The New England Real Estate Team

 

Step 1: Are you ready for home ownership?

 

Here we will help you identify the obstacles to home ownership and how to go about removing them and fulfilling your dream. It will take some effort but, the quest is not difficult. All you need to do is be very honest with your current financial situation. Hopefully you will discover that you're financially fit and ready to buy your dream home.



Are you ready for home ownership?

This is a great question to ask your self. To help you determine if you are ready you will need to break this question into several other questions to test your motivations, your ability to plan, your current financial status and your future financial well-being:

  • Do you have a strong desire to own a home?
  • Do you believe that home ownership is important to your financial future?
  • Do you believe your job is stable and secure for more than 3 years?
  • Do you expect to reside in the same geographical area for the next 3 years?
  • Do you have 3 or more years of reasonably good continuing and reliable credit history?
  • Do you have some money saved for a down payment and/or enough to cover the closing costs?
  • Do you have extra money each month after paying all your monthly expenses?
  • Do you consider yourself a reasonably financially responsible person?
  • Do you consider your current rent excessive with nothing to show for at the end of each year?

Be honest with yourself when mulling over these questions.

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Calculate your current living expenses.

Where does your money go? Before you can determine how much home you can afford, you will need to calculate what you currently spend. If you have not tracked your expenses and are not sure where your money goes you may find that the following may be helpful:

  • Track all your expenses for the next several months. Keep a log with you and write down all you expenses no matter how small.
  • Check your log against any previous months bank checks, bank statements, credit card bills, cash receipts. You can even go on-line and check your bank and credit card transactions.
  • Don't forget any future expenses such as car repairs, doctor visits, pet bills, new baby, collage expenses and other non-repeatable expenses.
  • Include any future salary changes or raises for the next 3 to 5 years. If you have a spouse, do either of you plan to stop working?

General guidelines are that your total mortgage payments should not exceed 25% of your gross monthly income. Also your total dept (does not just include credit cards and student loans but, it can also include alimony, child support, car loans, and housing expenses.) should be no more than 36%, if possible. Any higher than 38% of your gross income could put you into a financial bind.

Below are the Nation Wide Averages for typical house hold expenses:

  • Housing - 33%
  • Transportation - 19%
  • Food/Drinks - 14%
  • Retirement - 9%
  • Health Care - 6%
  • Entertainment - 5%
  • Apparel/Services - 4%
  • Other/Misc. - 10%
  • (Source: U.S. Bureau of Labor Statistics Report 986, June 2005)

**Note: You can do a very gross estimate of how much mortgage you can afford by multiplying your gross income by 2.5. The actual number will vary based on factors such as your dept and credit history.

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Consider any future income changes.

It is much easier to control your expenses than controlling your future income. You may find that the home you seek will require you to have a higher income. So take a moment to consider the following:

  • If you were to start a new family.
  • If your income should increase in the near or long term.
  • If your income should or should not keep up with inflation.
  • If one of the family members should stop working.
  • If a promotion is in your future.
  • If any work related bonuses will continue in your working career.
  • If any unexpected expenses occur. Do you have some form of reserves.
  • If you become a care giver.
  • If you have any children going to collage and so on...

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Calculate your net worth.

What is your net worth? To do this you will need to sit down and calculate your current assets and your current liabilities. This will create a snapshot of your financial health. Your lender will need this information. As an aside, putting this information together will also be helpful if you ever seekout a fincial planner.

  • On a sheet of paper mark the left side column as Assets.
  • On the same sheet mark the right side as Liabilities.
  • On the asset column list all your assets (i.e. cash, savings, stocks, bonds, 401k, boat, car, jewelry, etc.)
  • On the liability column list all your liabilities (i.e. Loans, credit card dept, medical depts, alimony, etc.)
  • Add all the assets.
  • Add all the liabilities.
  • Subtract the liabilities from the assets.
  • What is left is your net worth.

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Review your credit report.

There are three separate credit reports that lenders us to evaluate your financial worthiness. The reports are from Equifax®, Experian®, and Trans Union®. You should check your credit reports before you apply for a loan to avoid any surprises. You can receive one free copy of your report every 12 months from each of the three credit reporting bureaus. However, your free report does not contain your credit score. So for a fee you can order your credit score from each of the bureaus. If you should find a mistake in your reports you will need to contact the bureau and find out the bureau's procedure to remedy it. The general guidelines to a healthy score is to:

  • Fix any errors in your credit reports.
  • Do not open any new lines of credit.
  • Do not max out any available lines of credit.
  • Keep your balances low in relation to the max available credit allowed by any lines of credit.
  • Do not move/transfer dept around to different lines of credit to avoid paying them.
  • Make all dept payments on time.
  • Do not get behind on any due bills.
  • Do not fall behind in your rent payments.

