Part I: Getting Started

Almost every adult has dreamed of owning his or her own home. Whether bad neighbors, your friend’s beautiful new home, the desire for a yard of your own, or your kid’s education motivated this wish, once the idea of buying is planted it is hard to be satisfied with a rental. Suddenly, you can no longer live with a tiny bathroom and too few closets. Examining your reasons for wanting your own home is an important first step in making the decision to purchase. Once you are sure your reasons are sound, start considering what it means to be a homeowner.

For many first-time buyers, the process of purchasing and financing a home can be confusing and frustrating. You may want to enlist the assistance of a professional. There are nonprofit agencies that specialize in helping first-time purchasers and, best of all, their assistance is generally free. Housing counselors at these agencies are trained and certified to assist prospective home buyers throughout the purchase process. These employees are knowledgeable about such issues as obtaining credit, choosing a real estate sales professional, and understanding the different types of loans that are available. You can find a list of housing counseling agencies in your area by contacting the Department of Housing and Urban Development (HUD) or calling Infoline (2-1-1).

Key Question 1: Do I want to be a homeowner?

Buying a home--especially a first home--is a big step for any family. It is probably the largest purchase you will ever make. Before you start considering how many bedrooms you need and where you want to live, spend some time thinking about whether or not you really want the responsibility of being a homeowner; the benefits of homeownership are great, but so are the responsibilities.

How old are you?
Owning a home is a long-term commitment. Because there are costs involved in buying and selling, it doesn’t make sense to purchase a house you will own for less than three or four years. Are you ready to stay in one place for that long? Is your job secure? Are you planning to return to school or have children in the next few years? If you answer yes to any of these questions, you may be better off renting. Homeownership makes you less flexible, while renting gives you more freedom to move or make major life changes.

Do I have the time, inclination, and money to maintain a home?
Mortgage payments are not the homeowner’s only responsibility. Homeownership also entails maintaining and repairing your new home and property. You’ll have to mow the lawn on hot summer days, rake the leaves in the fall, and shovel your driveway on cold winter mornings. You’re the one who will call the plumber when a pipe leaks, and you’ll not only need money for the plumber but you’ll also need to buy a lawnmower and all the other equipment and supplies needed to maintain your home. If you are not prepared to take on these responsibilities, then renting may be your best option.

Can I live with less disposable income?
You will frequently pay more for housing as a homeowner than you did as a renter, at least for the first few years. Even if your new mortgage payments are less than you paid for rent, homeowners have the added expense of property taxes, homeowner’s insurance, utilities, and maintenance. A good rule of thumb is that if you pay 35% less in rent than you would for owning--including the monthly mortgage, property taxes, and any homeowner’s fees--then it’s smarter to keep renting. There are several good calculators on the Internet that can help you decide if it is financially wise for you to own rather than rent.

Key Question 2: Is my credit in order?

Once you have decided that you want to purchase, it’s time to make sure your financial house is in order. It is important to obtain a copy of your credit report and credit score. Credit reports are kept by three major agencies--Equifax, Experian, and TransUnion. A credit report includes information on where you live, how you pay your bills, and whether you have been sued, have been arrested, or have filed for bankruptcy. Nationwide consumer reporting companies sell the information in your report to creditors and other businesses that use it to evaluate your applications for credit. A forth company, the Fair Isaac Corporation, calculates your credit score based on the information in the reports. You can get your credit score from any of these agencies, although you should be aware that each agency may calculate your score differently. You can order a single report along with your credit score from any of the agencies or you can order a merged (or 3-in-1) report for about $39.00. Consumers are entitled to one free credit file disclosure every twelve months from each of the nationwide consumer credit-reporting companies.

To order a free report:

Website:
www.annualcreditreport.com

Mail:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
(A special form is used to request your credit report by mail. To receive this form please call Annual Credit Report at the number listed below.)

Phone: 1-877-322-8228.

This is the only place to order free credit reports. Be careful: many websites claiming to provide free credit reports automatically enroll you in another program for which you must pay a fee.

How do I correct my credit report?
Improving your credit score will take time, but it will be worth it. Although you may still be able to get a mortgage with a lower-than-optimal credit score, the terms of the mortgage will not be favorable. Taking the time to improve your credit picture is a good investment. Here are a few hints on how to improve your score, which may require you to rethink your budget. If you need help, see a housing or credit counselor. Infoline (dial 2-1-1) can direct you to free resources.

