- The Washington Times - Thursday, June 23, 2005

Spiraling home prices, bidding wars over resales and the specter of camping overnight for new homes must strike terror in the hearts of renters in the Washington area who long to own a home. Buying a first home has always been a financial and emotional leap for consumers. The seller’s market in this area and the explosion of confusing mortgage offers have combined to make the move to homeownership seem even more difficult.

Financial advisers and real estate experts agree that the best way for renters to become homeowners is through a long-term process of preparation and education.

Few homeowners have been able to slide with ease from renting to owning, so organizations such as the Federal Home Loan Mortgage Corp. (Freddie Mac), Fannie Mae, and federal and state housing authorities have developed a variety of resources to provide consumers with information so that they can make educated decisions about purchasing property.

Many consumers need to begin the renter-to-owner process years before they can purchase a home. The following timeline provides a guideline to the process.

2 TO 3 YEARS BEFORE PURCHASE

Potential buyers need to begin by carefully examining their finances and plans to determine whether homeownership makes sense for their circumstances.

“At the very beginning of the process, you need to look at the costs of renting versus buying a home,” says Stephen Israel, a buyer’s broker and president of Buyers Edge Co. in Bethesda.

“In our area right now, the monthly expenses of owning a home are significantly higher than renting one,” Mr. Israel says. “In today’s market, it is cheaper to rent, even when you factor in the tax break of owning a home, but that leaves out the potential appreciation of the property. Buying a home is still worth it if the market continues to appreciate, even with the higher costs.”

Certified financial planner Richard Vodra, vice president of Legacy Advisors LLC in McLean, says: “My basic rule of thumb is that the purchase decision should not primarily be a financial decision. The decision should be a personal lifestyle decision.

“If you are moving out of the area within three years, it may not make sense to buy because of the cost to buy versus the cost to rent,” he says. “Then again, it is always a good idea to clean up your credit and save money, anticipating that in the future home prices will be more reasonable.”

Phyllis Westall, housing and education manager for the Credit Counseling Network in the Washington region, recommends that renters review one of the many online calculators to help them determine whether renting or buying makes greater financial sense for them.

“At Bankrate.com, you can go to the rent-versus-buy calculator, which can help you tell over time whether you will save or lose money,” says Ms. Westall.

Renters who are uncertain about whether they are ready for buying a home can attend a homeownership class or seminar. CCN offers a three-hour “Homeward” program for an initial idea of what resources are needed to buy a home.

Once the decision is made to pursue homeownership, consumers need to begin preparing.

“Some consumers may need a two-year series of homeownership classes, particularly if they are low-income, have credit problems or any other barriers to buying a home,” Ms. Westall says.

“Most people will benefit from a one-year series of classes. Consumers who are almost but not quite mortgage-ready would benefit from a three-month series of classes,” she says.

As much as two or three years in advance of the purchase of a home, consumers should begin to establish or clean up their credit and begin saving money.

“At the farthest time out before buying a house, consumers have to establish credit and then to keep good credit,” Mr. Israel says. “Generally, you establish credit by obtaining a credit card and using it. While it may be a good idea financially to buy $50 worth of stuff and pay it off each month, lenders want to see that you have had a balance of, say, $1,500 or so and have been able to pay it off. To establish good credit, you obviously need to pay all your bills on time, stay below your credit limit and pay off a debt.”

Many consumers are unaware of their credit score or what information lenders will need in order to qualify them for a loan.

Ms. Westall suggests that consumers with difficulty understanding their credit report or with a low credit score contact a credit counselor recommended by CCN or the U.S. Department of Housing and Urban Development.

“In an individual session of 45 minutes to one hour, which costs about $20, a counselor can go over the credit history and put together a budget that looks at income and expenses,” Ms. Westall says.

“People often don’t realize that 70 percent of credit counseling does not result in a debt management program,” she says. “Most people just need to review their individual spending habits and income to put together a savings plan.”

CCN counselors can pull a credit history merged from the three major credit-reporting agents (Experian, Equifax and TransUnion) and review them with consumers for $60, or, for just $10, a counselor can do a quick review of a credit report already obtained by a consumer.

It can take time to correct errors in a credit report. Consumers may also need time to repair their score by paying down debt and paying their bills on time.

1 YEAR BEFORE PURCHASE

In addition to establishing and maintaining good credit, potential home buyers need to save money as early as possible.

“Buyers need to save money and put it in a safe place, such as a money market fund or certificate of deposit, not in the stock market,” Mr. Vodra says. “If you don’t have any cash, then you need to create it by cutting back on expenses and skipping vacations. I remind people all the time of the ‘Starbucks effect.’ If two people save $5 each workday instead of buying a coffee and there are 250 working days a year, they will have saved $2,500 in a year.”

Although many mortgage programs are advertised as no- or low-down-payment loans, they still have associated costs.

“Saving money is part of what potential buyers need to do,” Mr. Israel says. “In today’s market, there are 95 and even 100 percent loans, but you need either perfect credit or to participate in a home buyer’s program to get one with a low interest rate.”

“Even with a 100 percent loan,” he says, “buyers will still need money for closing costs and should anticipate needing 3 or 4 percent of the home’s value for those.

“Also, lenders need to see that you will have reserves in the bank when they make a loan approval, and cash will be needed for moving and making minor improvements to the home,” he says.

Ms. Westall recommends a specific method of determining how much consumers should save while they are renting.

