Purchasing Your First Home
Purchasing your first home is an exciting time filled with dreams of the future. We realize you are most likely feeling overwhelmed due to the speed numerous homes are removed from the market. We want to discourage you from making an impulsive decision because of the current real estate trends. The last thing we want is for you to make a purchase resulting in making mortgages payments long after you retire.
We want you to find the ideal home without damaging your future finances. The chances are good you are not sure where to begin. We want to help you by offering 10 excellent tips for purchasing your first home. Using these tips will help ensure your home brings you many years of happiness, without placing a burden on your finances.
1. Paying Off All Your Debt
When you own your home, you will have expenses you did not have as a renter. This is true even if your mortgage payment is equal to or less than what you have been paying for rent. You need to understand the responsibility for upkeep, repairs, and maintenance is on your shoulders. You may not realize how quickly these expenses can increase. We recommend paying off all of your debts prior to purchasing a home.
Once you an emergency fund capable of paying your expenses for three to six months, purchase your first home. One of the worst things you can do is form an attachment to a gorgeous home way out of your price range. Before you look at homes, sit down and look over your monthly budget. You need to know what price range is affordable. Your budget also needs to include other expenses such as your monthly fees.
This includes insurance, taxes and HOA fees. These expenses should not be more than 25 percent of your net income. Once you have determined your monthly net income, multiply the dollar amount by 25 percent. This will help determine the maximum monthly mortgage payment you can afford according to your income level. You then decide the length of time you want for your mortgage such as 15 years. Your interest rate is important including whether your rate is fixed or adjustable. We do not recommend an adjustable rate.
These components combine to determine which homes are in your price range. Your monthly payment will be affected by your homeowner’s insurance and taxes. Prior to deciding the maximum you can afford to pay for a home, you need to include these figures. There are free mortgage calculators available online to determine how much your monthly payment will be for specific price ranges including insurance and taxes.
We recommend talking to your insurance company and real estate agent to get an estimate for homeowner’s insurance and property tax. You must have an approximation in order to determine your price range for a new home.
2. Keep Your Budget in Consideration
Once you have paid off all your debts, the only payment you will have for your home each month is your mortgage. This means you can continue adding money to your emergency fund to cover any major unexpected expenses such as a new HVAC system or extensive plumbing repairs. The idea is to eliminate any potential stress resulting from an important repair or replacement you are unable to afford.
We want you to have peace of mind while enjoying your new home. After your debts have been paid off, it is important to remain free of new debts. We realize how exciting it is to purchase all new furniture or decorations for a new home. It is very easy to spend a lot more money than you intended. When I purchased my first home, my initial reaction was to buy everything I wanted immediately.
I am blessed with a practical nature, so I decided to start by decorating just one room. I chose the living room, and stayed within my budget. Despite the temptation to start on another room, I waited until I had saved enough money to cover the expense. I decided adding to my emergency fund on a regular basis was important, so it was six months before I started decorating again.
Three months after I finished my second room, I had to deal with a termite invasion. This was when I realized if I had spent every dime on decorating, I would not have been able to cover the expense. You can decorate with the furniture and accessories you already own, and decorate one piece or one room at a time. Even if there is a room you have to leave empty, new furniture is not worth placing your home at risk.
I strongly recommend against increasing your debt at any time, but especially when you are waiting to qualify for a mortgage. New debts can prevent you from being approved, resulting in the loss of your ideal home.
3. The Importance of a Down Payment
Most people are unable to save enough money to purchase a home for cash. This is not an issue provided you have a down payment for a minimum of 20 percent of the value of the home. This eliminates the cost of PMI or private mortgage insurance to protect your mortgage company if you are unable to pay your mortgage and end up in foreclosure. The average cost of PMI is one percent of the value of your loan.
The cost will be included in your monthly payment. If you do not have enough money saved for the recommended down payment, you may be thinking about some of the programs created for first-time buyers offering down-payments in the single-digits. Stay away from all of these programs because as time passes, you will be paying even more. One of these programs is called an ARM or adjustable-rate mortgage.
An ARM appears to be an excellent program offering a much lower interest rate. Our issue is your rate is adjustable. This means your rate will be adjusted by your lender, risking much higher monthly payments. If you are a veteran, you may qualify for a VA loan without a down payment. The problem is a shift in the real estate market can result in a mortgage much higher than your home is worth.
VA loans include a lot of fees, with higher interest rates than offered for conventional loans. An FHA mortgage with a downpayment of just 3.5 percent is not nearly as attractive once your mortgage insurance premium is added. You will have to pay for this the entire time you have the loan. You will literally be paying thousands of dollars, and not to help pay off your mortgage.
The only mortgage we recommend is a fixed-rate, conventional 15-year mortgage with a down payment of 20 percent or more. A 15-year mortgage does mean making a larger monthly payment, but you will own your home 50 percent faster, and save thousands in interest due to the lower interest rate. Your interest will remain the same with a conventional loan at a fixed rate.
This eliminates the possibility of your payments increasing to an amount you are unable to afford. Despite the lower monthly payment available with a 30-year loan, you will pay a lot more during the term of your loan. Not only will you own your house in half the time with a 15-year mortgage, but you will also pay a lot less for the long-term.
