Those home and garden network shows featuring couples scoping out potential homes are entertaining, but in real life, the process can be complicated,
confusing, and filled with highs and lows. With any major life decision, the more homework (pun intended) you do, the better prepared you will be. In this guide, you’ll find everything from terms explained to advice and a few homework assignments.
CREDIT CHECK: Get to know your credit rating. Higher scores represent a better credit history and make borrowers eligible for lower interest. You’ll want to learn what your debt-to-income (DTI) ratio is, which is a tool lenders use to decide how much you can borrow. Different loan products and lenders have different DTI limits. To calculate yours, add all of your monthly debt payments (car payment, credit cards, etc.) and then divide them by your gross monthly income (generally the amount you have earned before your taxes and other deductions are taken out). If your DTI doesn’t look great after you run the numbers, set goals for paying down debt and re-check the ratio monthly to measure your progress.
SAVE MONEY: With your credit looking good, it’s time to think about a down payment, which is the amount you pay toward the home upfront. You put a percentage of the home’s value down and borrow the rest through your mortgage loan. Generally, the larger the down payment you make, the lower the interest rate you will receive and the more likely you are to be approved for a loan. Low- or no-down payment options may be available to you. There are special programs for veterans and service members, rural residents, some types of first-time homebuyers, and others. Individual lenders may also offer their own low- or no-down payment options. Low-down payment options usually come at increased cost. When you meet with lenders, ask questions and ask to see multiple choices.
EXAMINE SPENDING: Take a close look at what you spend your money on. Meals out and streaming services add up fast. Consider starting a monthly budget or using a spending tracker app.
CHECK FOR UNCLAIMED MONEY: Each year, the Office of the General Treasurer recovers unclaimed cash and assets from businesses, banks, landlords, safe deposit boxes, and utility companies, all kept safe until it can be returned to its rightful owner. More than 300,000 Rhode Islanders have property waiting to be returned to them, and many don’t even realize it until they search the database. See if money is waiting for you at FindRIMoney.com
A glossary of terms that will help in the homebuying process:
5/1 Adjustable Rate Mortgage: Or a 5-year ARM is a mortgage loan where “5” is the number of years your initial interest rate will stay fixed. The “1” represents how often your interest rate will adjust after the initial five-year period ends. The most common fixed periods are 3, 5, 7, and 10 years and “1” is the most common adjustment period. It’s important to carefully read the contract and ask questions if you’re considering an ARM.
Adjustable rate: Adjustable-rate mortgages (ARMs) offer less predictability but may be cheaper in the short term. If you opt for an ARM, keep an eagle-eye on the Federal Reserve Bank. When they hike interest rates, your floating rate goes up, too.
APR: The annual percentage rate is a wider measure of the cost of borrowing money than the interest rate; it reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.
Buyer’s agent: Assists and represents their clients through every step of the homebuying process, including finding the right home, negotiating an offer, recommending other professionals (e.g., mortgage brokers, real estate attorneys, settlement companies), and troubleshooting problems (e.g., home inspection or appraisal issues).
Conventional loan: Any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs).
Escrow: An account set up by your mortgage lender to pay certain property-related expenses, like property taxes and homeowner’s insurance. A portion of your monthly payment goes into the account. If your mortgage doesn’t have an escrow account, you pay the property-related expenses directly.
Fixed rate: Your interest rate and monthly principal and interest payment will stay the same, but your total monthly payment can still change – for example, your property taxes, homeowner’s insurance, or mortgage insurance might go up or down.
Interest-only: Interest-only (I-O mortgage) plans allow you to pay only the interest on the loan for a specified period. This means a lower monthly price gets you started. Once the I-O period ends, your monthly cost could rise significantly, since you are now paying principal and interest.
Listing: A property that is for sale.
Listing agent: A real estate agent who represents a home seller and helps clients who are selling with a wide range of tasks, including pricing their home, recommending home improvements or staging, marketing their home, holding open houses, coordinating showings with home buyers, negotiating with buyers, and overseeing the home inspection process and closing procedures.
Long term: Lower monthly payment but you’ll pay more in interest.
MLS: Acronym for multiple listing service – a digital database of current real estate listings operated by a group of agents or brokers.
Principal: The total amount borrowed
in a mortgage.
Private Mortgage Insurance (PMI): An additional cost required if you don’t put 20 percent down to protect the lender should the borrower go into default.
Real estate agent: Someone with a professional license to help people buy, sell, or rent all sorts of housing and real estate.
Realtor: A licensed agent with the ability to use that widely respected title, an agent needs to be a member of the National Association of Realtors®.
Real estate broker: Someone who has taken education beyond the agent level as required by state laws and passed a broker’s license exam.
Rental agent: Helps consumers find properties to rent.
Short sale: A property sold for less than the amount owed on the mortgage.
Short term: Higher monthly payment but you’ll pay less over time in interest.
Source: ConsumerFinance.gov
List Pros and Cons
Homeownership can be rewarding and a good way to build wealth, but there are risks and responsibilities associated with owning property. When you rent, your landlord is responsible for the property and takes on the risks. When you buy, you take on risks and responsibilities. Some cons to consider: Your home value could decline, and you could lose equity or even owe more than your home is worth. If something important breaks, expensive repairs are your responsibility.
Do the Math
Like any purchase, you must figure out how much you can afford. Take an honest look at your income, monthly expenses, and credit rating. Be realistic, too – you don’t want to get into a situation where you are “house poor,” which is when you buy a house above your means. In other words, after you pay all of your bills, you still want to order a pizza on a Friday night. Make sure there’s some cash reserves, too,
so that if after a month your roof leaks or
the dishwasher breaks, you’re okay.
Ask Questions
Ask lenders about any special programs, like RIHousing’s 10kDPA program, which provides a $10,000 down payment assistance loan to eligible homebuyers in Rhode Island.
Research Locations
Many factors go into deciding where to live. Do you want city-living with cafes within walking distance? Maybe something by the water? Or it could be based solely on how school systems rank. This is why going down various real estate website rabbit holes can help. RILiving.com, for example, offers neighborhood reports, tax rates, and helpful stats about cities and towns, even the monthly median temperature (especially handy if you live in Westerly and wonder about the weather in Foster Glocester). Don’t forget to visit at various times. A quiet neighborhood by day may turn into a party palace once night falls. Consider checking in with local law enforcement to ask about the area.
Get Organized
Be prepared by assembling a loan application packet; this way you’ll be ahead of the game when it’s time to gather your personal and financial info.
• Pay stub for the last 30 days
• W-2 forms, last two years
• Signed federal tax return, last two years
• Documentation of any other sources of income
• Bank statements, two most recent
• Documentation of the source of your down payment: investment or savings account statements showing at least two months’ history of ownership. If some of the funds were a gift, get a signed statement from the giver stating that the funds were a gift.
• Documentation of name change, if recent
• Proof of your identity (typically a drivers’ license or non-driver ID)
• Social security number
• Certificate of housing counseling or home buyer education, if you have one
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