This is the ultimate first time home buyer guide for those you are ready to become a homeowner.
In this guide I'm going to cover a few key points:
What you need to buy a house, some first time homeowner pitfalls and the process of buying your first home.
But before I get started. Are you sure you want to become a homeowner? There are some benefits to renting over owning a house you can't ignore. Let me go over the pros and cons of renting or buying a house first before we dive in.
Renting vs buying: 4 questions to ask yourself
The thought of owning a house and having a place you can truly call your own is appealing for obvious reasons.
However, choosing to be a homeowner takes not only a decent level of financial stability but also a certain emotional maturity that’s needed to create a time-constrained plan that suits your budget and lifestyle.
If you’re feeling stuck on the fence between renting and buying, here are some important questions to ask yourself.
It’s easy enough to stack rental rates against each other, but when you’re looking into buying a home, you not only need to think about your mortgage payments, but also property taxes, homeowners insurance, and possibly some extras like homeowner or condo association fees.
In many cases, it’s much more expensive to rent than to buy, especially when mortgage rates are fairly low.
Even if the mortgage rates in your area aren’t all that attractive, it’s important to consider the wealth-building benefits of owning a home which can keep giving over time.
The median net worth for homeowners is significantly higher than those of non-homeowners, thanks to the way your equity increases as you pay off your home loan.
One of the primary benefits of renting over buying is that you’re not tied down to anything. When buying, things get a little more difficult.
Not only is the variety of choice generally more limited, but you have to find a home and an area where you’d be happy to live for several years, all the while recouping the cost of buying the property and building up your equity.
Take some time to consider whether you’re really ready to tie yourself down to such a big obligation.
It’s impossible to tell for certain what’s going to happen in your future. However, assuming that everything goes according to plan, you need to think about how renting or buying will mesh with your long-term strategy.
If your plans for the future include a major career change, or moving to another state, then you’re generally better off renting. If you’re planning to settle down and have kids, you’re better off buying, and incorporating the cost of raising a family into your budget.
If you’re out of touch with your credit, then you’re really in no position to think about renting or buying. Get a free credit report from the federal credit report website and comb through for any kind of errors and negative information in it.
Many home creditors will want to see a score of at least 620, but you won’t qualify for the best interest rates unless your score is over 750.
If you’re far away from having great credit, it may be worth renting and working on your credit score before you think about buying.
5 questions to ask before buying a new home
There are many reasons why buying a new home is ideal and better compared to renting or leasing. Renting a home to live in is not really that wise where you don’t really get to earn the property in the long-run. All the rental fees will earn you nothing in the end. So if you are relocating, downsizing, upsizing or just simply looking for another home to live in, consider owning one and gain better benefits.
Owning a property is always a good investment since it makes you save more money and it increases in value in the long-run. However, there are certain crucial things you need to ask yourself before you plunge into this relatively huge financial decision. With these questions, you can evaluate the scenarios and plan ahead.
Generally speaking, new homes are definitely more expensive compared to old and foreclosed homes. Since buying homes involve huge amounts of money, you need to evaluate your finances thoroughly before you do anything major.
Calculate every expense you would be incurring once you own the property. Aside from the selling price, include taxes, insurance, utilities, improvements, maintenance costs, and others.
Check the range of expenses you would be incurring, from the necessary ones to the wanted ones. Then you can have an idea if you can indeed afford a new home.
Choosing the location of the new home you desire living on is important. Every different location or neighborhood would give you are totally different living experience.
This fact is caused by the differences in the surroundings and composition of each unique neighborhood. From the business establishments present in the area to the residents the live there, there are many factors that affect the kind of living experience perceived by anyone who lives there.
The goal here is buying a new home in a suitable neighborhood based on your preferences and expectations.
You also need to ensure that the basic things you need are within your reach such as schools for your kids, market to shop on, mass transportation and other essential things.
So make sure you find a new home in a neighborhood you would fit in just fine.
You might be thinking that since you are buying a new home that you don’t need to inspect anything in the property.
There are a lot of things that you need to inspect in a new home. Needed inspections include radon levels, presence of certain pest such as termites, soil composition and others you might have in mind.