4. Preparing for Closing Costs
In addition to saving money for a down payment, you also need to have the funds to cover your closing costs. If you are purchasing your first home, you may not be aware of the extent of your closing costs. In most instances, your closing costs are between three and four percent of the price you paid for your home. You will receive the exact number from your lender to make certain your are ready for the closing.
The fees you are required to pay are part of the process of purchasing a home. These fees include:
- Home inspection
- Homeowner’s insurance
- Credit report
- Appraisal
- Attorney
The amount of your closing costs are dependent on the value of the home you purchase. Saving to pay for your down payment and closing costs is extremely important. These funds are just as critical as paying off your debts, and ensuring you have a good emergency fund. If you need to temporarily stop saving money for your retirement to ensure you have what you need quickly, do so.
You have several options to help you save. You can work a second job, move in with family or friends, rent a smaller apartment, cut your expenses, or look for a roommate. Whatever steps you need to take to save enough money are critical for ensuring you have a downpayment as fast as possible.
5. Pre-approved Loans
As soon as you have saved enough money for a 20 percent downpayment and closing costs, you need to contact a mortgage lender to make certain you have the other 80 percent. One of your best options is a pre-approved loan. Prior to looking for the perfect home, obtain a pre-approval letter. This letter tells sellers you are very serious about purchasing a home.
This is a great option to gain an advantage in a competitive market when you are purchasing your first home. In order to be pre-approved for a loan, your financial information needs to be verified by your lender including taxes and proof of income. Your loan can then be submitted for the preliminary underwriting. If you have paid off all your debts, we recommend finding a lender interested in debt-free homeownership.
This type of lender is willing to work with you when purchasing your first home with no credit score.
6. Locating a Home Selling Within Your Price Range
Recent data shows 50 percent of homeowners found their home online, with 28 percent going through a real estate agent. If you do both, you are increasing your chance of success. You can even look online, find homes of interest, then show them to a real estate agent to ensure they are fairly certain what you want. The realtor can then use an MLS or multiple listing service to find homes in your desired area meeting the criteria you have provided.
Real estate professionals are responsible for the creation and maintenance of MLS. This service is useful when you are purchasing your first home because you can see so many of the homes currently for sale in the marketplace. A real estate agent also offers you valuable experience in the market to help locate the best deal on a home before it is even listed.
7. Researching the Neighborhoods
Start by locating the home you like the best in your price range. Do not make a decision on just the property. A recent survey shows 20 percent of individuals purchasing a home are willing to compromise on the condition, and 17 percent on the size. Only six percent are willing to compromise regarding the neighborhood quality, with just two percent compromising on the distance from the local schools.
Before you make a final decision, you need to consider the location and neighborhood of the home. Talk to your real estate agent about the quality of the schools, and the crime rates in any neighborhood you are considering. Determine how long it will take you to commute to your typical destinations such as your job, relatives and any activities.
If your commute times are too high, you need to consider a different neighborhood. Drive through the area at different times during the day and evening. Observe the noise levels and traffic conditions, and see if the residents spend a lot of time outdoors. If your potential neighbors are not comfortable being outside, you may not feel good living in the area.
8. Take the Time to Go To Open Houses
After narrowing down the potential neighborhoods, go to several open houses by searching for homes for sale. It does not matter if you are viewing a home that is less than ideal because you can learn a lot about the neighborhood. Eventually, you will find your ideal home. You will be able to make a comparison between the best and worst homes in the neighborhood.
One of the best ways to purchase a home is by using a good strategy. Start by determining which house in the most affordable in the best possible neighborhood. When you purchase a home in a good neighborhood for the lowest price range, you are able to build value in your home. A good example is purchasing the only home on the block without ceiling fans and hardwood flooring. Once you have made both of these upgrades, you will immediately add more value to your home.
9. Making a Competitive Offer
Once you have found the ideal home within your price range, and have been preapproved to receive a loan, you need to make an offer. If you have never purchased a home before there is a good chance you will not know how much to offer for the property. At this point, the expertise of your realtor is extremely important. Talk to your agent to determine if the offer you are making is in your budget, competitive and accurately represents the value of the home.
Resist the temptation to make an impulsive offer for more than you are able to afford with the intention of eliminating the competition. If the market is hot, there will most likely be multiple offers for the home. You can stand apart from the competition with a personalized letter.
10. Preparing for the Closing
The process of closing will begin after your offer has been accepted by the seller. You can help ensure the process proceeds smoothly by understanding what to expect during your closing. The time required for a typical closing is 43 days. This means you have more than enough time to do everything necessary. The remaining steps will be scheduled by your real estate agent such as the home inspection, and the final walkthrough.
Your realtor will make certain you remain informed if there are any issues during the process. Take the time to thoroughly read each document you are given. If there is something you do not understand, have your agent explain. Do not sign the final contract to purchase your home unless you understand everything. Once you have signed the documents, you take full responsibility.
Starting the Process
Purchasing your first home is most likely the largest purchase you have ever made during the course of your life. For this reason, you do not want to make any mistakes. An experienced, professional real estate agent understands the process, and knows exactly what needs to be done. They will help you find the home you have been dreaming of, handle the negotiations, and handle everything including the closing.
We believe you will find the ideal home, and wish you many years of happiness with your family.
