Home ownership is the cornerstone of the American Dream. While it may or may not be your dream (depending on your list of priorities and financial goals) it is one of the most major of all major purchases you could ever make.
Before you delve in – or shrug it off completely – you’ll need to have a thorough understanding of the benefits of ownership and the process of buying.
To Rent a Home or Buy a Home? That is a Tax Question
Apart from lifestyle and other considerations (see Getting Started Rent vs. Buy), there are additional head-turning advantages associated with homeownership. Here's a brief overview of what they are:
- The mortgage interest deduction: If you’re itemizing deductions from your Schedule A of Form 1040, you can deduct the amount of interest you’ve paid on your loan or mortgage over the course of the year. The same applies to your real estate property tax.
- Energy tax credit: If you make energy-efficient improvements to your home by the end of 2013, you could be entitled to a 10% credit. That includes the addition of green roofs, windows, skylights, exterior doors, and insulation materials.
- Capital gains exclusion: If you make money on the sale of your home, you can exclude some or all of that “gain” from federal income tax.
It’s a Process
Buying a home is not only a major purchase, it’s a stressful one. Knowing what to expect ahead of time can quell some of the trauma.
Step 1. Mortgage pre-qualification & approval
Take a look at your budget [see Budgeting & Adjusting Your Budget] to determine how much of a mortgage you can afford, then shop around for the right mortgage rates and terms from various lenders. Next:
Pre-qualify to get an estimate of how much you can borrow, which can usually be done over a free and quick telephone call to the lender. Then:
Get pre-approval when you’re serious about buying, which will require an application, income verification, credit check, and usually a fee
Step 2. Lining up a real estate agent or buyer’s broker
An agent or broker worth a grain of commission will guide you through this process painlessly and seamlessly. His or her job is to:
- Show you properties and neighborhoods within your price range
- Act as an intermediary in negotiations
- Help you assemble your dream (home) team, including lawyers, mortgage brokers, title professionals, inspectors and more
- Disclose positives and negatives of the properties you’re considering
Step 3. Shopping for the right home
While this should be fun, it’s often not if you (and your partner) don’t have clear expectations of what you’re looking for in a home. To name a few, consider the price of the house and potential for appreciation; location; quality of construction, age, and condition of the property; quality of local schools; crime level; property taxes; proximity to shopping, schools, and work.
Step 4. Making the offer
The offer/counteroffer process is typically handled through an intermediary, like your real estate agent, and contract. Included with the initial offer contract is a nominal down payment, sometimes just $500. Then if the seller accepts it, he or she will sign. Then, what you’ve got is a binding agreement.
Step 5. Closing the Deal
The closing meeting, also known as a title closing or settlement, can be tedious and intimidating, but once it's over…it’s over!
Some or all of the following people should be present:
- You and your attorney
- The seller and/or the seller's attorney
- The closing agent (a real estate attorney or the representative of a title company or mortgage lender)
- Your real estate agent and the seller's real estate agent
Bring your favorite pen because you’ll be signing:
- The promissory note, which details the amount and repayment terms of your mortgage loan
- The mortgage
- Truth-in-lending disclosure, which will tell you exactly how much you will pay over the life of your mortgage, including the total amount of interest
- HUD-1 settlement statement detailing the cash flows between the buyer, seller, lender, and other parties to the transaction
Note: at this juncture, expect to pay between 3 to 7 percent of your mortgage amount for costs and fees, although you can sometimes negotiate with the seller to pay a portion or all of this.
Apart from moving in, there is no step six. Only: live within your budget.
Now, let’s walk through two other major purchases: