What To Know When Buying Your First House ((FREE))
Buying a house can take as little as a few days if you're buying in cash, or can take years if you're counting the amount of time it takes you to save money for a down payment and decide where to live. In a competitive housing market, you may put in multiple offers on homes before one is accepted. Conversely, mounting worry over a housing recession could lead more sellers to pull their homes from the market, making it more difficult to find a suitable property. If you already have your money saved and have a good idea of the neighborhoods and type of home you want, the process will probably take you two to six months. Ask a local real estate agent for a more accurate timeline based on your local market conditions.
what to know when buying your first house
Did you know that you can decide between multiple types of mortgage loans? The type of loan you choose will determine your down payment amount, the type of home you can buy and more. Here are some of the more familiar types:
Your reason for buying a home will be your north star for making decisions about your purchase. If your goal is to dip your toe into real estate investment, a duplex may be the perfect option for you.
First-time homebuyers are often eligible for specific programs and discounts that can make buying a home more affordable. For example, an FHA loan, which is backed by the Federal Housing Administration, is designed to help first-time buyers. It requires as little as a 3.5% down payment, for example. And while most mortgages require a credit score of at least 620, you can secure an FHA loan with a credit score of 580. If your credit score is slightly lower, say between 500 and 579, you could still qualify for an FHA loan, but the down payment requirement jumps up to 10%.
This is the part where you get to scroll through Zillow -- and not just window shop. Looking for a home online has become something of a national pastime, but you should also go to local open houses, as well as talk to realtors, brokers and other people in your neighborhood who have recently purchased their first home.
You want to put your strongest foot forward when making an offer as a first-time homebuyer. Making your highest and best offer first is usually what realtors recommend in order for it to be competitive, which is particularly important right now.
Your closing costs will add up to thousands of dollars. The average closing costs for a single-family home purchase were $6,387 in the first half of 2021, but they vary widely depending on where you live. For example, in high-demand places such as New York, average closing costs can be as high as $17,000. Typically, your closing costs will be around 2% to 5% of your loan.
Spending all or most of your savings on the down payment and closing costs is one of the biggest first-time homebuyer mistakes, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Illinois.
How this affects you: Any new loans or credit card accounts on your credit report can jeopardize the closing and final loan approval. Buyers, especially first-timers, often learn this lesson the hard way.
What to do instead: Consider other mortgage options. You can put as little as 3 percent down for a conventional mortgage with PMI, and FHA loans only require 3.5 percent down if your credit score is 580 or above. With some other types of loans, you might even be able to secure a mortgage with no down payment at all. Plus, check with your local or state housing programs to see if you qualify for housing assistance programs designed for first-time buyers.
Many loan programs allow you to use a gift from a family, friend, employer or charity toward your down payment. Not sorting out who will provide this money and when, though, can throw a wrench into a loan approval.
There are lots of programs out there to help first-time homebuyers. This can range from local government or community programs that offer free classes about home buying and homeownership to grants that give you cash to put toward a down payment.
For example, if you bring home $6,600 a month, your maximum house payment is $1,650. Now imagine you get a 15-year fixed-rate mortgage at 4% interest. If your property tax is 1.14%, home insurance is $1,200 per year, and PMI is 0.5% (for down payments below 20%), here are some home prices you could afford:
Here are the basic home-buying steps: Determine how much house you can afford, get preapproved for a mortgage, find an experienced real estate agent, research neighborhoods for best fit, go house hunting, make a competitive offer within your budget, finalize your financing, and prepare for closing.
1. Use a trusted realtor. We all know that realtors get a cut of the sales price of a home which makes some buyers hesitant to use a realtor: they believe it drives up the overall cost. Keep in mind that the seller, not the buyer, pays the commission. Brooke Willmes, real estate agent at SPACE & COMPANY in Philadelphia, says that potential buyers should keep in mind that a listing agent (the agent representing the seller) doesn't protect your interests and "that agent would simply pocket both sides of the commission." That means that you're not saving money. A savvy realtor who works for you can protect your interests and guide you through the buying process - from negotiating a price to navigating home inspections.
