Important Considerations Before You Buy a Home

I am always astonished at the casual attitude some people have towards homebuying. Some people seem to wake up on Saturday morning and say, "Let's go buy a home this weekend!"

I am all in favor of helping people buy a home. It's my business, after all. But it is a more serious project than going to Best Buy and buying a new TV set. It's one of the biggest financial decisions you will make. For this reason, the homebuying process deserves some meticulous advanced planning.

I do not want to make this a downer, but many families have lost their homes through foreclosure and still more will in the near future. Some of them got into that situation because they were not well-prepared. Maybe they let some smooth-talking real estate agent tell them juicy tales about how much money they were going to make. They also may have let some smooth-talking mortgage lender stuff them into a toxic sub-prime loan that they could not afford. Those people are suffering now because they did not do their homework.

I can imagine the pain those people are going through. I do not want that to happen to you. Buying a home isn't merely serious because that the purchase involves more money. It's serious because buying real estate is different than other transactions. Truthfully, it is an adult project and you need to be adult expert at every step.

First of all, I want you to think about paying your rent. There may have been a time when you didn't have enough cash to pay the rent on the first of the month. Take that as a warning sign. Your landlord may be forgiving, but lenders are notoriously lacking in understanding. Even if you pay a few days later than the grace period, they will collect a big penalty. If you are more than 30 days late, they will report the late payment which will likely mess up your credit too.

So part of getting prepared is to review how much money you are going to have after making the down payment. Make sure that you have a "cushion" — we call it reserves — so it doesn't happen to you. You ought to KNOW that you aren't going to be late.

Second, you need to assess your job security, or your prospect for continuing income. Unemployment is currently over 11 percent in my home state of California. Many people who thought they had secure jobs are finding out to their dismay that they didn't. If you cannot honestly say that your employment is secure for the next two years, this probably isn't the time for you to buy.

If you pass the job security test, it's time to develop a budget. There are good books on personal finance and on the Internet that can help with this. Start out with how much you pay in rent. If you cannot set something aside in savings every month after paying rent and other bills, you need to take that too as a warning.

Third, the days of 100 percent financing are gone. FHA still allows 3.5 percent down payment and conventional loans from Fannie Mae and Freddie Mac require at least a 5 percent down payment. That increases to 10 percent in weak markets like California, Nevada, Arizona, Florida and perhaps a few others. Do you have enough for a down payment? Remember closing costs and the need to have reserves.

Fourth, get an education, just as you are starting right now. I would get a good book on homebuying and a mortgage book (mine I hope). You may not be the book-reading type and if so, I want you to overcome that and do it anyway. You do not need to read the books cover to cover, but you need to admit that you can learn something from the experts who wrote the books. Their purpose, after all, is to keep you from getting into trouble.

Another aspect is true too, and it's sad. Although great numbers of real estate agents and mortgage loan officers are honest, hard-working people with whom you can place your trust, there are also great numbers who are unethical and will try to manipulate you into doing something that makes a big commission for them but puts you in jeopardy.

If you are mentally prepared and well-educated, you will be better able to identify and ward off those smooth-talking types. You want to be as knowledgeable as possible so you know how to ask questions and defend yourself if you do run into an unscrupulous character during the homebuying process.

It really matters to work with people you trust. It can be the beginning of a beautiful relationship. But as Ronald Reagan said, "Trust, but verify."

I hope that you have been encouraged to enter the Homeowner Club, but I also hope that you will treat it as a serious project that requires serious effort and advanced planning.