What Will it Take For You to Buy a House?

Initial planning

Recognizing that people want and need different amounts and types of assistance, we realize that the process we describe is just one approach and may not be necessary or helpful to you. Even if this is the case, you may want to read through the section on planning. There will be certain pieces of information that may be useful to you.

You have decided to purchase a home! Next, you may wish to choose two key people to assist you in this undertaking. One is a housing counselor, or education provider, and the other is a facilitator. A housing counselor/education provider is a person who is trained and certified to assist prospective home buyers throughout the purchase process. This person is knowledgeable about such issues as obtaining credit, how to choose a real estate sales professional, and the different types of loans that are available. Housing counselors typically work for non-profit organizations. For a list of housing counselors/education providers in your area, contact Fannie Mae HomePath^® Services at 1-800-7FANNIE (or 1-800-732-6643).

A facilitator is a person who knows you well, believes in your dream of owning a home, and is willing and able to assist you through all of the steps to reaching your goal. In Chapter Two, we will talk about how to choose a facilitator and what his/her role might be. The next step will be to assemble a planning team. You will want to make a list of friends, family members, people who provide assistance to you, and anyone else who may be helpful or supportive of you becoming a homeowner. Together, all of these people will assist you with the home-buying process.

Once you have chosen these individuals, you will gather everyone together, perhaps at your home or the home of a friend or family member. During the first get-together, it is a good idea to discuss and develop a ways you will implement your action plan. The action plan details the major steps that must be completed to purchase a house. Every time the group gets together, each person will be given a specific task(s). At the following gathering, everyone will report on their progress.

Chapter Two, "Planning," is dedicated to the actual planning process and will walk you step-by-step through the process described above. To illustrate the steps involved in using an action plan to achieve homeownership, an example of a homeowner named Joe is given. His experiences will emphasize the importance of the planning process in assisting someone to purchase their first home.

You may not have thought it possible to own your own home. By looking at all of your resources and carefully reviewing your income and expenses, you will have a good idea of what is feasible. It is also important for you to keep track of your spending and begin to develop a budget, that will document where your money is spent each month.

All of the money that comes to you, or is received into a account on your behalf, makes up your income. When a bank, housing finance agency, or other lender reviews your financial situation, your total income is used as one part of a formula to decide if you can afford a particular home. For many people with disabilities, a portion of their regular income is money from sources such as SSI and Medicaid. In another section of this chapter, you will find more detailed information on how it may be possible to use this income to buy your own home. For now, it is important that you know that receiving public benefits does not prevent you from purchasing a home. People with disabilities have used their benefits as income to qualify for a mortgage.

Blending of resources means accessing, combining, and using a person’s assets, such as employment income, public benefits, grant moneys, loans, and personal funds to make sure that there is sufficient money for an individual to purchase a home and receive the needed assistance. This strategy of blending resources is being used by people with disabilities, the housing industry, and others working in the service system, to make homeownership a possibility for people who have limited personal resources. Specific examples of how resources may be blended will be given later in this chapter.

As resources are blended in order to purchase a home, your income may look different. There may be less money from one source, but a larger amount from a different or new source. As mentioned earlier, you may no longer use your Section 8 voucher or certificate, but you may receive other funds that will help make your monthly mortgage payment affordable. These different funding sources will be described in greater detail later in this chapter.

As a property owner, you will have different living expenses. You may recall that initially you might pay more to own a home than you had paid in rent or in payments to a provider. There may be expenses such as city water and sewer charges, trash collection, or yard maintenance that you did not have as a renter. Your expenses for assistance will probably change also. For example, you may pay the people who provide you with assistance directly, versus having an agency pay them. The good news is that if there is thoughtful planning and a creative use of resources, your purchase of a home can sometimes lower your overall expenses. This may be possible by tapping into new income streams and devising new ways of receiving assistance.

The costs involved in purchasing a house include both upfront expenses and ongoing expenses.

This term refers to the money you will spend before you move into the home you are purchasing. Your upfront costs will include the down payment, various closing (or "settlement") costs, and the cost of moving your belongings into your new home.

Down payment. Nearly everyone who purchases a house must rely on a loan from a bank or other lender. Most lenders require that you contribute a portion of the purchase price from your own funds. Lenders feel more comfortable knowing that you have a personal investment in the property.

Traditionally, the buyer has been expected to make a down payment of 20 percent of the purchase price. This would amount to $12,000 on a $60,000 house. Today, under some conditions, a buyer can pay as little as three to five percent in down payment. A five percent down payment on that same $60,000 home would be $3,000.

Two low down payment products offered by Fannie Mae are Fannie 97^®, which requires only three percent down, and the 3/2 Option^®, which requires a five percent down payment. Both of these options will be discussed later on in greater detail.

Closing costs. There are a number of additional upfront expenses that must be paid at the time of purchase. These "closing costs" generally range from three to six percent of the total mortgage amount. If you were to buy a $60,000 house with a five percent down payment, your closing costs would total between $1,710 and $3,420. In some situations, other individuals or organizations may pay the closing costs on your behalf.

