Tips For First Time Home Buyers
Buying Your First Home
A first home is often the one our memories cherish the most. It is our foundation for building a life and takes us one step closer to achieving the American Dream. However, while deciding to buy a new home may be the most exciting decision you have made, it can also be the most difficult. Simplifying this process by sequencing the steps and preparing for such a grand undertaking can greatly reduce the risk of missteps and dead ends.
Every first time homebuyer is an amateur and in order to accept and move past this, it is important to learn about the mistakes made by those before you. Many buyers want to start by looking at the market and find their dream home before creating a stable background that lenders can feel confident in supporting. Prepare yourself mentally and financially for taking on this momentous decision.
Become a Preapproved Buyer
-Prior to any appointments or even browsing real estate websites it is imperative that you become a preapproved buyer first unless you’re lucky enough to pay for the home in full. Doing this will help you to make smart financial decisions over emotional ones so don’t be afraid to speak with a lender for fear of not being able to afford the home you want. Avoid lowest mortgage rate ads online as they will pass your information along to incessant mortgage lenders.
Consider Your Permanent Employment Status
-In today’s market people are changing jobs every two years in order to achieve the raises that were once available thirty years ago by working at the same company your whole career. Ask yourself if you change jobs frequently and if moving will be a requirement for you to step up the ladder and advance your career.
Make Sure That Buying Makes 'Cents'
-You don’t want to be in the position where your mortgage payments are thousands of dollars above what your rent would be. While you are paying towards your future, you could be in a position where that money would be beneficial now instead of stuck in equity. By doing your homework you will understand that the little monthly costs add up and can quickly overshadow your anticipated mortgage payments.
Prepare to Manage Buying and Owning Costs
- Understand the cost of closing on a home. These include origination fees charged by the lender, title and settlement fees, taxes, and home owners Insurance. Not only is buying a home expensive but also be aware that the costs revolving around owning a home are going to be much more than just the mortgage. These costs will include property insurance and taxes, homeowner’s association fees, maintenance, and utility rates. Keep in mind that both property tax and insurance premiums can rise every year.
Get a Team of Reputable Agents
- Get a real estate agent and a loan officer before looking. By finding a Buyers’ agent, you will have someone working for you to find the house you want. Many agents also tend to work very closely with lenders, a reputable agent leads to a reputable lender so don’t be hesitant to ask for references and testimonials of previous buyers.
Apply for Government Programs
-Remember that a 20% down payment or more means no mortgage insurance. FHA offers rates as low as 3.5% down but this will necessitate a mortgage insurance that will inevitably raise your monthly payments. In addition to the FHA, check with local credit unions and your employer for other assistance programs. Do not be afraid to reach out to other government programs such as VA, USDA, the Energy Efficient Mortgage Program, HUD fixer upper loans, Good Neighbor Next Door etc
Estimate Insurance and Property Tax Costs
- Find out insurance and tax rates before searching for your home. Pick a house in the area and price range you’re looking at and contact an insurance agent to get an estimate. You won’t have to buy anything but you will gain an idea of the insurance costs and what it is like dealing with an agent. On top of that you can search the appraiser’s website for taxes. Keep in mind there are exemptions variations in local law that may cause discrepancies between what you will pay and what the home owner is currently paying.
Allocate Part of Your Budget to the Uncertainty of the Future
-Do not plan on spending all your savings on the down payment and closing costs. Keep a rainy day fund and begin your home maintenance savings account. By starting early and creating a safety net, an unexpected faulty roof or rusty plumbing will not ruin your first year owning a new home. Be prepared to only accept as much as you can afford from a lender and not the full amount in order for you to live comfortably with your new mortgage.
Prepare For Your New DTI
- Target your mortgage to be around 28% of your income. Fannie Mae recommends not going over 30% as this can lead to being house-poor however; Fannie Mae does offers up to a 36% DTI ratio (debt to income ratio) that can be raised to 45% if you meet their credit score requirement. Start to lower your DTI now in order to get an idea of what your financial state will be like after purchasing your new home. A good lender cab provide an estimate of your mortgage.
Don’t incur additional debt
- Do not take out an additional loan before you close on your new home. Lenders pull credit reports to verify that your financial situation has not changed since the loan was approved. A new loan can negatively affect their decisions. Consider an angel investment from a parent instead of a bank. Up to $14,000 can be given before incurring a gift tax.