Obviously you need to examine the home and the neighborhood if it does meet the needs of your family. You cannot just fall in love with the physical things you see, you need to prioritize those that you need such as security and comfort.
You need to address size issues such as that yard and room and make sure that everybody, including your pet, will live comfortably.
If the home does not have the space you need you may have to consider general steel buildings for added space. You also need to examine is the property is in a comfortable distance away from your kid’s school and your workplace.
The home may look like your dream house based on its physical appearance but don’t let that fool you. You need to consider safety when buying a new home.
This kind of safety is beyond the physical structure or anything with regards to the property.
There are certain outside and uncontrollable forces that contributes to the overall safety in a home and neighborhood. One in particular is crime. You don’t want to live in a community where criminal activities are rampant.
Another thing to consider are the forces of nature. Check for histories of flooding, earthquake, tornado, and others that you would find alarming.
You can address this issue by doing research. Ask the local authorities and the residents nearby and know more about past significant events regarding safety.
5 things everyone should do before moving to a new home
Moving into a new home is always a big deal. It doesn’t matter if this is the first house you bought, or the third one you’re moving to, changing houses is always a stressful affair.
There are so many things to think about and take care of before you even think about moving, that by the time you find yourself in your new home you will be too stressed to enjoy it.
Before you unload your packing boxes out of the truck in front of your new home, here is what you should do.
Who has the keys of your home? You and the members of your family, of course, but also your friends, and possibly your neighbor so they can stop by in case of emergency.
The same probably goes for the previous tenants of your new home – there will be people who have keys to the locks of your house.
Safety first; so you should change the locks on your front and back door, as well as the cellar (if there is one). This might seem like too much work, but you don’t want to think about who else may get into your home when you’re not around.
If possible, install alarm system straightaway – you don’t actually know the neighborhood that well, and it’s better to be safe than sorry.
Not many people bother with cleaning when they’re moving away, and you never know in what condition your new house will be.
Even if it looks spotless, it doesn’t mean that it’s really clear. You don’t have to call professional to clear every corner of your home, you can do it yourself with an all-purpose cleaner and a pair of rubber gloves.
Still, you should take the carpets out to be steam cleaned, or borrow a steam cleaner and do it yourself. Couches and armchairs can also gather a lot of dust and dirt, so it’s best to have them disinfected too.
This is incredibly boring and people think they can do it once they move, but it isn’t so.
You should change your address as early as possible to avoid new tenants of your old house having to forward you mail, and bills piling up.
The post office should be notified immediately of your new address, but you should also inform the businesses and government bodies individually. This will ensure that all your mail is going to the right place.
Any subscriptions you have should be redirected to your new address, and your bank should be informed that you’ve moved too.
Your details on the electoral roll should be updated as well, so you don’t have to travel to your old hometown when you have to vote.
Packing boxes are a nightmare – no matter how many you have, it won’t be enough. If you have thought well in advance and packed your belongings in the labelled boxes, it’ll make organizing easier once you step into your new home.
Think about all the things you have to pack, and try to get plenty of boxes of different sizes.
Your clothes can be stored neatly even in something as simple as plain old trash bag (these are incredibly spacious and you’ll be able to pack a lot of clothes in there).
But your books, glasses, plates, and family memorabilia should be packed neatly in cardboard boxes. So set off and find plenty of durable packing boxes so all your things are protected.
No matter how long the previous tenant lived in the house, you need to disconnect the energy in their name and reconnect it in your own.
You only need to call your energy provider, give them your address, and let them know when you’ll be moving in so they can make sure the connections are okay.
They should have your contact numbers and identification, and it’s vital that you do this just before you move so that the previous tenant won’t be charged for the energy you’ve spent, and vice versa.
Also, you should call internet service providers at least a month before to make sure you’ll have the internet in your new home.
We live in such times when moving houses isn’t a strange and rare thing anymore, most of us will move several (if not a dozen) times in our lifetime.
If every time we moved we had to go through equal amount of stress, we would suffer greatly.
By being systematic and well-organized, you will make your move as stress free as possible, and this means more time to enjoy the good things.
