Buying a House
Government and business support of homeownership makes buying a house an achievable goal for most Americans. Loans, tax breaks and other incentives for buying a home make homeownership attractive and within financial reach for a majority of people in the U.S.
Benefits and Drawbacks of Homeownership
Homeownership has long been a key part of the American dream. Homeownership comes with advantages shaped by the finance and housing industries and by government policies. But you should also consider drawbacks of homeownership when you consider buying a home.
- A home purchase is an investment that creates equity.
- A home purchase may improve your credit score.
- Home ownership creates long-term stability, reducing the number of times you move.
- Mortgage payments are predictable.
- You can borrow against the equity you build.
- You can pass your home to your children or other heirs.
- You have greater control over your living space with a home you own rather than rent.
- You have greater flexibility for pet ownership than with rental properties.
- A down payment can mean high upfront costs to buy a house.
- Monthly expenses tend to be less predictable than renting.
- Mortgage payments may be higher than rent.
- Rent can increase at any time.
- Selling a home can take considerable time in some cases, leaving you stuck with multiple mortgages or mortgage and rent if you move.
- You are less mobile and flexible if you decide to move.
- You are responsible for property taxes and other fees — though these may be passed along to you as a renter as well.
- You are responsible for repair and maintenance costs for the home.
Advantages for First-Time Homebuyers
Nearly two-thirds of U.S. households owned a home as of late 2021, according to the U.S. Census Bureau. That’s down from a high of 70 percent in 2004. This high rate is largely due to advantages provided to first-time homebuyers.
First-time homebuyers qualify for federal loans, tax breaks and other programs that can help them get around the traditional 20 percent down payment required for most home loans.
- Federal loans
- First-time homebuyers may qualify for Federal Housing Administration (FHA) loans. The FHA insures mortgages making them more affordable for some homeowners. Veterans and service members may also qualify for Veterans Affairs (VA) home loans.
- Commercial loans
- Almost all major mortgage lenders offer loans specifically for first-time home buyers. You should ask lenders what they offer and shop around for the best rates.
- Tax breaks
- Homeownership comes with a range of tax breaks. This includes the mortgage interest tax deduction, property tax deduction and other tax deductions or credits. These are tax breaks that are available to all homebuyers. The First-Time Homebuyer Tax Credit passed during the 2008 recession has since expired.
- State programs
- Different state housing authorities offer down payment and closing cost assistance to many first-time home buyers. You can contact your state housing finance agency to see what state homeownership programs you may qualify for.
Even if you have purchased a home in the past, you may still qualify as a first-time home buyer under federal regulations set by the U.S. Department of Housing and Urban Development.
- Anyone who has had no ownership in a primary residence during the three-year period ending on the date of a new home’s purchase. (If one spouse had no ownership, that person is considered a first-time homebuyer).
- A single parent who has only owned a home with a former spouse while married.
- Any displaced homemaker who has only owned a home with a spouse.
- A person who has only owned a principal residence which was not permanently affixed to a permanent foundation in accordance with applicable regulations.
- Anyone who has only owned a home that was not in compliance with state, local or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent home.
Talking with your real estate agent may also point you to other first-time homebuyer advantages for your particular location — or for the particular house you’re thinking about buying.
Before You Buy
There are several questions you have to ask yourself before deciding to buy a house.
These include your finances, whether you really want to buy a house at this stage of your life, how much you can afford and where you will get the down payment.
How Much House Can You Afford?
When determining how much house you can afford, you should start by taking an inventory of your financial situation.
- Debt-to-income ratio
- Your debt-to-income ratio is your monthly debt payments divided by your gross monthly income. If your ration comes to 43 percent or higher, you’ll have a much harder time finding a mortgage because it generally means you’ll have a harder time repaying your loan.
- Credit score
- The higher your credit score, the more likely you are to get a mortgage or other loan. Credit scores range between 300 and 850 based on your financial history. You typically need a credit score of 620 or higher to buy a house. You can request a free copy of your credit report — and should do so each year — to check your credit score and look for errors in your credit history.
You’ll also have to consider how much you can afford on a monthly basis for mortgage, property taxes, maintenance and other costs associated with home ownership.
Saving for a Down Payment
In addition to the month-to-month costs of homeownership, you’ll typically need to cover a down payment before you get a mortgage.
With a conventional loan, the down payment is 20 percent of the home’s cost. The average sales price for a home in the U.S. was $477,800 in late-2021. That would mean you would have to come up with a traditional down payment of $95,560.
But there are strategies to get around this.
An FHA loan may reduce your down payment to as little as 3.5 percent of the cost — dropping your down payment to as little as $16,723.
