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For Sale: A homebuyer's guide to getting a piece of the American Dream

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Recently, the public's attention has been absorbed by the state of the housing market, as news of subprime lending, housing affordability and the softening market have splashed the headlines. In 2007, the median price for a home in California tops the charts above a half a million dollars at $564,700. This is two and a half times higher than the national median home price of $212,800. Without a proper base knowledge of the cyclical life of the housing market in the sunshine state, the consumer will be left in the dust.

Buying a new home can be a life-altering event, and whether you are a first-time homebuyer or upsizing to a larger home, the homebuying process can be a daunting one. Focusing on understanding the process is the first step in your quest to buy a home. The following provides a simple guide to home buying. Learning and studying these items will save time, money and energy in the long run.

What do I need to buy a home?

There are three important things necessary to make your home buying dreams a reality: cash for a down payment and/or closing costs, a dependable and steady income and good credit. If these things are in place, the next step is to sit down individually or with your significant other and determine what your home buying objectives are.

Consider your home buying objectives and needs

Before you make your way through the following steps, determine what your buying objectives are. Ask the following questions: Why do you want to buy a home? Is it because you need more room? Or less room? Do you want to invest your rent money into a mortgage? Asking and answering all of the questions will help you better understand your current situation, and the underlying desire to purchase a home.

Once you have determined your objectives, you can determine your buying needs. Prioritize your needs (styles, sizes, neighborhoods, schools, etc.) versus your wants. Be realistic in deciding where you are going to live. Maybe everyone wants to live in a mansion, but not everyone can afford it.

Know what you can afford

As obvious as this is, it may not be what a potential homebuyer will think of first. First, start with trying to save as much as you can prior to buying a home. In addition, this is not the time you want to make big purchases, like a big screen television or new car.

Also, review your current debt to determine if your debt-income ratio is lower than 36 percent of your income. If it is not, work on lowering your balances and reducing your overall debt. Once you buy a home, your mortgage payments should be less than 33 percent of your monthly gross income. You want to make sure that you have enough income to support your new home.

Determine your buying power

It is recommended that you check your credit report from one of the three credit agencies at www.annualcreditreport.com. You should do this at least once a year to determine if there are any mistakes on your credit report that could prevent you from being approved for a mortgage.

After checking your credit report and fixing any mistakes you may have, you will want to get pre-approved for a mortgage. This is a step above being pre-qualified, which only determines a "guess" of how much you can be approved for based on unverified financial information you provided to the loan officer.

Pre-approval will give you a set dollar amount that your bank will approve you for. This gives you buying power in advance of deciding on a home. Also, it allows you to set a limit on a house you can afford and can help you close the deal in about 15 days. "Closing on a home" usually takes about 60 days if you are not approved. You may also find that having pre-approval could open doors to a home that you may not have considered.

Determine the loan for you

There are a variety of loan options you can choose, and each depends on your own personal financial situation. There are questions to ask before you decide on a loan, and be sure you understand your loan officer's answers completely before signing any paperwork.

Determine what down payment is required for a specific loan. This cost should be in your budget before you close the deal. The larger your down payment, the lower your monthly payments will be.

Know the interest rate as well as the annual percentage rate for your loan. Will this rate fluctuate, or is it a fixed rate for the life of your loan? For those buyers looking to stay in a home for a short time, an adjustable-rate mortgage may work best for you. The interest rate fluctuates with the market and can save you from paying way too much for such a short time.

Know the lender's closing costs. Find out if there are any extra costs involved. It is OK to ask why the lender charges these fees and how much commission they will make.

Know how to avoid predatory lenders. There are lenders who may encourage home buyers to lie about their finances to be approved, or lend more money than the home buyers are able to afford. If you feel as if you are in a situation where you may be taken advantage of, go to another lender. By knowing which loan you should use and ensuring a healthy credit score, you can avoid predatory lenders.

Search for a home

Now, this is where the fun begins. Actually looking for a house when you have your finances in order makes the process less stressful. Save time and money by having the following essential questions answered before you step out.

¥ Why are you buying a home?

¥ What do you want vs. what do you need?

¥ Do you want to be close to work, schools, shopping?

¥ What size lot/land do you want?

¥ What is the general condition of house that you want? Fixer-upper or ready to live in?

¥ What kind of neighbors will you live on the street with?

¥ Verify the taxes in the city/state in which your home is located. Make sure you can afford it.

Make an offer

After finding the home of your dreams, you may be ready to sign on the dotted line and move in. But, it is recommended that you do a little more research first.

Even if you know the loan amount you are qualified for, you must take it a few steps further to make sure you're getting the best value for your money. To avoid overpaying, check a comparable market analysis (CMA), listing the current sale information of homes in the neighborhood of your potential new house.

When going through the home buying process, be confident in your negotiations. Remember to cover all corners of your offer and to be specific to get the most bang out of your buck. Here are a few tips to remember when cutting a deal to buy your new home:

¥ Do not make a verbal offer or sign anything that has blanks or that you do not understand.

¥ Do not offer the full asking price unless you know you are getting an exceptional deal. This will leave room for you to negotiate.

¥ Make sure your deal contains home inspections in case of any major repair problems that cannot be resolved with the seller.

¥ Make sure the arrangement includes an "out" in the event of major repair problems irresolvable by the seller or financial concerns.

¥ Consult with a real estate attorney if you do not have an agent.

Escrow and closing

The most important step has come. Though the words may seem confusing to the novice homebuyer, a brief explanation will help you take the final step into purchasing your new home.

To begin, you must understand the role of the title company. The title company reviews the title to ensure the previous owners of the home did not have any problems leaving a clear title to the property.

After ensuring no problems with the property, the title company handles the escrow portion of the transaction. This means it serves as a neutral party to exchange funds as well as making certain the buyer and seller both adhere to the terms of the contract.

The escrow agent makes the final steps toward making the acquisition of the home official. The agent prepares a closing statement outlining the required funds, who's paying and where the funds are going. By ensuring the homebuyer a clean title, the lender is ensured a good mortgage and all financial transactions are legitimate and beneficial. The escrow agent closes the purchase.


Schroeder is CEO of San Diego Metropolitan Credit Union. The credit union routinely holds free home buying seminars, and the next workshop is slated for June 12.

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