Don’t put off things until the last minute, be thorough and responsible, and you will soon learn that moving isn’t so bad after all.
4 things you need to buy a house
Buying a house isn’t as easy as it used to be. The days of no-documentation or low documentation loans are all but gone.
Before you can become a first time home buyer, you need to check these 4 items off first.
If you want to make your dreams of becoming a first time home buyer come true, the first thing you want to make sure of is that your credit score is in order.
Let me be more blunt: you need a good credit score to buy a house.
But, what's considered a good credit score?
The absolute bare minimum credit score to qualify for a mortgage is 620. However, to secure the best rates, you need a score of 740 or higher.
If your credit score is below this number, you have several options:
- Wait. While this can take a while, it may be best to wait to buy a house until your credit has improved.
- Get an FHA loan instead. For an FHA loan, you need a score of at least 500 to go along with a 10% down payment. If your score is over 580, then you’re only required to put down 3.5%.
The downside of an FHA loan is that you have to pay a monthly mortgage insurance premium on top of your mortgage payment.
If you have bad credit, don’t despair, there other factors that can help you qualify for a mortgage. These are:
- A low loan-to-value ratio. You can achieve this by making a higher down payment. If you want a $200,000 house and can make a $50,000 down payment, it shows you are more committed to making the payments on the property.
- A big savings account. The more money you have saved up, the better.
- High income. Even if your credit is bad because of past mistakes, you can overcome it if you show you make a lot of money.
- A low debt-to-income ratio. If you don’t have much (if any) credit card debt, yet good income, it shows you will be able to handle the new mortgage payment.
- A long history of employment. If you’ve been working at the same place for over 10 years, odds are your job is pretty safe. This goes a long way toward showing future income stability.
When you’re applying for a mortgage the one thing you’ll need is a lot of proof. The lender will ask you for… just about everything.
Be ready to provide bank statements of every bank account you have, to show you have steady income. You’ll also be asked to provide recent pay stubs along with the last 2 years of tax returns.
You need proof for everything. So if you have side gigs which pay you cash, that income is not going to count.
This information you provide must back up the total income you claimed to earn. You will not qualify for a house if your income isn’t up to par.
To help you better qualify for a mortgage, you can combine your income with your spouse. But if you do, keep in mind that now both credit scores will be taken into account.
While income can be combined, credit scores are not combined or averaged. The lender will use the lower credit score of the two of you to calculate your interest rate.
The days of buying a house without putting a down payment are long gone. Lenders want you to be committed to your home purchase. After all, if they’re letting you borrow a few hundred grand, they want to make sure you’re invested into the house too.
To buy a house, you need to make a sizable down payment to secure a mortgage.
It is advisable to put down 20% of the homes sale price toward the down payment. By doing so, you avoid paying the dreaded private mortgage insurance (PMI).
You pay PMI every month until you owe 20% of what your property is worth. Typically, PMI is 1% of the loan amount per year. So on a $300,000 loan, you owe $3,000 per year (or $250 per month). This money doesn’t benefit you and goes straight down the toilet.
If you don’t have 20% down payment, you have several options:
- Wait until you’ve saved up 20% down.
- Bite the bullet and pay private mortgage insurance.
- See if you qualify for something other than a conventional mortgage.
Other lending programs don’t require too much of a down payment:
- FHA loans require 3.5% if your credit score is at least 580.
- VA loans don’t require any down payment. Plus, there’s no monthly mortgage insurance to pay.
- USDA loans don’t require a down payment either. USDA loans are available for single family homes location in less dense, rural areas.
And lastly, banks will want to see that you have enough money in your reserves just in case you happen to fall into a financial setback.
It used to be a good rule of thumb to have at least up to 3 months of money reserves, but now just to be on the safe banks want to see that you have at least 3-6 months of reserves.
Here’s how you calculate how much is necessary to have in reserves.
You need to take your total proposed monthly mortgage payment and multiply by 6 for 6 months reserves.
Your mortgage payment may consist of the following: principal, interest, private mortgage insurance, homeowners insurance, real estate taxes and homeowners association dues. It really adds up!
