| Buying your first home.
Look at a home as a lifestyle investment, then determine what your needs are. Finding the right first home starts with a price range and a short list of desirable neighborhoods. But there are many other factors you'll need to consider before investing in what may be your biggest asset.
Choosing your real estate professional is, perhaps, the most important decision you will make when buying property. I believe the more you look around, the more you will see the value of working with me.
However, no matter whom you choose, these simple tips will help you find and purchase the home of your dreams more quickly and efficiently. If you're a first-time buyer you can find more information here.
Before you shop:
Before you buy:
- Be a smart consumer. Learn the financing basics. Know how to shop for a home loan that's right for you.
- Get pre-approved. This takes very little time and lets you know the price range that fits your lifestyle.
- Know what you want. The last thing you need is to close a deal and realize you bought a house you don't want. Ask yourself what you're looking for in a home, before you shop. Think about size, commute time and necessary repairs.
- Keep your debt load to a minimum. Don't make major purchases or incur any additional debt until after your purchase. Pay down credit cards and don't apply for new ones. Remember, financial institutions evaluate your financial situation on your gross monthly income. Your total monthly house costs should not exceed 28 percent of your gross monthly income.
- Be prepared to view new properties quickly. Sometimes homes sell quickly, so be ready to make fast decisions. Be accessible to change the terms.
- Have instant access to your agent. Instant communication can mean the difference in purchasing the property of your choice.
- Submit a strong competitive offer.
- Include a substantial earnest money deposit. Sometimes offers are accepted based on the amount of the deposit.
- Try to minimize the number of contingencies. Fewer contingencies mean a stronger offer.
- Hire an inspector. A professional building inspector or appraiser will make sure the house of your choice is in satisfactory condition.
- Check zoning regulations and covenants. Good residential neighborhoods will be zoned to keep out commercial and industrial users. Read any restrictive covenants and make sure they fit your lifestyle.
- Request an updated property survey. Be sure it clearly marks boundaries. Check for problems.
- Make sure you know what stays or goes. Your contract should be very specific about which items (appliances, etc) are included in the sale.
- Get agreements in writing. Make certain verbal agreements are written into the final contract to avoid any stressful and expensive issues laterClick here on tips for Writing a Winning Purchase Offer.
Before You Start
- Grab your current household budget so you can consider your financial situation and your ability to make mortgage payments.
- Ask family and friends if they can recommend experts, like a lawyer and an inspector, who can help with the home buying process.
- Think about your lifestyle and how it might affect your choice of home and neighborhood.
- Do a little research on current home prices in the neighborhoods you plan to target.
Buying Your First Home
Home ownership is the cornerstone of the American Dream. But before you start looking, there are a number of things you need to consider. First, you should determine what your needs are and whether owning your own home will meet those needs. Do you picture yourself mowing the lawn on Saturday, or leaving your urban condo for the beach? The best advice is to look at buying a home as a lifestyle investment, and only secondly as a financial investment.
Even if housing prices don't continue to increase at the torrid pace seen in recent years in many areas, buying a home can be a good financial investment. Making mortgage payments forces you to save, and after 15 to 30 years you will own a substantial asset that can be converted into cash to help fund retirement or a child's education. There are also tax benefits.
Like many other investments, however, real estate prices can fluctuate considerably. If you aren't ready to settle down in one spot for a few years, you probably should defer buying a home until you are. If you are ready to take the plunge, you'll need to determine how much you can spend and where you want to live.
How Much Mortgage Can You Afford?
Many mortgages today are being resold in the secondary markets. The Federal National Mortgage Association (Fannie Mae) is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. Mortgages that conform to Fannie Mae's standards may carry lower interest rates or smaller down payments. To qualify, the mortgage borrower needs to meet two ratio requirements that are industry standards.
The housing expense ratio compares basic monthly housing costs to the buyer's gross (before taxes and other deductions) monthly income. Basic costs include monthly mortgage, insurance, and property taxes. Income includes any steady cash flow, including salary, self-employment income, pensions, child support, or alimony payments. For a conventional loan, your monthly housing cost should not exceed 28 percent of your monthly gross income.
