Buying your first home is not something you should take lightly. You should be prepared with as much information about the process as you can learn before you begin. You should consult a great local agent to help you understand your real estate and the current mortgage markets. The more you know – the better.
The following answers most first time home buyers questions:
Why should I buy a home, instead of renting?
Most of us start out as renters because it doesn’t require a big upfront financial investment. But the downside to renting is that your monthly payments are a pure expense. In other words, once you make them, they’re gone forever.
On the other hand, when you own a home, there are some nice financial perks, such as:
A portion of each payment reduces your outstanding loan balance each month, if you have a fixed-rate mortgage.
Your mortgage interest and property taxes can be deducted from your taxable income each year.
The market value of your home may rise over time, allowing you to build equity.
Additionally, when you own a home, you can have the lifestyle you want, spread out, and express your personal style. However, you’ll be responsible for maintenance and many unexpected expenses.
When should I consider buying a home?
The right time to consider buying a home is different for everyone. But here are a few important questions that you should ask:
Do I have good credit?
Can I demonstrate 2 to 3 years of steady income from a job or business?
Can I afford to pay a mortgage, taxes, and insurance every month?
Is my current income likely to continue or increase?
Do I have enough saved for a down payment? (See more about this below).
If you answer “yes” to these questions, you’re probably in a good position to seriously consider buying a home.
How much down payment money will I need?
How much down payment you’ll need depends on several factors, including the price of the home, the type of mortgage you get, and customary closing costs for buyers in your market.
In general, you need enough cash in the bank to cover 3 costs:
1. Earnest money – this is the good faith deposit you make on a home when you submit an offer. The customary amount varies depending on the market, but might range from $5000 to $10,000. If your offer is accepted, the funds are applied toward your closing costs. If not, your earnest money is returned to you.
2. Down payment – this is the percentage of the home price that you must pay at closing. The more you put down, the lower your mortgage payments will be. Some loans require you pay 5% to 20% of the purchase price. Other loans designed for first-time home buyers, such as an FHA loan, may only require 3% down or less.
3. Closing costs – these are fees you must pay at the settlement, such as lender charges, an appraisal, title insurance, and any other processing expenses. You should receive an estimate of your total closing costs from your lender, so you aren’t caught by surprise.
What financial programs are available for first-time home buyers?
The U.S. Department of Housing and Urban Development (HUD) and one of its agencies, called the Federal Housing Administration (FHA), work to make buying a home affordable for more Americans.
With an FHA loan, you don’t need excellent credit or a high down payment to qualify.
The FHA has helped more than 30 million people become homeowners since 1934. They don’t actually make loans, but insure them so if a buyer doesn’t make payments, the lender will get their money. This encourages lenders to give mortgages to hopeful home buyers who might not qualify otherwise.
With an FHA loan, you don’t need excellent credit or a high down payment to qualify. The loan limits for a single family home vary throughout the country.
How much house can I afford?
As a first-time home buyer, it’s important to have an accurate idea of how much money you can borrow for your new home and most importantly, how much you can afford. Sometimes those two aren’t exactly the same (depending on your financial situation), so always use what you can afford as your main metric for deciding how much house you should mortgage. One of the realities of first-time home buying is the frustration of finding that perfect home only to discover that it is not in your price range. Finding out how much home you can afford is actually not that difficult. Your mortgage banker will help you
Remember that you’ll have other costs every month, in addition to the mortgage payment. These are called the PITI, which stands for principal, interest, taxes, and insurance:
Principal – is the repayment of the amount you borrowed.
Mortgage Interest – is the payment to the lender for the use of the money you borrowed.
Home insurance – protects you and the lender against damage from many (but not all) natural disasters, theft, vandalism, and legal hazards.
Property taxes – are annual city and county assessments
Taxes and insurance can be rolled into your mortgage payment and then paid by your lender on your behalf. Additionally, you’ll have to pay utilities, maintenance, and perhaps homeowner association dues if your home is in a gated community.
Should You Have the Home Inspected?
Yes, you should. You should never buy a home without inspecting it, and most purchase agreements are contingent upon inspection. Spend a few hundred dollars and hire a qualified/licensed professional to inspect your new home (before you buy it) —it’s the only real way to ensure the home is in good condition. The home inspector should provide a very detailed summary report listing the condition of each item, and recommending repairs. You should always be there when the home inspection takes place. It usually takes a couple hours and you’ll learn not only about the condition of the house but how everything works. Ask questions as you go along. If there are problems, the seller may adjust the purchase price of the home or simply repair the problems. There’s always the possibility that the home is in such bad shape or has some monumentally costly problem that it’s no longer the home you want. If that’s the case, get your deposit back and resume your house hunting. These are the cases when you’ll be most happy you got an inspection.
A thorough inspection includes:
Heating and cooling systems
Plumbing and electrical systems
Structural integrity of walls, floors, ceilings, foundation, roof
Condition of gutters, spouts, insulation and ventilation, major appliances, garage, etc.
Do You Need Homeowner’s Insurance?
Yes, you’ll need a valid homeowner’s insurance policy before you close on your home. You can’t get a mortgage without it.
What should I expect at the home closing?
A home closing is where all your fees and costs of buying the property are finalized on the Settlement Statement, Form HUD-1. It’s your last opportunity to make necessary changes to your paperwork. So don’t hesitate to ask questions about charges that you don’t understand.
The closing agent will have a stack of documents for you and the seller to sign. You can handle it in person or remotely through the mail. The mortgage and deed will be recorded in the county records registry, you’ll receive a copy of everything (including the keys), and then you’ll be an official homeowner.