Becoming a homeowner is one of the most important financial decisions you will ever make. Education is the key to making a wise, confident decision during the home buying process. Maintaining and protecting your new home provides you with a sense of stability, and helps strengthens neighborhoods and communities. Your credit is important in the homeownership process as well.
Comparing Mortgage Products
All sorts of organizations provide mortgage loans, from your local bank or credit union to government agencies and nonprofit community development corporations. Before you sign on the dotted line, do your research on different rates and terms, and have the very best mortgage for your personal financial situation. The best loan doesn’t always mean the lowest interest rate.
Where to Look: The first step is narrowing things down to a manageable list of loan options. Start with the bank or financial institution where you currently keep a checking or savings account.Get referrals from friends, family, or community organizations. In particular, make sure to seek out any special programs with down payment assistance that might be available for first time or low to middle income homebuyers. This will be especially useful if you find yourself having trouble qualifying for loans with traditional lending sources.
Choosing Your Realtor
Your real estate agent is the backbone of your home buying team. From beginning to end, it’s a real estate agent helping you to select, negotiate, legally purchase, and finance your new home. Who do you choose? Here are a few quick tips.
- First, the basics. A real estate agent is a state licensed professional who has been trained and certified to sell houses, other buildings, and land. An agent who advertises as a REALTOR® is a member of the National Association of REALTORS® and subscribes to their code of ethics.
- Second, make sure you know who your agent is working for. A seller’s agent (usually be the person you see on a lawn sign) has a contract with the seller of a house to advertise the property for sale and represent the seller exclusively when offers are made. They get paid by the seller out of the proceeds of the sale. A buyer’s agent, meanwhile, works exclusively for the buyer and gets paid by splitting the commission with the listing agent, or sometimes directly by the buyer. Finally, a dual agent legally represents the interests of the seller and the buyer in the same transaction, usually requiring both parties’ written consent. Regardless of who they are representing, the agent has a legal obligation to deal fairly and honestly with both parties, and must disclose everything they know about the home.
- Third, don’t be afraid to shop around. Interview and look into the credentials of more than one real estate agent when making your decision. Any agent can sell you any home in your area. Therefore, it’s important to find someone who you feel comfortable with and confident in taking you through the many steps of this process.
Choosing Your Inspector
Home inspection generally takes place after an offer has been accepted and the buyer and seller have signed a contract, within a certain number of days, but before the closing of the sale that makes you the owner. The appointment is arranged solely between the professional inspector and the buyer as soon as possible after your offer has been accepted by the seller. The standard home inspector’s report will cover the condition of the home’s heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems, the roof, attic and visible insulation, walls, ceilings, floors, windows and doors, the foundation, basement and structural components.
The US Department of Housing and Urban Development Federal Housing Administration (HUD) has prepared 10 important questions for buyers to use as a guide when looking for and working with a home inspector. If you buy a FHA property, check out getting a home inspection. It is the responsibility of the buyer to pay for the inspection on the day it is conducted. A few days later, you will receive a detailed written report from the inspector. The inspection and any subsequent negotiations must occur within the time period specified in the purchase agreement or the sale will move forward without the benefit of negotiation.
What If…? What if something serious is discovered? Problems discovered during the home inspection process that were unknown before an offer was made and accepted, may affect your desire to go through with the purchase. Your purchase agreement should state that the sale is contingent on the home passing inspection. The buyer and seller have the right to negotiate the cost of any needed repairs or to cancel the contract based on the outcome of the inspection report within the time specified in the purchase agreement. Most likely, the inspection report will include a few less serious issues, and the seller may agree to a set amount of liability in making the repairs.
Protecting Your Home with Insurance
Making sure you purchase the right insurance to protect your home may seem as complicated as it is vital. Here’s a quick rundown of what types of insurance are out there, what levels of coverage they include, and the factors influencing how much you pay.
- Hazard Insurance is what is usually referred to as homeowners insurance. It’s required by the lender in the amount of the mortgage to protect you and the lender against hazards such as fire or storms. This insurance may be more or less comprehensive in how it protects the home.
- Property Protection covers your home, other structures, and possessions, if they are damaged or destroyed due to perils.