For Fannie Mae and Freddie Mac loans, the amount needed in reserves vary depending on your credit score and the loan to value ratio. As a rule of thumb though, the riskier the loan, the more you need to have in reserves.
Other loan types, like FHA, VA and USDA don’t require reserves.
If you find yourself fulfilling all of the requirements of this "buy a house checklist", then you’ll be well on your way to becoming a first time home buyer and owning your first home.
First time home buyer mistakes to avoid
If you’re a first time home buyer, especially one who has waited years to buy a home, you may have a day dream about the perfect house.
Maybe you picture a cute bungalow with a nice garden in the backyard with room for the kids to play. Perhaps you imagine a flower-lined walkway and a picket fence.
While daydreams are nice, and you may actually find a home just like you imagine, you also should remember that as a first home buyer, you face a steep learning curve.
If you’re not careful and don’t do your research, you could make a major mistake.
Here are some pitfalls to avoid:
Even in this environment, banks may be more lenient and say that you qualify for more than you can comfortably afford. The best way to decide how much you can truly afford is to set aside money now for your mortgage payment before you buy a home.
For instance, if your current rent is $1,000, but you want a home that will cost you $1,700 a month in mortgage payments, start setting aside the difference of $700 a month now.
Do this for 6 to 12 months to see if you can truly afford the loan amount you would like.
Houses are never cheap. Even buying a run down home comes with expenses afterwards. Ideally, you should have enough in savings to afford a substantial down payment.
A good rule of thumb is having at least 20% of the home’s price available to pay upfront. Mortgages insured by the FHA (Federal Housing Administration) require a 3.5% down payment. That doesn’t sound too bad, does it?
However, not having at least 20% available to put down on the house requires you to buy additional mortgage insurance.
Making the effort to save money for a down payment is worth it. The bigger your down payment, the smaller your mortgage debt will be.
Oftentimes, home-owners-to-be forget about the real cost of a mortgage.
Aside from paying the monthly installment, mortgage payments also include interest, taxes and insurance. Then there are utilities, homeowners' association fees and maintenance.
Failing to take these (and many other) additional expenses into consideration can lead to being overwhelmed by the total cost of the mortgage.
Unfortunately, this is a very common mistake among many new homeowners. Not being able to afford your mortgage loan often leads to having to sell your new house.
Ideally, before buying the house of your dreams, you should take the time and create an estimated budget to figure out if you can afford the loan.
Unfortunately, your monthly home loan payment is only one expense associated with homeownership that you’ll have to pay. There are many more expenses.
You’ll also need money for property taxes, homeowner’s insurance, repairs, and routine maintenance.
If you didn’t have 20% down to pay, you likely will also have to pay private mortgage insurance. Don’t be surprised if these expenses add as much as $500 to $2,000 additional monthly to your budget.
Another common mistake to avoid when buying your first home is looking at too many or too few houses for sale.
Of course you should shop around and look for a home that best fits your needs!
However, finding a house that’s perfectly perfect sounds like fiction. By knowing more or less what you’re looking for and how much house you can afford, you should be able to narrow down your choices.
On a different note, try not to make such big decisions in a hurry. It’s not unheard of to look at few houses and after careful consideration, realize the first one you saw would perfectly fit your needs.
Unfortunately, buying the very first property you see might not be such a good idea. What if there’s another home for sale in a better neighborhood? What if a better deal awaits just around the corner?
Mortgages are among the biggest financial commitments out there, so make sure you make an informed decision before buying real estate.
You may have your daydream about your perfect house, but recognizing that no house will meet all your needs is important.
Be flexible when choosing a property and remember to offset the price with what you’re getting.
Often low cost, cosmetic fixes may be all you need to make a property you weren’t enthusiastic about homier.
Compromising on your wants can help you afford a home in your price range.
People trying to sell their home might have a different view when staging their house to show it off to buyers.
Try not to let that stand in the way of seeing a home’s true potential. Or lack of it!?
Imagine you’re checking out a property where you feel right at home. Everything’s so clean. The house smells nice. The furniture is so modern, just how you like it.
