I am a licensed realtor in the state of Pennsylvania. These are the things you should prepare for before buying a home.

1. You need Credit:

You’re getting nowhere fast without establishing credit. You need credit for everything that you want: a car, business, insurance, rentals, a home etc. Buying a home requires a huge amount of credibility.  Different types of loans require different criteria. For example, the Fha Loan requires a minimum credit score of 620. It also allows you to put less money down upfront.  Most FHA loans will allow you to put down as little as 3% of the purchase price of the property. So the question is, are you there? Are you building, repaying, etc.  The reason you build your credit is to obtain a larger “line of credit” called a mortgage.

2. Financing Commitment:

You must realize that when buying a home, you are going to be signing your life away to a large debt. This is a big step. Are you prepared to do so? Financial institutions require a minimum of 2 years of employment to be considered as stable income. Do you like your job? You will be committed to that job you have for 15 years minimum. Do you have an alternative source of income to support yourself and pay toward principal to finish the loan early?

There are different types of mortgages. The most common mortgages that new homeowners look for are the fixed FHA loan and conventional loan. The two types of loan differentiate mostly by the required down payment and terms such as mortgage insurance.

3. Savings for Down Payment:

The common misconception of many is “I’m can get pre-approved for this amount, pick out a house for less than my preapproval, and my bank loan will cover everything.” Wrong! A bank pre-approves you for a loan that covers a certain percentage of the value of the home, but not the full cost.  You still have to bring some money to the table and be prepared for closing costs. Closing costs: Homeowners insurance premiums, Real Estate Taxes, Title Search fees, Appraisal fees, Inspection fees; all will be paid for by you outside of the loan given by the bank. Oh and the bank itself may charge you an origination fee.  You should save at least $5000 minimum (depending on the price of your home) to be prepared to cover the cost of these things.

The FHA loan requires a minimum 3.5% down payment (of the total price of the home). Traditionally, Conventional mortgages require a 20% down payment. However today, conventional loans have become more lenient… requiring only 10% and sometimes even 5% .

4. Your Monthly Payment:

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Your monthly mortgage payment is made up of Principal, Interest and an Escrow account payment.

What is an Escrow Account: So you’re probably thinking, you will get a mortgage and your principal and interest payment will be $565, Khaleef will sell you the house, and we’ll all live happily ever after right? Sorry wrong… again. Principal and interest are just a part of your monthly mortgage payment. In addition to your principal and interest is your escrow payment, which increases the total of your monthly mortgage payment.  Banks often require that THEY will collect (in addition to principal and interest) an escrow payment for your property taxes, homeowners insurance, and flood insurance to guarantee the security of their investment.

Mortgage Insurance: Another addition to your escrow payment can be mortgage insurance. People are attracted to FHA loans because of the relaxed rules for qualification and the reduced closing costs. However, FHA loans charge for mortgage insurance (MIP). The most common misconception of mortgage insurance is that it is an insurance that insures the HOMEOWNER in case of default on the mortgage.  This is the farthest thing from the truth. 

The truth is you’re paying that premium each month to insure the BANK in case you (the homeowner) default.  If the homeowner goes through foreclosure, the bank will take the property and still get paid because of mortgage insurance (MIP).  It has no benefit for the homeowner. Like Really… Why would anyone want to pay for your mortgage in case you default? Let’s be clear, the most the bank will ever do for YOU is give you the initial money to buy the property. Everything after that, the bank is acting in the best interest of itself.  They collect and pay your taxes so that the government won’t take the property in sheriff sale, insuring that everyone won’t lose out.

FIXED PAYMENT: Many believe that their mortgage payment is set in stone because of the term “Fixed rate”.  In reality, the only thing fixed is principal and interest.  The escrow portion of your payment could fluctuate as it is based on local insurance rates and property tax assessments. Insurance rates are influenced by factors like: crime, neighborhood, and the building features of the property. As these factors change, so will the homeowners insurance premium. Similarly, If city hall says the value of your home has increased, so does the property taxes. Therefore, the bank has to collect more FROM YOU in escrow in order to pay the bill.  Another thing to consider before purchasing is property taxes.  The price of your dream house can be just right but if property taxes are high, your monthly payment will increase significantly.  Choose wisely!

5. Maintenance Responsibility

YOU OWN THE HOME not the BANK… You. Do not call the bank when there is a flood in the basement, roof leaks, gas leaks, hot water tank breaks, furnace breaks, when your stove breaks down, burglary,  Grandma is sick etc.  The bank doesn’t care.  The bank’s only care is that your homeowners insurance is paid in case of total loss of their investment.  The bank cares about the structure itself. That’s it.  All of its’ content and their upkeep is your responsibility.  All improvements will come at YOUR expense. Keep all of these things in mind when buying a home.

Homeownership is a major decision but certainly a worthwhile goal. Knowing these things will help you prepare for the responsibility. Preparation will make the buying process easier for you when the time comes to make that decision. For more information on the Buying Process, read this.

Here’s how to make a good offer in a Sellers Market.