• Pay your bills on time. Late or delinquent payments can have a significant, negative impact on your credit score.
• Get current on any missed payments and stay current. The longer you go without a missed or late payment, the better your score will be.
• Pay off debt, and don’t transfer balances. You may lower your score by having the same amount of debt in one account rather than divided among several accounts.
• Resist the temptation to open new accounts on a regular basis.
• Contact your creditors or see a counselor if you are experiencing trouble paying your bills.

Key Question 3: How much house can I afford?

You may have heard that a good rule of thumb is to look for a home that is two and a half times your gross annual salary, but be careful: there are many exceptions to that equation. If you have high credit card debt or other financial obligations such as child support, you may need to set your sights lower.

A quick way to calculate the appropriate price range is to use an affordability calculator that you can find on the Web. A lender can provide you with a more accurate figure by preapproving you for a mortgage and looking at your income, debt, and credit standing.

Key Question 4: Do I have enough money to buy a house?

What is the down payment and what are the closing costs?
The savings and cash you currently have available can be used to support your up-front payments such as the closing costs and down payment for your home. Closing costs are fees and expenses beyond the cost of the property that need to be paid at the time of the mortgage closing. Closing costs vary, but can run between $5,000.00 and $7,000.00. There are opportunities to negotiate closing cost expenses with the seller and lender, or to finance some portion of the closing costs as part of the loan amount.

The down payment is a percentage of the sale price that must be paid up front. Generally, the more money you put down, the lower the loan interest rate. Conventional loan down payments may be close to 20% of the sale price; however there are programs, particularly for first-time purchasers, that require lower down payments. If you put down less than 20% of the sale price, however, you will probably be required to secure mortgage insurance.

If your available cash isn’t sufficient to cover your down payment, there are several options. First-time home buyers can withdraw up to $10,000.00 without penalty from an Individual Retirement Account (IRA), though you must pay taxes on the amount; you might also be eligible for a loan from your 401(k) plan. You can receive a cash gift of up to $12,000.00 a year (the limit for 2006) from each of your parents without having to pay a gift tax. And don’t forget to ask your employer if they provide any assistance to first-time buyers.

Recently, lenders have become more flexible in working with first-time homebuyers and have created a variety of special programs requiring only a small down payment. These programs, combined with favorable interest rates, have created a good environment for first-time buyers. Here are some examples of programs that will work with first-time homebuyers.

Community Home Buyer’s Program
Through their networks of mortgage lenders, Fannie Mae and Freddie Mac offer Community Home Buyer’s Program loans. These programs require a 5% down payment.

You may want to ask lenders about other ways they can help first-time or lower-income buyers. These may include options for expanded debt-to-income ratios or the use of alternative credit scoring.

Although a lender can help you find these programs, you can also work with a HUD-approved housing counseling agency. These agencies specialize in helping low- and moderate-income first time home buyers. You can find these agencies on the HUD website or you can call Infoline in Connecticut to find an agency near you.

Department of Veterans Affairs (VA)
VA mortgages allow veterans or active service personnel to purchase home with no down payment.

Federal Housing Administration (FHA)
FHA mortgages allow homebuyers to purchase a home with as little as a 5% down payment, and to finance all non-recurring closing costs.

Individual Development Accounts (IDAs)
IDAs are matched savings accounts that can be used for first-time home purchases. By agreeing to attend financial education classes and to save a minimum of $25.00 each month, first-time buyers can get a 2:1 match on their savings up to $2,000.

Mortgage Revenue Bonds and Mortgage Credit Certificates
Mortgages funded with these instruments typically require a minimum of 5% down and have interest rates that are 1.5 to 2 percentage points below conventional thirty-year fixed rates. These types of loans, offered by state and local housing agencies, are available only to first-time homebuyers.

Are there other costs to consider?
You will want to consider how much money you will need to move and settle in. There may be some immediate costs, such as a moving van or the purchase of a major appliance. There may also be repairs that must be completed in order to make the house safe. There will be fees for hooking up or changing the billing for your utilities. It is important to anticipate these and other expenses so that you do not spend all of your available cash resources on the down payment and closing costs.

