Home ownership is part of the American dream. But, as the number of foreclosures during the recent housing crisis showed, home ownership can become a nightmare. Whether you are hoping to purchase your first home or are thinking of buying a home again after a foreclosure, pre-purchase money counseling can help you avoid buying more house than you can afford or avoid buying before you are financially ready. Depending on the type of mortgage you receive, pre-purchase counseling might be a required part of the home-buying process.
Review Costs of Home Ownership
Pre-purchase money counseling can give you a good idea of what it really costs to purchase a home. When you buy, you not only have to think about the cost of the mortgage interest and principal, but also the cost of property taxes, private mortgage insurance and homeowner’s insurance. There’s also the monthly cost of utilities and the cost of repairs or general maintenance. According to a report from Zillow, the average homeowner pays more than $6,000 in hidden costs to own a home.
Figure Out What You Can Afford
Counseling also helps you determine what you can afford by looking at the real cost of buying and comparing it to your income and expenses each month. Your counselor will also help you figure out your debt to income ratio, which is an important number used by lenders to determine how much you can borrow. If you have a lot of outstanding debt, such as credit card debt or student loans, your debt to income ratio might be too high for a mortgage, or it might be high enough that the amount you can comfortably borrow is greatly reduced.
Preparing to Buy
Whether you’re ready to buy a home now or not, pre-purchase counseling can walk you through the steps of getting ready to purchase. Your counselor might give you advice on working to improve your credit score, so that you get a better rate on your mortgage or give you advice to help you save up a significant amount for a down payment.
Which Mortgage is Right For You
Money counseling before you buy a home will also help you understand the different mortgage options available to you and will help you compare different loans to figure out which is best for your situation. For example, your counselor will go over the advantages or disadvantages of a mortgage with a 15-year term compared to a mortgage with a 30-year term. You’ll also learn the difference between a fixed rate mortgage and an adjustable rate mortgage.
Counseling can also cover the different mortgage programs available, such as FHA loans, which allow you to put a smaller amount down, usually between 3.5 and five percent, instead of 20 percent, but also require you to pay mortgage insurance until you’ve paid off a certain amount of the loan. Most counseling programs also include a section on predatory lending and how you can avoid being a victim.
Even if you’ve had no problems with debt in the past, pre-purchase counseling before you buy a home can be a helpful tool. The goal of counseling is to help you overcome any issues that might stand in the way of you successfully owning a home. To learn more about the home-ownership counseling offered by CESI and how it can help you, contact us today.
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Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
CESI is NOT A LOAN COMPANY