Settling-in costs/Repairs. You will want to consider how much money you will need to move and settle in. There may be some immediate costs, such as a rental truck to move your furniture. You may need to purchase a major appliance such as a refrigerator or stove prior to moving in. There may also be necessary repairs that must be completed in order to make the house safe. There will be fees for hooking up or changing the billing for your utilities, such as telephone, cable, electricity, gas, and oil. It is important to plan ahead so that you do not spend all of your available cash resources on closing costs.

Accessibility. For a person who uses a wheelchair or has other mobility considerations, the house may need modifications in order to make it accessible. Some changes that are commonly needed include the following:

• Installing ramps
• Widening doorways
• Lowering countertops
• Installing grab bars or handrails
• Modifying or replacing bathroom fixtures
• Flashing door light
• Textured flooring

Renovations of this sort can be costly and must be a critical consideration in the planning process. Depending on where you live, there are certain rules intended to meet safety and other requirements. In some neighborhoods, there are limitations on the type of materials that may be used to construct a ramp or other structure. You will want to find experienced and qualified architects and contractors. The first step is to contact the local housing inspector to determine how to satisfy both the lender and local building codes.

If you have been a renter, your main housing costs have been your monthly rent payment and utility expenses. As a homeowner, your housing costs will now include your mortgage payment, utility bills, property taxes, maintenance, property insurance, and mortgage insurance. In addition, condominium and townhouse owners also pay a monthly maintenance fee.

Your monthly mortgage payment. The amount of your monthly mortgage payment will depend on how much you borrow, the term (repayment period) of the loan, and the interest rate. Since most new home buyers are accustomed to paying rent on a monthly basis, they are usually prepared to make monthly mortgage payments.

Principal and interest (P&I). Each mortgage payment includes both the repayment of a portion of the principal (the amount you actually borrowed) and the interest (a fee for borrowing the lender's funds). Lenders refer to payments of principal and interest as "P&I." If you know how much you need to borrow (the purchase price minus your down payment) and what the interest rate will be, you can use the principal and interest chart that follows to determine what your monthly principal and interest payment will be on a standard 30-year fixed-rate mortgage. Note that this chart includes only principal and interest payments, not property taxes, property insurance, and private mortgage insurance.

Mortgage insurance. Mortgage insurance helps protect the lender if you fail to repay the mortgage loan. Loans that are insured, either by the government or by a private mortgage insurer, enable the home buyer to purchase a home with a lower down payment than would otherwise be acceptable to the lender.

Private mortgage insurance (PMI). Private mortgage insurance is paid for by the borrower and protects the lender against loss if a borrower fails to repay the mortgage. With PMI, lenders may reduce the down payment requirement from 20 percent of the purchase price to as low as 3 percent of the purchase price. On a $60,000 home, instead of putting down $12,000, you may be able to make a down payment as low as $1,800! The cost of PMI is approximately $25-$50 per month.

Taxes and insurance (T&I). In many situations, a home buyer's monthly mortgage payments include not only the amount required to repay a portion of the principal and accrued interest (P&I), but also an added amount for property taxes, homeowner's insurance, and PMI. The lender holds these additional amounts in a separate "escrow" account and pays the tax and insurance bills when they come due. In this way, the lender ensures that these important annual expenses are paid on time. If taxes and insurance are not put into an escrow account each month, the homeowner must be prepared to pay these bills when they come due.

Because taxes and insurance are an essential part of a homeowner's housing costs, lenders often refer to the components of a mortgage payment as "PITI" (an abbreviation for principal, interest, taxes, and insurance). Lenders also view condominium and cooperative fees as belonging in this category of basic housing costs.

Calculate your principal, interest, taxes, and insurance (PITI). You can determine the approximate cost of your PITI, or total monthly mortgage payment. Divide the amount for annual property taxes by 12 and add this figure to the amount of your estimated principle and interest from the P & I chart below. Now add $25 to $50 per month for property insurance, and about $25 to $50 per month for PMI. These four figures should approximately total what your monthly mortgage payment will be.

Annual Property Taxes

divided by 12 = ______________

+ Monthly Principal and Interest = ______________

(see principal and interest chart)

+ Monthly Property Insurance = ______________

($25 to $50)

+ Monthly PMI = ______________

($25 to $50)

= Estimated Monthly Mortgage Payment ______________

Some people also choose to put money aside for a maintenance fund. This money would be used to pay for unexpected repairs, like a broken water heater or a leaking roof. If you decide to set up such an account, add this to your monthly expense figures.

Other costs of homeownership. Ongoing costs of owning a home include utilities (oil, gas, electricity, and water) and maintenance costs. First-time home buyers often are surprised by how costly basic upkeep is, both in terms of time and money. The cost of utilities may vary greatly (increasing during the heating season, for example). As we mentioned earlier, repairs often represent an unexpected expense. If you don't already have money set aside for emergencies (in a separate account) you will need to begin saving now. Financial advisers suggest saving 5 percent of your monthly income, for example, $50 per month if your monthly income is $1,000. Your goal should be to build up a reserve equal to three to six months' worth of housing expenses.