The total obligations to income ratio is the percentage of all income required to service your total monthly payments. Monthly payments on student loans, installment loans, and credit card balances older than 10 months are added to basic housing costs and then divided by gross income. Your total monthly debt payments, including basic housing costs, should not exceed 36 percent.
Many home buyers choose to arrange financing before shopping for a home and most lenders will "pre-qualify" you for a certain amount. Prequalification helps you focus on homes you can afford. It also makes you a more attractive buyer and can help you negotiate a lower purchase price. Nothing is more disheartening for buyers or sellers than a deal that falls through due to a lack of financing.
In addition to qualifying for a mortgage, you will probably need a down payment. The 28 percent to 36 percent debt ratios assume a 10 percent down payment. In practice, down payment requirements vary from more than 20 percent to as low as 0 percent for some Veterans Administration (VA) loans. Down payments greater than 20 percent generally buy a better rate. Lowering the down payment increases leverage (the opportunity to make a profit using borrowed money) but also increases monthly payments.
How Much Home Can You Afford?
Bob and Janet's combined income is $50,000 a year, or $4,166 a month. Their housing expense ratio of 28 percent yields a monthly maximum of $1,166 for mortgage, insurance, and taxes ($4,166 x 0.28 = $1,166).
Their total debt ceiling of 36 percent is $1,583 (4,166 x 0.36 = $1,500). Their monthly debt payments include a $200 car payment, credit card payments of $100, and student loan payments of $200. Subtracting this total of $500 from the $1,500 permitted leaves $1,000 in monthly housing payments.
Costs of Buying a Home
Many home buyers are surprised (shocked might be a better word) to find that a down payment is not the only cash requirement. A home inspection can cost $200 or more. Closing costs may include loan origination fees, up-front "points" (prepaid interest), application fees, appraisal fee, survey, title search and title insurance, first month's homeowners insurance, recording fees and attorney's fees. In many locales, transfer taxes are assessed. Finally, adjustments for or property taxes and Association fees will be included in your final costs. All this will probably add up to be between 3 percent and 8 percent of your purchase price.
In addition to mortgage payments, there are other costs associated with home ownership. Utilities, heat, property taxes, repairs, insurance, services such as trash, landscaping, assessments, and replacement of appliances are the major costs incurred. Make sure you understand how much you are willing and able to spend on such items.
Condominiums may not have the same costs as a house, but they do have association fees. Older homes are often less expensive to buy, but repairs may be greater than those in a newer home. When looking for a home, be sure to check the actual expenses of the previous owners, or expenses for a comparable home in the neighborhood.
Choosing a Neighborhood
Before you start looking at homes, look at neighborhoods. Schools and other services play a large part in making a neighborhood attractive. Even if you don't have children, your future buyer may. Crime rates, taxes, transportation, and town services are other things to look at. Finally, learn the local zoning laws. A new pizza shop next door might alter your property's future value. On the other hand, you may want to run a business out of your home.
Look for a neighborhood where prices are increasing. As the prices of the better homes increase, values of the lesser homes may rise as well. If you find a less expensive home in a good neighborhood, make sure you factor in the cost of repairs or upgrades that such a house may need.
Finding a Broker
If you are a first-time home buyer, you will probably want to work with a broker. Brokers like Kay and Jim know the market and can be a valuable source of information concerning the home buying process. Ask lots of questions, most brokers in the State of Florida are Transactional Brokers - not working for the Seller or the Buyer - and are responsible to you for disclosing all known pertinent about the properties which you plan to make an offer. With a Transactional Broker you make your own decisions and in most cases the brokerage fee is paid for by the seller. An alternative is a so-called buyer's broker. This individual does work for you, and therefore is paid by you. Make sure that the broker has access to the Multiple Listing Service (MLS).