But did you see there’s some mold behind the closets? Or have you heard the noisy neighbors right next door?
Try to look at each house objectively. Don’t let emotions get in your way and make a rash decision you might regret later on.
Having said that, remember what is truly important. If you work from home full-time, you’ll likely need a home office.
Compromise on this important feature, and you may regret buying the property.
If you have one child but plan to have another in the future, you’ll likely need a 3 bedroom rather than a 2 bedroom home.
Buying a home is an overwhelmingly complicated process. However, you don’t have to do it alone.
A qualified mortgage broker can help you through the process as well as help you find the best mortgage for your situation. Mortgage brokers can save you time and energy.
Best of all, they usually provide their services free to the consumer. There’s really no reason not to hire a mortgage broker.
Although a thorough home inspection does come with certain costs, skipping it isn’t a good idea. The house you’re about to buy might look good to the naked eye, but how do you know the plumbing is in perfect condition? Or the electrical wiring.
Many skip this step to save money, but hiring a home inspector could potentially save you hundreds or even more in the long run!
The costs of homes vary. There is no regulation regarding a cost threshold for high or low pricing. Obviously, being a major purchase, perhaps the largest purchase in one’s life, price becomes a factor.
Young couples and singles are sometimes attracted to the cost of modestly-priced homes, especially ones in high-profile neighborhoods. However, a huge mistake is assuming the cost of the home (in present condition) is a good deal.
Often, parties with limited experience underestimate the costs associated with renovation and supplemental needs such as furniture, roofing, etc.
No listing price is set in stone; in real estate, all prices are negotiable. However, a new homebuyer, inexperienced in real estate acumen and negotiation skills, may purchase homes too soon or appear too anxious to buy, placing the advantage in the seller’s favor.
Associating the pursuit of a new home with a knowledgeable and experienced real estate agent can save thousands of dollars. Moreover, once an agent understands the general range of price, they can lead you to a number of alternatives previously unknown.
How to save up for a down payment
If you have always dreamed of white picket fences and a golden retriever, you’ll be happy to know it’s possible to save up enough to buy a house in just 12 months depending on how disciplined you are.
In fact, there are certain techniques that anyone can use to stash cash for a future house payment so they can forget about apartment life and jump into home ownership.
Read on to discover 4 easy ways that you can save up for a down payment on your dream home in as little as 12 months.
Houses aren’t cheap and in light of the recent financial crisis, many lenders are saying goodbye to the zero down option.
However, for first time buyers there are always FHA programs that allow you to buy with as little as 5%. Aim for that if this is your first house.
To determine how much you need, you’ll want to figure out what your maximum price point is. You can use online loan calculators to play around with figures and determine a monthly payment that you’re comfortable with.
Remember that online loan calculators often don’t include your escrow payment which includes money for insurance and property taxes. Look at houses online for an idea of what property taxes are in your area.
Next, take your maximum price point and multiply it by 5%. For example, if you’re comfortable with purchasing a home up to $200,000, you’ll need about $10,000 for a downpayment. Also include the cost of purchasing the property which can include a real estate lawyer, recording fees, etc.
Your pay schedule is the amount of times you are paid each year. If you are paid weekly, you’ll get 52 paychecks each year. Biweekly, it’ll be 26 times.
If you need to save $10,000 and you get paid weekly, you would need to save $192.31 per week to reach your goal of $10,000 in a year. If you get paid biweekly, it would be $$384.62.
If this number is way too high or more than you make even, extend your deadline to 2 years or even 3 years. Find a goal that seems reasonable so you have better odds of sticking with it.
As soon as you get paid you need to put that money aside and DO NOT touch it. That’s the hardest part.
It’s easy for things to come up and dipping into your house savings seems like a simple way to pay for your necessities, but resist doing so or you risk throwing off your savings plan.
Now that you know what you need to set aside to reach your goal, the next task is to find a way to live off of whatever is left. This may include increasing your income.
The easiest way to increase your income is to look for a better paying job. If you don’t want to do that or doubt that you can find a better paying job, you can get a second job or find a more creative way to make cash.
If you have a special talent, you can leverage your skills online through freelancing sites or if you’re crafty, you can sell homemade creations for profits.
