Tuesday, July 25, 2017

Buying Your First Home

Finding the right first home starts with a price range and a short list of desirable neighborhoods. We can certainly help you with that and we can even begin to sort through your options and email you homes that fit your search parameters. But there are many other factors you'll need to consider before investing in what may be your biggest asset.

1 Buying Your First Home

buying-your-first-homeHome 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? The best advice is to look at buying a home as a lifestyle investment, and only secondly as a financial investment.

Buying a home can be one of the best financial investments you make in your lifetime. Making mortgage payments can also allow 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 get started, you'll need to determine how much you can spend and where you would like to live.

2 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, sometimes referred to as “front end” and “back end” expense ratios.

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, the basic costs of owning the new home relating to your new mortgage. 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% of your monthly gross income.

The total obligations to income ratio is the percentage of all income required to meet the monthly obligations of your monthly debts. 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, cannot exceed 36%.

Many home buyers choose to arrange financing before shopping for a home and most lenders will "prequalify" you for a certain amount. This only takes a few minutes over the phone and will definitely be worth the time. Prequalification helps you focus on homes you can afford so that when we find the perfect dream home for you, and we will, we are ready to move on it and begin negotiating the best deal possible. It also makes you a more attractive buyer and helps us negotiate the lowest possible purchase price. Nothing is more disheartening for buyers or sellers than a deal that falls through due to a lack of financing.  Getting a “prequal letter” can help keep that from happening.

In addition to qualifying for a mortgage, you will probably need a down payment. The 28% to 36% debt ratios assume a 10% down payment. However, down payment requirements vary from more than 20% to as low as 0% for some Veterans Administration (VA) loans. Down payments greater than 20% 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?

Dave and Jackie's combined income is $50,000 a year, or $4,166 a month. Their housing expense ratio of 28% yields a monthly maximum of $1,166 for mortgage, insurance, and taxes ($4,166 x 0.28 = $1,166).

Their total debt ratio of 36% 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.

3 Costs of Buying a Home

Many home buyers are surprised to find that a down payment is not the only cash requirement. A home inspection can cost $250 or more. Closing costs may include loan origination fees, up-front "points" (prepaid interest), application fees, title search and title insurance, appraisal fee, survey, your first month's homeowners insurance premium, recording fees and attorney's fees. In many areas, transfer taxes are assessed. Finally, adjustments for property taxes already paid by the sellers will be included in your final costs. All this could possibly add up to be between 3% and 8% of your purchase price.

4 Ongoing Costs

In addition to mortgage payments, there are some 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. Take the time to analysis and plan out how much you are willing and able to spend on these types of  “ancillary costs”.

Condominiums may not have the same costs as a house, but they do have association fees (usually paid monthly to the HOA). Older homes are often less expensive to buy, but repairs could be quite a bit more than those in a newer home. When looking for a home, be sure to ask for the actual expenses of the previous owners, or expenses for a comparable home in the neighborhood.

5 Choosing a Neighborhood

Before you start looking at homes, evaluate the neighborhoods. Schools and other services play a large part in making a neighborhood appropriate for your needs. Even if you don't have children, your future buyer may. Crime rates, taxes, transportation, and town services are other things to consider. Finally, you may even want to research the local zoning laws. A new car repair shop next door might alter your property's future value (up or down!).

Look for a neighborhood where prices are increasing. As the prices of the larger homes increase, values of the smaller homes may rise even at a higher percentage. If you find a less expensive home in a good neighborhood, make sure you factor in the cost of repairs or upgrades that may be needed.

6 Finding a Broker

The best recommendation we can give you (other than working with one of our experienced and highly trained REALTORS) is to find an experienced Broker who is also a member of the local REALTOR Association (please note that down south this is sometimes pronounced “Real-A-Tor”.  There is only one “A” in “Real-Tor”.  Now all of our agents are from the area…. so we get to criticize. J) REALTORS know the market and can be a valuable source of information concerning the home buying process. Make sure that the broker has access to the Multiple Listing Service (MLS). This service lists all the properties for sale by most major brokers across the country. Brokerage commissions vary, are negotiable, and are usually split between the listing broker and the broker that eventually sells the home.

7 Home Buying Costs

Down Payment 0% - 20% of purchase price

Home Inspection $200 - $500

Points $1,000 and up for 1% - 3%

Adjustments 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 may be anywhere from two to seven years, consider the qualities that will be attractive to future buyers as well as those attractive to you.

Although it sometimes 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 pan out in the years to come and can enhance this valuable investment’s worth to you and your family.

SUMMARY

  • Buying a home can mean building significant value through the years.  It can be your greatest investment in you and your family’s financial future.
  • Think carefully about how much you can really afford to spend and consider borrowing guidelines, like those used by Fannie Mae.
  • Prequalifying with a good lender is a good way to determine how much house you can afford and gives you credibility and negotiating clout.
  • You will need cash for a down payment and closing costs. In general, you can expect that the higher your 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 supplemental and ancillary costs of home ownership.
  • Be sure to seriously consider schools, taxes, services, crime rates, transportation, and zoning when selecting a neighborhood.
  • A broker that’s a REALTOR, and by rule then belongs to the local Multiple Listing Service will be able to offer a wider variety of homes to choose from.
  • Remember to consider that you may not live in this home for the rest of your life and the  re-salability is a primary factor when buying your home.

CHECKLIST

Update your personal household budget so you can begin to realistically assess how much home you can afford. Be sure to factor in all your monthly income and all the expenses that may come with your new home.

Add up any savings you could use towards your down payment, and decide whether you need to save more before you start house hunting.

Start talking to lenders about your options and be sure to get a prequalification and preapproval.  We will be glad to suggest several good lenders for you to consider.