Home Buying Costs
||$200 - $500
||$1,000 and up for 1% - 3%
||3% - 8% of purchase price
Once you've determined a price range and location, you're ready to look at individual homes. Remember that much of a home's value is derived from the values of those surrounding it. Since the average residency in a house is seven years, consider the qualities that will be attractive to future buyers as well as those attractive to you.
Although it can be difficult, try to remember that you will probably want to sell this home someday. The more research you do today, the better your decision will look in the years to come.
- Buying a home can mean building significant value through the years.
- Think carefully about how much you can afford to spend and consider borrowing guidelines like those used by Fannie Mae.
- Pre-qualifying with your lender is a good way to determine how much house you can afford.
- You will need cash for a down payment and closing costs. Generally speaking, the higher the down payment, the lower the interest rate and monthly mortgage payment.
- In addition to your mortgage payments, you will also need to consider the other costs of home ownership.
- Schools, taxes, services, crime rates, transportation, and zoning are important considerations when selecting a neighborhood.
- Brokers can be valuable sources of information for buyers. A broker that belongs to the Multiple Listing Service will be able to offer a wider variety of homes to choose from.
- Remember to consider resale value when buying your home.
Tips for Writing Winning Purchase
- Submit a Pre-approval Letter With Your Offer
A lender's letter that says your credit rating has been examined and you can afford to buy the home carries a lot of weight. It tells the seller that you are serious and qualified. It says you are ready to buy and have already committed to lender. If the seller has a higher offer from a buyer without a pre-approval letter, your offer will likely win.
- Hire an Assertive Real Estate Agent
An agent who constantly combs the marketplace and networks with other agents is more likely to get a lead on your new home before anybody else, which is why you need to hire a good agent. When a young nurse was ready to buy a home she had just toured over lunch, her agent insisted they write the offer on the hood of her car. Then the agent called the listing agent from her cell. She persuaded that agent to drop what he was doing and join her at his seller's home to present the offer. The nurse's offer was accepted that afternoon.
- Write a Friendly Offer
Don't include demands in your offer that are likely to irritate or anger the seller. If it is customary in your area for the buyer to pay for their own closing costs, don't ask the seller to bear that cost. If most buyers demand possession on the day of closing, don't demand to move-in before closing.
- Put Your Best Foot Forward
Simply put, this means write your very best offer. You might get only one chance to make an impression on the seller, so don't make a low offer hoping the seller will give you a counter offer. If the seller has received previously higher offers, the low offers most often are not even considered. They are shoved into the rejected pile. Figure out the top dollar you are willing to pay for the home and offer that price.
- Put Down a Healthy Earnest Money Deposit
A larger earnest money deposit shows you are serious and are willing to put your cash on the table. Sellers will feel you are more committed with, say, a 3% deposit than 1%, meaning if a home is listed at $300,000, don't offer a $500 deposit. The seller could feel you have nothing at risk and could walk away from the transaction at will. A deposit of $5,000, $10,000 or $15,000 says "I am committed to buying this home."
- Cash Talks
If you are able to pay "all cash" for a home, say so. Although it's always "all cash" in the end to the seller, even if the buyer obtains a loan, a transaction that is not dependent on receiving loan approval is more attractive to a seller.
- Shorten Inspection Periods
Many standard real estate purchase contracts give the buyer "X" number days to perform inspections before the buyer is required to proceed with the transaction. If the default in your purchase contract is 10 days, try shortening that time period. By federal law, unless you specifically waive your right under the Lead Paint Disclosure, you have 10 days to inspect the property for signs of lead paint contamination.
- Waive Some Contingencies
If you have spoken to your legal advisor and feel comfortable risking your deposit, you might want to consider waiving contingencies such as those for loans, appraisals or inspections. However, there are risks. If you waive an appraisal contingency and the home appraises below your sales price, you will need to make up that difference in cash. But without some contingencies, your offer will be more than solid than a competitor's even is the price is lower.
- Offer to Close Quickly
Unless there are extenuating circumstances, many sellers prefer to close within 30 days or fewer. If you can offer a 21-day closing time frame, that might be more important to the seller than an offer for more money and be just the edge you need to beat out the competition.