Ready to Take the Plunge?
Buying a home can be nerve wracking, especially if you’re a first-time home buyer. Not only is it probably the biggest purchase of your life, but the process is complicated, fraught with unfamiliar lingo and surprise expenses.
The first thing you'll need to determine is what your long-term goals are and how home ownership fits in with those plans. It could be that you're simply looking to transform all those "wasted" rent payments into mortgage payments that actually lead to you owning something tangible. Others see home ownership as a sign of their independence. Narrowing down your homeownership goals will point you in the right direction. Here are six questions to ask yourself:
1. What type of home best suits your needs?
You have several options when purchasing a residential property: a single-family home, a townhouse, a condo, a co-operative or a multi-family building with two to four units. Each option is unique and depending on your homeownership goals, you need to decide which type of property will help you reach those goals. You can also save on the purchase price in any category by choosing a fixer-upper. But be aware that the amount of time, sweat equity and money involved to turn a fixer-upper into your dream home might be much more than you bargained for.
2. What specific features will your ideal home have?
While it's good to retain some flexibility in this list, you're making perhaps the biggest purchase of your life, and you deserve to have that purchase fit both your needs and wants as closely as possible. Your list should include basic desires, like neighborhood and size, all the way down to smaller details like bathroom layout and a kitchen that comes with trustworthy appliances. Be realistic and understand what you can afford to ask/look for based on your budget.
3. How much down payment can you afford?
It’s common to put 20% down, but many lenders now permit much less, and first-time buyers programs allow as little as 3%. But putting down less than 20% may mean higher costs and paying for private mortgage insurance, and even a small down payment can still be hefty. For example, a 5% down payment on a $200,000 home is $10,000.
Play around with a down payment calculator to help you land on a goal amount. Some tips for saving for a down payment include setting aside tax refunds and work bonuses, setting up an automatic savings plan and using an app to track your progress.
Consider using your 401k savings as a down payment.
If you’re struggling to come up with a down payment, first-time home buyer programs are plentiful, including federal mortgage programs like Fannie Mae and Freddie Mac that allow loans with only 3% down.
4. How much mortgage do you qualify for?
Determine what kind of home you can afford. The rule of thumb is to multiply your annual income by 4 or 5 depending on your debt ratio.
Before you start shopping around, it's important to get an idea of how much a lender will actually be willing to give you to purchase your first home. You may think you can afford a $300,000 place, but lenders may think you're only good for $200,000. It can depend on factors like how much other debt you have, your credit score, your monthly income and how long you've been at your current job. Most sellers want to work with pre-approved buyers so once you know what you’ll be getting, don’t just get qualified, get approved.
5. How much home can you actually afford?
On the other hand, sometimes a bank will give you a loan for more house than you really want to pay for. Just like with the purchase of a new car, you'll want to look at the house's total cost, not just the monthly payment. Of course, looking at the monthly payment is also important, along with how much down payment you can afford, how high the property taxes are in your chosen neighborhood, how much homeowners insurance will cost, how much you anticipate spending to maintain or improve the house, and how much your closing costs will be.
6. Who will help you find a home and guide you through the purchase?
A real estate agent will help you locate homes that meet your needs and are in your price range, then meet with you to view those homes. Once you've chosen a home to buy, these professionals can assist you in negotiating the entire purchase process, including making an offer, getting a loan, and completing paperwork. A good real estate agent's expertise can protect you from any pitfalls you might encounter during the process. They represent you in the whole process so it is imperative that there is a strong level of trust.
The Buying Process
Now that you've decided to take the plunge, let's explore what you can expect from the home buying process itself. This is a chaotic time with offers and counteroffers flying furiously, but if you are prepared for the hassle (and the paperwork) and trust in your real estate agent, you can get through the process with your sanity more-or-less intact. Here is the basic progression you can expect:
1. Find a home.
Make sure to take advantage of all the available options for finding homes on the market, including using your real estate agent, searching for listings online and driving around the neighborhoods that interest you in search of for-sale signs. Also put some feelers out there with your friends, family and business contacts. You never know where a good reference or lead on a home might come from.
2. Consider your financing options and secure financing.
First-time homebuyers have a wide variety of options to help them get into a home, including federally backed loans and loans for those who don't have the standard 20% minimum down payment. Your state may also have its own programs for first-time homebuyers. Your mortgage interest rate will also have a major impact on the total price you pay for your home, so shop around. It will really pay off.
3. Check your credit
When you’re taking out a mortgage loan, your credit will be one of the key factors in whether you’re
approved, and it will help determine your interest rate and possibly the loan terms. Check your credit before you begin the home buying process. Dispute any errors that could be dragging down your credit score and look for opportunities to improve your credit, such as making a dent in any outstanding debts.
Make sure you pause any new credit activity as well. Any time you open a new credit account, whether to take out an auto loan or get a new credit card, the lender runs a hard inquiry, which can temporarily ding your credit score. If you’re applying for a mortgage soon, avoid opening new credit accounts to keep your score from dipping.
4. Make an offer.
Your real estate agent will help you decide how much money you want to offer for the house along with any conditions you want to ask for, like having the buyer pay for your closing costs. Your agent will then present the offer to the seller's agent; the seller will either accept your offer or issue a counter-offer. You can then accept, or continue to go back and forth until you either reach a deal or decide to call it quits. If you reach an agreement, you'll make a good-faith deposit and the process then transitions into escrow. Escrow is a short period of time (often about 30 days) where the seller takes the house off the market with the contractual expectation that you will buy the house – provided you don't find any serious problems with it when you inspect it.
5. Obtain a home inspection.
Even if the home you plan to purchase appears to be flawless, there's no substitute for having a trained professional inspect your potential new home for the quality, safety and overall condition. If the home inspection reveals serious defects that the seller did not disclose, you'll generally be able to rescind your offer and get your deposit back. Negotiating to have the seller make the repairs or discount the selling price are other options if you find yourself in this situation.
6. Close or move on.
If you're able to work out a deal with the seller, or better yet, if the inspection didn't reveal any significant problems, you should be ready to close. Closing basically involves signing a ton of paperwork in a very short time period, while praying that nothing falls through at the last minute.
Things you'll be dealing with and paying for in the final stages of your purchase may include having the home appraised (mortgage companies require this to protect their interest in the house), doing a title search to make sure that no one other than the seller has a claim to the property, obtaining private mortgage insurance or a piggyback loan if your down payment is less than 20%, and completing mortgage paperwork.
The Bottom Line
This brief overview should help put you on the path towards filling in any gaps in your home-buying knowledge. Be sure to find an agent that you can trust and feel comfortable with. This individual is going to represent you and your best interests in what will probably be the biggest purchase of your life. Remember that the more you educate yourself about the process beforehand, the less stressful it will be, and the more likely you will be to get the house you want for a price you can afford - and with a smile on your face.
For assistance during your home buying process, contact us at email@example.com or call us at 301-928-1772.