You can also shop around for commercial lenders that will offer rates as low as three percent, but the FHA loans may be easier to qualify for.
- Save your income tax refunds.
- Set up a savings account dedicated to home buying.
- Tap into your other savings or retirement funds — you can borrow against your 401(k) plan or individual retirement account (IRA) in certain circumstances.
- Consider VA loans or other government programs.
- Ask the seller to help — they may be willing to reduce the asking price, or give you the down payment as a credit.
- Ask for a loan from your parents or other close relatives.
In some cases, you may qualify for a zero percent down payment. You will have to have excellent credit and will have to live in a state or community that offers 100 percent financing through a first-time homebuyer program for which you qualify.
The Home Buying Process
The home buying process can be lengthy and time consuming, but you can break it down into a series of seven steps.
- Get pre-approval for a mortgage
- Seek pre-approval for a home loan from a lender. This will let you know how much of a loan you can get and let you see what houses are in your price range. You’ll still need to get full approval after you find the home you want.
- Find a real estate agent
- You don’t need a real estate agent to buy a house, but they can save you time, help you get home buying information, narrow down your best search options and handle negotiations. In addition, their services are usually free to buyers.
- Create a checklist
- List the things you want in a home, from the price range, to nearby schools or other amenities, to features of the house itself. This can help you narrow your focus to the houses you are interested in.
- Find the right house
- The right house should check off as many boxes as possible from your checklist — giving you as much as you want while staying in your price range. Buying a house is a long-term commitment, so you want to make sure the house you settle on is one you can live with.
- Make an offer
- With your pre-approved mortgage as a guide and working with a real estate agent, you can produce an offer that matches your home, the market and your budget considerations. You — or your real estate agent, if you have one — can put together an offer letter. If the seller rejects your offer, you can begin negotiations to get the best price possible.
- Get the home inspected and appraised
- You will want the home inspected and appraised before buying it. These procedures will cost you hundreds of dollars but they will expose any potential problems that may cost hundreds — or even thousands — more. If there are problems, you typically have seven days after the inspection to walk away from the deal. The appraisal is a professional assessment of the home’s actual value based on several factors. If the appraisal is lower than expected, the sale can be canceled or delayed.
- Take a final walkthrough
- This is your final tour of the home after the seller has moved out, but before you close on the sale. It’s your chance to examine any agreed upon repairs and to make sure there are no new problems. It’s your final chance to look over the house before going through with the purchase.
- Close on the home
- Closing is the final step before you take ownership of the home. The closing date is the date you become the new owner. You will sign paperwork including your mortgage note promising to pay your home loan, the mortgage or deed of trust that secures the mortgage note and a settlement statement listing all costs related to the home sale. You’ll also pay closing costs — about three to four percent of the home’s sales price.
Steps To Take After Purchasing a Home
If this is your first house as a homeowner, there are a lot of things you may have taken for granted that are going to need immediate — and often ongoing – attention.
- Hook up utilities. Ideally you should schedule this ahead of time so water, gas and electric services can be switched over to you as soon as you close or new internet or cable can start as soon as possible after moving in.
- Change your locks. You want to make sure anyone who had a key before can’t get in.
- Reset security codes. This includes your garage codes and any gates or other coded devices on the property.
- Update your address. The bank, the Department of Motor Vehicles, credit cards and other regular billing services need to know where to find you. Your voter registration and driver license information also need to match your new address.
- Check your smoke detectors. New batteries right away will prevent a rude awakening in the middle of the night, scrambling through your boxes looking for batteries.
- Get familiar with your house. Know where electric, water and other utilities connect and how to turn them on or off if you need to. This can also make home maintenance easier when it’s needed.
- Schedule and budget house and utility payments. You can set a schedule for payments or set them up on autopay so you don’t miss one.
- Create a maintenance schedule — Use your home inspection report to create a to-do list for maintenance. Also know how often your appliances, HVAC and other parts of your house need maintenance and put those dates on your calendar. Replacing air conditioning filters monthly can prolong the life of a HVAC system worth thousands of dollars. Maintenance on other parts of your house can also be a big money saver overall.
- Review your paperwork. Make sure you understand your mortgage statement and get to know your loan servicer. You will have a large stack of paperwork from the closing, which you must keep in a safe place for future reference. And ignore any refinance offers you’ll likely be flooded with after moving in. They could be costly if you have just closed on your mortgage since you will have to pay closing costs on any of these offers as well.
The process of looking for a house, closing on it and moving in can seem like running a marathon. But as you settle into your new home — crossing the finish line on that marathon — you may likely find the ongoing efforts of maintaining your new home become routine.
13 Cited Research Articles
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