In addition to planning for how you will pay the up-front costs, you should think about your other expenses once you move. It’s a good rule of thumb to have at least three months’ living expenses available after closing on your new home. This will help pay for non-housing-related expenses and emergencies (e.g., unexpected car repairs, credit card payments, car loans). Lenders will look at your available cash to make sure that once you purchase, you will have enough cash to cover emergencies and other home-related expenses.

Key Question 5: How do I find the right home?

Now that you know how much money you can borrow and you have an estimate of your closing costs, you also know the price range you can afford. Maybe you already have an idea of what your “dream home” looks like or where you want to live. Even if you know exactly what you’re looking for, the house-hunting process can be overwhelming and time consuming.

Before you start house hunting, list your needs and your wants and make sure you know the difference between the two. Decide what’s most important to you about the neighborhood you aspire to live in and then concentrate on a few neighborhoods that meet those criteria. This can limit the work of your search considerably. Consider all your housing options--detached single-family homes, condominiums, multi-family units, cooperatives. Each has its advantages and disadvantages.

Compare homes as you proceed, making sure you know what you would get and what you would miss in each house before you make a decision. Most importantly, take your time. Don’t be pressured by real estate agents or others. This is a big decision and you should spend an appropriate amount of time analyzing the pros and cons of each property.

Do I need a real estate agent?
A real estate agent can look for homes that meet your needs and financial circumstances, and can help you narrow your choices. Generally, the seller pays the agent’s fee, so there’s no cost to you. Real estate agents can help you find the kind of home you want, examine comparable homes, and compare different neighborhoods. When you’re ready to make an offer on a home, an agent will handle the negotiations with the seller, including the presentation of your bid. Your agent can also refer you to a mortgage lender, although you should still shop around.

When selecting a real estate agent you may want to ask your family and friends for referrals. You may want to attend a few “open houses” listed in the newspaper where you can talk with professionals showing houses. It’s important that you select an agent who makes you feel comfortable and can provide the knowledge and services you need.

Here are some questions you may want to ask before selecting a real estate agent.

• How long has the real estate agent been in business?
• Is this person a full-time agent?
• Is the real estate agent familiar with your preferred community?
• How many homes has the real estate agent sold in the past year?
• What is the average sale price of those homes?
• Is the real estate agent acting as an exclusive “buyer’s agent,” meaning that they work exclusively with people like you who are interested in purchasing a home, as opposed to property owners who are selling a home?
• Will the real estate agent offer you three references from home buyers?
• For how long will the agent’s contract with you be valid?

If you feel you are being steered away from or into certain neighborhoods by your real estate agent, you can report it to HUD, the agency that enforces the Fair Housing Act. This Act prohibits discrimination based on race, religion, color, national origin, age, receipt of public assistance funds, sex, or marital status.

Key Question 6: How do I find the right mortgage?

Choosing the right mortgage can be as difficult as finding the right home. There is a lot of information available on mortgages, so sifting through it to find the best product for you can take some time. There are many issues to consider, and your choice can make a big difference in your monthly payments and the overall cost of the loan.

You will want to consider the interest rate, the type of mortgage (fixed or adjustable rate), the term of the mortgage, and other aspects such as points (prepaid interest you pay your mortgage lender to reduce the interest rate of your loan), closing costs, and any other fees or charges.

You can obtain a mortgage from many different sources--mortgage banking companies, commercial banks, community banks, credit unions, mortgage brokers, and other financial institutions. To find a lender, you can consult your bank or financial institution, talk to your realtor, contact a housing counselor, or ask family members, friends, and coworkers for a recommendation.

Key Question 7: How do I move from thought to action?

If you are a first-time home buyer you may want some help negotiating the classes available to learn about the home-buying process. Classes may cover: assessing the pros and cons of homeownership, obtaining credit and budgeting, shopping for a home, making a purchase offer,

getting a mortgage and understanding the mortgage loan process, maintaining a home, and managing finances after becoming a homeowner. Many classes also offer personalized assistance to individuals.

Buying a home is an important step that can have a positive influence on your family. Homeownership can provide stability and security for your family. Research has shown that children of homeowners are 25% more likely to graduate from high school, 116% more likely to graduate from college, and 59% more likely to become homeowners.

If you think you are ready to buy a home, begin speaking to professionals who can help you make the American Dream come true for you.

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Donna Taglianetti is the Executive Director at Co-Opportunity in Hartford, CT. She can be reached at donnat@co-opportunity.org.