mortgages and are fully assumable by any qualified buyer. Rates and points may be negotiated with the lender

VA/FHA qualification guidelines are more flexible than those for conventional loans. Actual income qualifications are dependent on the type of loan requested.
Advantage: Usually no down payment; points and other closing costs may be paid by the seller; the buyer may be charged a loan origination fee (tax deductible); no prepayment penalty; assumption may make your home very attractive to buyers when you decide to sell.

How much down payment should I make?

There are advantages to both large and small down payments, and which you choose depends on both personal choice and your financial circumstances.

Advantages of large down payment: Less mortgage to pay off, smaller monthly mortgage payments and greater opportunity to find lower interest rates.

Advantages of a small down payment: Less cash out of hand, therefore more money for other costs; a larger mostly mortgage payment means a larger tax deduction for mortgage interest.

With an FHA loan or less than a 20% down payment on a conventional loan, you will be required by the lender to take out mortgage insurance. The FHA calls it MIP (Mortgage Insurance Premium), while private companies call it PMI (Private Mortgage Insurance).

What are the best sources of cash for a down payment?

If your own band account isn't large enough, you have several options. For example:

• Receive a tax-free gift from your parents (or others) documented by a "gift letter" stating no repayment is required (thus your debt burden is not increased). Some lenders may require you to use some of your own money in addition to the gift.
• Borrow against a life insurance policy
• Borrow against a company pension plan
• Cash in a retirement savings plan (even though you may have to pay a penalty for early withdrawl).
• Ask for cash payment from your employer instead of next year's raise
• Use your own business as collateral.
• Team up with friends, relatives or investors as partners in return for equity in your home. (You can, if you like, buy them out later.)

Should I shop for a loan before or after I find a place to buy?

Knowing where you stand concerning how much money a lender will lend you (based on your income and credit rating) puts you in a good bargaining position. Sellers faced what deciding between two buyers - one who is "pre-screened" by a lender - may favor the offer of the buyer for whom getting a long is almost a sure thing.

On Your Mark. Get Set. Go!

Now that you've mapped out your strategy, determind what you want to lok fo in general and lined up a real estate agent, you'll want to discover all you need to know about intelligent, time-saving house hunting. That's what our next section is all about.