“Buyers should go online to determine how much house they can qualify for at their income level, then add 1 percent of the market value to find out how much they should be saving each month after they buy a home to pay for maintenance and emergencies,” Ms. Westall says.

“On a $300,000 home, this should be about $250 per month,” she says. “If someone is paying $1,000 in rent now, they should determine what their mortgage payment will be. On a $300,000 house it would be about $1,450 a month.”

Ms. Westall recognizes the difficulty many people have saving money.

“To try to save $500 per month or more while renting will be a hardship, but it enables people to save money for a down payment and to become accustomed to living at that budget level,” Ms. Westall says.

6 MONTHS BEFORE PURCHASE

Once a pattern of saving and maintaining good credit has been established, consumers should begin to educate themselves about the variety of loan programs that are available.

The Freddie Mac and Fan-nie Mae Web sites (www.freddiemac.com and www.fanniemae.com) include explanations of various loan programs, and the Virginia Housing Development Authority includes a succinct explanation of loan programs on its Web site, as well.

Lenders can also explain the benefits and disadvantages of particular programs, as well as determine the maximum loan amount for which a buyer can qualify.

“Probably, checking with a lender to figure out what you buy is not that useful because you will think you can afford more than you can,” Mr. Vodra says. “A lender will look at your income, net worth and savings to determine how much of a monthly payment they think you can afford. Consumers should then drop that amount by at least 5 to 10 percent because lenders usually will give you a maximum, not what you should spend.”

Ms. Westall suggests that buyers decide the maximum mortgage payment they will be comfortable making and then work with a lender to determine which program works best for them.

Many financial experts are concerned about the popularity of interest-only loans, which allow buyers to qualify for a larger loan but do not build equity and require higher payments within a few years.

“I wouldn’t recommend that anyone buy anything that they can’t afford to buy at 20 percent down with a 30-year fixed-rate loan, even if they don’t choose to finance it that way,” Mr. Vodra says.

“You need to figure it out backwards, first looking at what you can afford and then looking at what you can buy, and not the other way around,” he says. “Believe it or not, a lot of people do this by first seeing what they want and then figuring out they can afford it.”

At about six months before they intend to purchase a home, potential buyers should interview and choose both a buyer’s real estate agent and a lender.

“Many consumers start off with a visit to a lender, and a lender can provide you with basic calculations to help you determine what you can qualify for,” Mr. Israel says.

“But a lender will only look at the financial picture, not the big picture, so buyers are really better off starting with a real estate broker who represents buyers,” he says. “The broker can help you figure out where you want to live and what kind of environment you want, as opposed to what you can qualify for.”

Although it is tempting to begin searching for property immediately, experts recommend limiting this practice until closer to the anticipated time of purchase.

“The risk of looking too early is that your apartment looks smaller and smaller, so you become tempted to jump into the market with a risky loan program such as an interest-only loan or a short-term adjustable-rate loan. Pretty soon, you’ve talked yourself into a disaster,” Mr. Vodra says.

3 MONTHS BEFOREPURCHASE

At some point along the road from renting to owning, renters need to switch from a one-year lease to a short-term lease.

“Month-to-month leases usually cost more than long-term leases,” Ms. Westall says. “For some people, it can work better to put their belongings into storage and live in a furnished short-term rental in anticipation of moving into a permanent home.”

In addition to preparing for leaving the rental home, potential buyers need to obtain a preapproval for a loan.

“Loan preapprovals are usually good for 60 to 90 days, so buyers should keep that in mind when they are ready for an approval,” Mr. Vodra says. “Once they have the preapproval, they should begin paying close attention to the real estate market and begin working closely with a Realtor.”

Ms. Westall recommends that consumers consider carefully the effect buying a home will have on their lives, including transportation issues.

“Homes which are geographically distant from the city may be less expensive, but the travel costs go up considerably, including travel time, gas, car wear and tear, or the cost of public transportation,” she says.

1 MONTH BEFOREPURCHASE

Once a home has been chosen and an offer made and accepted, buyers need to maintain close contact with their real estate agent and lender to be certain that all aspects of the arrangement are being completed satisfactorily.

Consumers need to obtain homeowner’s insurance as soon as possible, arrange for movers and utilities, and be certain that the funds needed for the closing will be available.

A home inspection should be arranged, even if only for informational purposes, so that the consumers can identify potential problems in the home and understand how to care for the home in an emergency and how to handle routine maintenance.

The lender or real estate agent should provide the buyers with a good-faith estimate of the closing costs and fees that must be paid at the settlement.

Just before the settlement, buyers will have an opportunity to inspect the property on a final walk-through to be certain that the home has been left in good condition and includes any items that were contracted to convey to the new owners.

CLOSING DAY

Real estate agents usually recommend a settlement agency and title company for the closing, so consumers need to be prepared with identification, proof of paid homeowner’s insurance and certified funds at the settlement. The keys to the property will be handed over at the end of the closing.

POST-PURCHASE

“Credit counselors and HUD recommend that consumers in a home buyers’ program continue that program after the purchase for at least three months or so,” Ms. Westall says.

“Both front-end and back-end programs are needed to make sure that consumers understand what it means to care for a property, to warn them about the pitfalls of the credit offers which pour into the home when you buy a property, and to remind people of how much they should be saving to fix up the house,” she says.

Some consumers may find when they anticipate buying a home in two or three years that they are far closer to achieving that goal than they realize, while others may find that they need to prepare themselves rigorously for what is likely to be the biggest investment of their lives. Either way, potential buyers all need to begin with educating themselves and developing sound finances.

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