As always, cut unnecessary spending wherever possible and save, save, save. Move to a cheaper apartment, cut back on your TV plan, reduce your phone cots. If you look hard enough you’ll find ways to cut back and make your dream of home ownership possible.
With a little bit of hard work and some careful planning it’s possible to save for a house payment in just 12 months. However, if you need to, extend your deadline a short while and work to reach your ultimate goal of home ownership.
4 mortgage options for a low down payment
There are a lot of people that would love to buy a house right now, but think they can’t because they don’t have the traditional 20 percent needed for a down payment.
Luckily, there are some lesser known mortgage options that allow you still buy your own home, even if you don’t have a lot of money available.
While banks are making it more difficult to get a loan and no-down-payment loans have all but disappeared, there are still ways to get a home with 5 percent down or less. Here are 4 mortgage options for a low down payment.
Conventional mortgage usually means that a loan conforms to standards set by Fannie Mae or Freddie Mac. These two government agencies back home loans and make it safer for banks to make the loan.
Typically, a conforming loan can be no larger than $417,000 in most parts of the country, or $625,000 for a “jumbo” loan in high-cost markets.
Both Fannie Mae and Freddie Mac will back mortgages with as little as 5 percent down. Most lenders will require 10 percent or more if your credit rating is below 700.
However, both Freddie Mac and Fannie Mae offer special incentives for buyers to purchase foreclosed properties. These incentives include down payments of as little as 3 percent.
Both groups also allow buyers to pass on the mortgage insurance, which is usually required if you have less than 20 percent down, and you can still qualify for the programs if you have flawed credit.
The only downside is that you will have a reduced group of houses to choose from and many foreclosed homes need work done on them.
FHA mortgages are popular choices for first-time buyers. They feature low down-payments with as little as 3.5 percent down.
You are not limited to foreclosed properties, but the upper loan limits are lower than with traditional loans – just $271,050 for a single family home in most of the US.
FHA mortgage rates are fairly competitive and are usually only slightly higher than traditional mortgage rates. Where you’ll notice the difference is in the mortgage insurance, which can be up to 1.25 percent of the loan balance each year.
If you’re a veteran or an active-duty military member, you can get a VA mortgage to help you finance your home.
A VA mortgage gives you the opportunity to purchase a home with no money down and no mortgage insurance. This is possible because in return for your service to the military, Uncle Sam will guarantee your loan.
In most of the country, qualified borrowers can get up to $417,000, or up to $1 million in high-cost areas. You can also increase your purchasing power by providing a down payment.
You’re probably used to seeing USDA on your food labels, but the government agency is also involved in home loans. USDA loans are not the most popular variety of mortgage, but they offer 0 percent down loans with some of the best rates on the market.
Typically, USDA loans are limited to homes located in rural areas. The definition of a rural area is a little grey and covers some areas that most people would consider a suburb or a midsize town.
USDA mortgages come with income limits, and homes purchased must be modest in size and cost. There is often a waiting list for USDA mortgages due to limited funding, but if you’re looking for a small starter home in a rural area, you can’t beat a USDA mortgage.
Look into these four options and see if any of them are right for you. With a little creativity, you can get into the home you’ve always wanted at an affordable price.
The American dream is still attainable, you just have to be a little more creative.
How to get the best mortgage rates
When you decide that you need a mortgage, the obvious next step is to start shopping around to compare the offers available to you.
Cutting just a tenth of a percent off the amount of interest you pay over the course of a loan makes a huge difference when you talking about a mortgage.
Since a mortgage is a long-term debt that will take you many years to repay, it makes sense to invest a little time in learning how to secure the most favorable interest rates before you take a loan. The tips presented here can help.
With all other factors being equal, short-term mortgages cost less than long-term ones. A 15-year mortgage, for instance, will have an interest rate about 0.75 percent lower than a 30-year loan.
Although your payments will be larger with a short term, you’ll have the full debt paid off faster.
Going for a shorter mortgage is also a good idea if you don’t want to risk changes in your interest rate or you’re comfortable refinancing to take advantage of rate drops in the future. Short-term mortgages generally expose you to less uncertainty all around.