2. Remember that a house purchase involves a contract. When you're buying a house, there are papers to sign. And more papers to sign. Many of those papers - which are actually contracts - look like "standard" home buying contracts with no room for negotiation. That isn't true. Contracts are meant to be negotiated. You don't have to sign a standard agreement. If you want more time to review your inspection, wish to waive a radon test or want to make a purchase subject to a mortgage approval, you can make that part of the deal. That's where a savvy realtor can help. See again #1.
3. Don't necessarily buy for the life you have today. Chances are that buying a house will be one of the bigger financial commitments you'll make in your lifetime. Before you agree to buy what you think might be your dream house, consider your long-term plans. Are you planning on staying at your current job? Getting married? Having kids? Depending on the market and the terms of your mortgage, you may not actually pay down any real equity for between five and seven years: if you aren't sure that your house will be the house for you in a few years, you may want to keep looking.
4. Think about commitment. I'm not talking just about your mortgage. When you get married, the laws of your state generally determine how your assets are treated - and ultimately how they're distributed at divorce. The same rules don't necessarily apply when you're not married. That means you need to think long term. When you buy a house with your significant other who is not your spouse, make sure you have an exit plan if things don't go the way you hope. It's a good idea to have an agreement in place with respect to titling, mortgage payments and liability, repairs and the like: it's best to get it in writing (and yes, I'd recommend getting a lawyer).
5. Look beyond paint. It's often the case that your dream house has that one room that you're already fantasizing about changing. Willmes says to remember that it's fairly inexpensive to fix cosmetic issues (a bit of paint or some wallpaper) but making changes to kitchens and baths can be expensive. She says, "People tend to focus on the cost of cabinets, appliances and counters but sometimes forget about the cost of labor which can double to triple the cost." That doesn't mean that you should give up on a house in need of a significant fix but you should factor in those costs when determining whether you can afford to buy.
6. Buy the house you know that you can afford. This can be different from the price that your mortgage company believes that you can afford. When my husband and I bought our first house, we were approved for a mortgage of about three times more than we ultimately ended up spending. Fresh out of law school and working for established firms, our finances looked good on paper. But we dialed back our expectations because we weren't convinced that our income and expenses would remain at those levels. We were right: two years later, we started our own business just as the economy turned south. The less expensive house meant that we could still make our payments even with less income in pocket. So what's the best ratio to use? Some lenders suggest that you can afford mortgage payments totaling about 1/3 of your gross income but others suggest closer to 28% for housing related costs including mortgage, insurance and taxes. There are a number of factors including your projected income, interest rates, type of mortgage and the market. Ask your mortgage broker to help you understand what's in play.
7. Don't fixate on the purchase price. The purchase price is just one piece of owning a house: be sure to consider all of the costs associated with your potential new home. That includes the cost of insurance, homeowner association fees and real estate taxes - depending on where you live, those can quickly add up. And it's not just home improvements that can cost money: maintenance costs dollars, too. It's a good idea to ask questions about upkeep for extras like swimming pools, fancy heating and cooling systems and out buildings. Finally, Willmes suggests that you make sure you're comparing apples to apples: a condo with a large fee that's priced low may be more costly than a higher priced one with lower fees while a cheap home with high taxes may cost you more a month than a more expensive one with lower taxes.
9. Don't get carried away by the home mortgage interest deduction. Many taxpayers are tempted to buy more house than they can afford by figuring that they'll save enough with the home mortgage interest deduction to make up for it. The mortgage interest deduction is only deductible if you itemize on your Schedule A: only about 1/3 of taxpayers claim the itemized deduction. You itemize if your deductions exceed the standard deduction: for 2015, the standard deduction rates are $12,600 for married taxpayers filing jointly and $6,300 for individual taxpayers (those rates stay put for 2016). Assuming that you do itemize, remember that your out of pocket will still be more than your tax savings (if you're in a 28% bracket, paying $5,000 more in interest will only "save" you $1,400 in taxes). And you can't count on the same level of savings forever: mathematically, the longer you own your house, the less you will owe in interest. That's good for building your equity but it means a smaller deduction come tax time. 041b061a72