- Liability Protection is paid out to third parties if you or any relative or dependent person living in the home is legally liable for an act that harms a third party, provided it is not excluded (i.e. criminal, intentional, or business activities). This protection also includes medical payment coverage to cover medical costs, regardless of liability.
- Flood or Special Hazard Insurance may be required the lender if your new home is in a flood zone or other special hazard area. However, floods can happen anywhere, and are typically not included in standard hazard insurance, so buyers often choose to buy a flood policy even if their home is not particularly susceptible to flooding.
- Mortgage Insurance (often called Private Mortgage Insurance – PMI) is required by the lender if your down payment is less than 20 percent of the price of the home, and protects the lender in case of foreclosure. You will typically pay a mortgage insurance fee at closing, then a monthly fee as part of your payment until you’ve paid off 22 percent of the loan. If your loan is an FHA loan you will pay mortgage insurance (called MIP - mortgage insurance premium) for the life of the loan.
- Title Insurance is required to protect the lender against any problems that may arise with the title to the property. An owner’s policy is also recommended to protect your equity in the property.
Interested in learning more about homeownership?
Choose one of our in-person or online educational opportunities. You can increase your skills and successfully purchase a home.
- Attend in-person workshops or webinars in your community to develop your skills in homeownership. MSU Extension is a HUD certified housing counseling agency and all staff are MSHDA certified housing counselors. Check out our calendar of events online to find classes and programs in your area!
- Take an online homeownership class with MSU Extension and eHome America. This online course ($99) can help you manage your personal finances and debt, analyze credit scores, and understand how much of a home you can afford.
Your credit score is a number generated by factors present in your credit report, a record collected by a credit reporting agency. Most credit reports and scores are supplied by one of the three major national credit reporting agencies: Experian, TransUnion, and Equifax.
Each agency uses a slightly different method calculate a credit score, but they all rely on software developed by Fair, Isaac, and Company (FICO). These credit scores are referred to as FICO scores which range from 300 to 850. The information on your credit report that determines your credit score includes:
- Payment history (whether you’ve paid your bills on time)
- Outstanding debt (whether you’re overextending your ability to repay what you borrow)
- Length of your credit history (how well established you are as a borrower)
- Types of credit you use (a mix of credit cards, installment loans, mortgage loans, etc.)
- New credit (whether you’ve recently taken on new obligations)
Credit Scores and Your Mortgage
Your credit score affects your ability to obtain future credit, whether that credit is a credit card, auto loan, or a home mortgage. If your credit score is particularly low, it indicates to a lender that you are a credit risk, and that they should either take additional precautions when lending you money, or decline to lend you money at all. In terms of a home mortgage, your credit score affects the kind of mortgage you’ll be able to obtain, and what kind of rates and fees will be attached.
- Home buyers with good credit ratings will have access to Conforming Conventional Mortgage Loans, also known as prime rate loans, or “A” loans. These mortgages have the best rate of interest a lender has available according to market conditions, and are made by for-profit lenders without insurance from the federal government.
- For buyers with low credit ratings, meanwhile, there are Subprime Loans, used by lenders when buyers cannot qualify for prime loans. These loans rely on risk-based pricing, which determine your interest rate and fees based on a complex computerized evaluation of your specific circumstances and the likelihood that you will default on, or fail to pay, your mortgage. Subprime loans have a grading system developed by lenders, which range from A- to D. The lower your credit score is, the lower grade loan you will qualify for, and a higher interest rate and fees will apply.
- While subprime loans are pricey, they are not predatory, and can be a legitimate way for someone with a low credit score to obtain home financing. However, it is a fine line, and you must shop carefully and watch out for outrageous fees and unfair terms. Also, it is important to consider other options that may be available to you, including FHA(government insured loans), USDA Rural Development loans, and Michigan State Housing Development Authority (MSDHA) loans which are specific programs for low-income or first time homebuyers.
Check out our fact sheet on bankruptcy and homeownership.
Improving Your Credit Score
Fortunately, it’s possible to improve your credit score! According to Terry Clark-Jones, MSU Extension Educator, “You can improve your credit score by always paying your bills on time, minimizing your credit card balances to below one third of the available credit, and when opening and closing credit account only open accounts when truly needed and close accounts slowly making sure not to close your longest held active credit account.”
TIP! You are entitled to a free credit report from AnnualCreditReport.com one time each year from each of the three credit reporting agencies.