Hybrid ARMs are new credit products that may help you make the most of low interest rates.
Hybrid loans have low introductory rates for a fixed period (generally one to five years) at the start of the term. The rate will jump up afterward.
Lenders like Hybrid loans because they limit the amount of risk they have to take on to offer attractive interest rates.
Of course, these loans carry the danger of exposing you to high rates that you can’t handle later on in the term of the loan.
These loans are most useful if you plan to resell your home during the introductory low-interest period or are confident in your ability to refinance in the future.
Borrowers that come to lenders with great credit histories are, obviously, the ones who get the most favorable interest rates.
Limit your borrowing to what is absolutely necessary, make prompt payments (above the minimums if possible), and maintain a healthy debt-to-income ratio.
Although there are mortgages available for borrowers all over the credit spectrum, loans are going to cost more for people who have average or bad credit.
You might even want to delay buying a home in order to bolster your credit score before you take out a mortgage. This sort of patience can improve your long-term financial position considerably.
Home loans that don’t call for down payments are becoming very rare. It’s a good idea to stow away as much money as possible prior to a home purchase so that you can get started with some equity right off the bat.
There are many different benefits to making a large down payment.
If you can pay 20 percent of the total cost of your home at signing, you won’t have to pay for private mortgage insurance (PMI). You’ll also receive equity in your new home, increasing your security greatly.
Larger down payments also encourage lenders to offer lower interest rates. Even if you can’t change your rate, you will reduce the size of the principle by putting more money down.
Different lenders cater to different sorts of borrowers. Some lenders offer unique financial products to qualified borrowers that their competitors simply can’t match.
Shop for your mortgage with the same patience and attention to detail that you put into shopping for your home.
Don’t just inquire with your local banks and credit unions. Look further afield to check out other lenders as well.
Use resources like online comparison services and independent brokers to get a better idea of all the options that are available to you.
4 other ways new homeowners can get financial assistance
Home sales are increasing across the country, and when that happens, the prices of real estate typically soars sky high. Higher property prices and relatively few homes for sale in the market usually spell trouble for the first-time home buyers.
Experts say that these days, not only finding the right home is difficult, it can also become very expensive. Most people end up finding their dream house only to let it go away because they are unable to afford it.
We believe that homebuyers should never give up on their dreams of buying a home in such instances. There are financing programs out there that are designed just to help people cover the down payment of a real estate property and there are also private money lenders that help people in getting a more affordable loan.
So if you are an individual looking to buy a house for the first time anytime soon, below are a few programs that might be of benefit to you.
You can get money to buy a house easily, if only you know the right places to ask. City, state and county governments have pools of money dedicated to help people of all income levels in buying a house.
To get this, your total income must fall below a certain benchmark. In states where real estate is expensive, this number can be higher.
Wells Fargo’s LIFT programs offer grants that help you pay the down payment of a house.
These grants are available to eligible home buyers in certain communities across the US. These communities include San Diego, Philadelphia, Bakersfield, New Haven and Detroit.
Grants having a value of $15,000 are available and they depend on where you live. In order to qualify for this you must earn an amount that is less than 120% of the median income for the area you are living in.
There are some states and cities that offer housing grants to recent college graduates. This is done to attract educated workers to certain geographical areas.
For example, Grant County in Indiana is a place that offers people with a bachelor’s degree and a full-time job in the county a grant of up to $5,000 which can be used to pay the down payment for a home.
Ohio also offers a grant worth 2.5% of the property price to first-time homebuyers who have completed a bachelor’s degree in the past two years.
In some states there are incentive programs available for members of the military, teachers, and people working in law enforcement.
In Iowa, veterans and service members can easily apply for a home grant and receive up to $5,000 for closing costs or down payment.
In Texas, teachers, military, firefighters and police are offered grants for 2% to 5% of the property price.
6 reasons you may be rejected for a mortgage
With the housing market on the rebound and mortgage rates still incredibly low, it's a tempting time to buy a home right now. But because of the subprime mortgage industry collapse a few years ago, many mortgage lenders have tightened their standards when it comes to lending.