You can order your credit reports on line at www.annualcreditreport.com or call the Annual Credit Report Request Service at 1-877-322-8228 and finally you can fill out a credit report request form at www.annualcreditreport.com and mail it at the address instructed on the website. By mail may take 2 to 3 weeks.

The three Credit bureaus are:

Equifax

800-685-1111
www.equifax.com

Experian

888-397-3742
www.experian.com

Trans Union

800-888-4213
www.transunion.com

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Set financial goals.

With your financial situation figured out, you may find that you may have some work to do before you can start searching for your dream home. It is easier to work with a budget when you have some financial goals. The goals must be realistic and attainable. The goals should be divided into short term and long term goals. Each goal should have target dates for completion. Have targets for 3-months, 6-months, 1-year and 5-years. The trick is to stay within your goals.

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Create a wish list of all the important features in your future dream home.

Before you start your home search, spend some time thinking about what you want in a house. For couples it is best to make up a list separated from each other. When both of you have finished with the list have a meeting and share each others list. Compare them and determine where you two strongly agree and disagree.

Use the questions bellow to help you get your thoughts in order. Don't worry about affordability at this point. Just consider all the items that come up. Once your list is completed, sort the items in order of must-have, nice-to-have, if-included we will take it and no-way-no-how.

  • New home or existing home?
  • Desire to remodel a home?
  • Desire a fixer-upper?
  • Desire a move-in condition?
  • Desire a Single-Family home with a yard?
  • Do you like yard work?
  • Would you consider a duplex or a condominium?
  • Lot size important?
  • Do you need a paddock?
  • If considering a condo do you like a lower level or an upper level?
  • Would you consider a condo Townhouse?
  • What style of home (i.e. colonial, cape, garrison, dutch, ranch, split)?
  • Do you like a contemporary home or condominium?
  • What type of exterior (i.e. brick, clap boards, vinyl, stucco etc.)?
  • Would you consider a one, two, or three story home?
  • How much living space would work for you?
  • How many bedrooms do you need?
  • Do you need any office space?
  • Do use an entertainment room?
  • How many half and full bathrooms will be required?
  • Do you need open space with lots of light?
  • Do you need a great view (i.e. of a lake, mountains, and etc.)?
  • Is central air conditioning important?
  • Do you like forced hot water or forced hot air heating systems?
  • Is oil or gas better for your needs?
  • Do you want a basement?
  • Do you want a finished or unfinished basement?
  • Do you want a walk-out basement?
  • Do you want a garage?
  • Will a carport do?
  • Do you want the garage to be attached to the house or detached?
  • Do you want a garage under the house?
  • Do you like an inclined lot or a level lot?
  • How much closet and storage space do you need?
  • Do you want a porch or patio?
  • Do you like a 3-season porch or screened-in porch?
  • Do you need a storage shed or an attic?
  • Is it OK if a home came with a swimming pool?
  • Do like a fireplace or wood stove?
  • Do you consider hardwood floors (i.e. oak, maple, bamboo, and etc.)?
  • How far from work or shopping would you tolerate?
  • Do you want to be close to family and friends?
  • Do you need public transportation?
  • Is public park or ball field important?
  • Would you live next to conservation land?
  • Would you live next to wetlands (i.e. brooks, marshes, ponds etc.)?
  • Do you travel often? Access to airports and highways important?
  • Would you live in an isolated rural area or a densely populated area?
  • Are you considering living on a cul-de-sac, dead-end street or a loop?
  • Do you like cookie cutter neighborhoods or custom homes?
  • Is the neighbors close to your own age?
  • Do you need the use of the Internet, cable TV, and other special utilities?
  • What type of school would you consider (i.e. private, public, religious, charter etc.)?
  • Do you want a neighborhood with children of the same age as yours?
  • Do you have specific needs (i.e. disabilities, children, pets etc...)?
  • Does the home need to be optimal for disabled or elderly family members?
  • Is noise a consideration?

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