Identify Current Market Trends
- Have the courage to ask a few realtors about the real estate climate. Ask about their homes sold in the past few months, ask about their current homes for sale and how long they have been on the market. Visit open houses in the area and price range you are looking for. Not only will this educate you on the current market trend and availability, it will encourage you to continue pursuing your dream home. Additionally, do your own market research from home by finding statistical data about the area you’re moving to.
Check Your Credit Score
- Get your free credit score and double check it for any errors or unresolved issues. Obtain your FICO credit score as well. Keep in mind the FICO score will cost a small fee. The FTC found that 1 in 4 Americans identified errors on their credit report and 5% found errors that could lead to higher loan rates. Check this before you begin the process to avoid any last minute misfortunes.
Set Your Priorities
-Research neighborhoods, find schools, consider the caliber of local athletic clubs and after school programs, note the proximity to freeway access and how loud cross traffic will be, identify crime rates, determine the available internet providers, locate amenities such as grocery stores, restaurants, banks, gas stations, parks, movie theaters, shops, and public transportation. Knowing what you need versus what you want will help narrow down locations and make the process that much easier on you and your family.
Season your money
-Lenders will look to see how long you have had stable funds in your account and will provide more trust and lower rates to those with better conservation practices. While it may be difficult, the more money you can keep in the bank means the more money you can be trusted with.
Have All Your Ducks in a Row
- Maintain your personal documents such as pay stubs, current and past tax information going back for the past 2 years, bank account statements including loans and credit lines, 401k, and contact information for your landlords over the past two years as well. These documents will help to establish your professionalism and readiness in the eyes of a lender. In addition, reviewing these documents will help you mentally prepare for living with your new DTI and encourage you to save wherever you can in order to reach that dream home as soon as possible.
Win the Bidding War
-In order to outbid a rival you may have to pull some strings and cut some edges. Buyers, just like sellers, want to protect themselves and create contingencies that must be met in order to close on the sale. Consider lowering your requirements to solidify your commitment to buying the home with as much ease on the seller as possible.
-Often time’s sellers are receiving offers from agents and have no idea how their precious home will be treated after they pass it on to the next buyer. Introduce yourself and demonstrate your ability to fit in with the neighborhood. Don’t be afraid to write a letter and attach it to your offer to humanize yourself to the seller. We all want to know our property will be cared for after we have sold it and that new tenants won’t disrupt the neighborhood potentially leading to neighbor’s resentment or hostility towards you or the buyer.
-Sellers are more often than not Buyers as well and need time to close on their next home and move out. One way to reduce stress and show your character is to offer the seller a few days after closing to finish moving out without asking them to prorate your mortgage.
-Speak with the seller about raising your earnest payment in order to show your sincere intent. Usually around 3 percent, earnest payments can be thousands of dollars and difficult to afford on top of closing costs. Keep in mind that you are entitled to a refund if the seller backs out or possibly if new information is discovered about the property that was not disclosed to you prior to your offer. By offering a higher earnest payment, you may position yourself higher on the bidding pole and cement your security in the seller’s eyes.
-Having your realtor draft several contracts with alternate offers will help you to be prepared and stay on top of the bidding war when time is of the essence.
-Dealing with counter offers can be a stressful and emotional process. Always consider your maximum amount and be aware that every counter offer is a new contract that needs to be properly reviewed by you and your agent. Counter offers are usually contingent upon additional services that the seller does not want to complete such as resolving an issue with mold or pest control. Be ready for competing buyers to accept these charges and to follow suit, thus raising their costs of buying the home.
Prepare for Closing
-Allow enough time to close on a home before your move-in date. This ‘escrow period” can usually span between 4-6 weeks or even longer if the home inspector finds repairs that need to be completed before closing. Final steps to buying a home include acquiring home owners insurance, conducting a final walk through, and making sure your bank is prepared to issue a cashier’s check or wire money on your behalf.
Congratulations! By taking these precautions you will be sidestepping any unforeseen circumstances Buying a first home can be a wonderful experience when treated with the respect it deserves.
Article by Jesse S. of the Sonya Shastri Team.
Author: Sonya Shastri
March 5th 2017
About Sonya: ...