How to Buy a Home

The purchase of a house is probably the single largest financial investment that a person undertakes in their lifetime. The process can be long and complicated. Here we'll look at the importance of a good credit history, how to evaluate a real-estate agent to assist in the home-buying process, the different types of mortgages available, the appeal of foreclosed properties and the key items to consider throughout the process.

Credit History

Your credit history will be a key factor when banks determine if they will approve a mortgage loan for you. A higher credit score can get you a lower down payment and a more attractive interest rate, which can save you tens of thousands of dollars over the life of a mortgage.

At least six months – if not longer – before your start your search for a home, you should get a copy of your credit report from each of the three major reporting agencies – Experion, Equifax and Trans-Union. Carefully look over each report, and if you find any errors, address them right away, in writing, and include any documentation, such as canceled checks or receipts. Late payments, particularly, can have a negative affect on your credit score, so be be sure to make all payments on time.

By doing all this in advance, you can help avoid the unwelcome surprise of an unsettled credit report when you are already in the process of buying a house.

Finding A Real Estate Agent

It is vitally important that you engage a Realtor who represents your interests when you start to look for a house. Since there is no formal rating system for agents, here are some questions to consider:

Is your agent a Realtor? For how many years? Is this the agent's full-time job?

Have their been any complaints filed against him or her?

How familiar is your agent with the market, neighborhood and price range?

What levels of support and service will your agent provide?

Will your agent provide references of past customers?

Does your agent represent only you, as a buyer?

Types of Mortgages

There are two principal types of mortgage loans – fixed and adjustable -- with a large number of variations on them to choose from.

With a fixed mortgage, the interest rate you pay and the number of months you borrow the money for are set at the inception of the loan; the principal and interest components of your monthly payment will never change. The vast majority of mortgage loans in the U.S. are fixed, because it is a stable and predictable way to finance a home.

Often referred to as an adjustable rate mortgage (ARM), the interest rate of an adjustable mortgage can go up and down over the life of the loan, making your monthly mortgage payment larger and smaller.

Some mortgages have a cap on the amount the interest rate can rise or fall.

The rate cap, adjustment index (often the prime rate or Treasury certificates) interest rates and time periods are all set at the inception of the loan.

Ask your real-estate agent and bank loan officers about other possible ways to finance a home:

• FHA loans – Guaranteed by the U.S. government
• Option ARM – The interest rates changes monthly and has no cap
• Balloon mortgage – At the end, a set amount of the principal is due in full
• Interest-only loan – Interest only is paid for a set period of time
• Buy-down – Buyer pays some money up front (called points) to reduce the interest rate

In the current economy, many homeowners fall behind in their payments and the mortgage lender forecloses on their properties. A foreclosed property is an excellent opportunity to buy a home at a below-market price, but you need to proceed carefully. Here are some things to consider:

• Many foreclosed homes have been neglected and are in need of repairs
• You should require an inspection and the ability to back out if it finds problems
• Is the price competitive with comparable properties in the area?
• Check for liens and proper releases – do a title search
• Foreclosed homes often come with back tax bills – check with all taxing authorities
• Is the existing mortgage assumable?

Foreclosed properties often sell at 20-25 below market, but there will typically be a minimum bid.

As we mentioned, buying a can be a very complicated process. Here are a few other things you will need to consider as you go through it:

Develop a budget – remember, your payment will consist of principal, interest, taxes and insurance. Some lending institutions may also require private mortgage insurance. Don't forget utilities, repairs and maintenance.

Shop around - Look at lots of houses in different areas and neighborhoods to get a better feel for what will best meet your needs and the prices of different kinds of homes.

As we said at the outset, buying a home is the largest financial investment most people will ever make. Paying attention to the little things as well as the big can make the process more relaxed and enjoyable for everyone.