If you’re ready to make the plunge into home ownership, you may be surprised to find that you’ve been rejected for a mortgage.
Here are 6 common reasons you may be rejected for a mortgage.
Before the housing bubble burst, no credit was good credit, but today no credit is a risk factor. Homebuyers need to be able to demonstrate a history of managing their credit. New players to the credit game will find it nearly impossible to get a mortgage.
You're going to need to have an aged credit profile. Your oldest credit sets the age of your account. Another factor is the average age of your credit accounts. If you've opened up new credit accounts as of late, it's going to lower your average credit age.
It's even more important to have a good mixture of credit. This means a solid credit profile has revolving accounts like credit cards, installment accounts like a car loan, and open accounts like a cell phone bill.
It's more difficult to get a loan with only 5 total accounts. When you have 15+ accounts you're showing you use credit and can handle it responsibly.
Applying for credit cards, mortgages or other types of loans will have a negative effect on your credit score.
If you’re on the threshold of good and fair credit, a slight drop of a few points may be the tipping point that prevents you from being approved for a mortgage.
To be safe, don’t apply for new credit 6 months before you apply for a mortgage. You cannot give the impression you're short on cash and desperate for credit.
You may have been pre-approved for a mortgage before you went home shopping. But Fannie Mae requires lenders to run a new credit report just before a loan is funded.
Thus, changes to your credit situation while the deal is in escrow can put a wrench in your closing plans.
If you've opened a new credit card, financed furniture or made any other changes to your credit profile before closing on your home, expect to have to provide a good explanation or have the deal fall through.
If your down payment is less than 20 percent of the sale price, you’ll need to have private mortgage insurance on your loan. PMI is required by most lenders in case you default on the loan.
However, qualifying for a mortgage and qualifying for PMI are two different things. Both companies will run their own credit check and determine if you’re worthy of their services.
Most lenders like to see that the borrower has proper financial reserves in case of a job loss or other unforeseen event. This means that you need to have money in your savings account, IRA, 401K, stocks or other source to cover a loss of job.
So even if you have good credit, even if you put down a solid down payment, you could still be denied if you don't have money left in your bank account.
Having inadequate reserves can kill your chances of securing your dream home.
Just because you and the seller have agreed on a price doesn't mean the negotiations are over. In a shaky market, the appraised value of the home may be lower than the agreed-upon purchase price.
The bank isn't going to want to loan you more money than the house is worth in case they have to foreclose on it later. In this case, the buyer must come up with more cash as a down payment to maintain the correct loan to value ratio.
6 things to know before you take out a mortgage
With a term of anywhere between 10 and 50 years, a mortgage is the largest single financial transaction most people perform in their lifetime.
With so much money (and time) on the line, it’s crucial that you do your due diligence. So before you sign on the dotted line, do your research!
Here are a few things you need to know about home loans.
There are two parties in a mortgage: the mortgagor, or borrower (you), and the mortgagee, or lender (typically your bank or credit union).
A mortgage is technically a lien, with your home as the lender’s security on your debt.
That means that the lender has the right to repossess or foreclose upon it if it becomes clear that you are unable to keep up with payments or eventually repay the principal, which is the original size of the loan. Interest is the mortgagee’s fee for using its funds.
There are a few different ways for lenders to charge interest: fixed-rate, adjustable-rate, and interest-only.
A fixed-rate mortgage is self-explanatory: The terms you sign up for will not change for the duration of the loan.
Adjustable-rate mortgages might initially present a lower introductory interest rate but, as the name implies, the rate is subject to change based on a predetermined index of national interest rates. As your rates change, so do your monthly payments.
The Consumer Financial Protection Bureau recommends you calculate your payment based on your lender’s maximum rates (if available) to ensure you can afford the loan, even under extreme circumstances, before accepting it.
Interest-only loans are unqualified mortgages that start out with fixed interest rates. The homeowner is not required to pay on the principal of the loan until the 10-year mark, which functions on the assumption that their income will increase over time to accommodate the larger payments.
Interest rates can change from month to month, but keeping tabs on national average rates can help you distinguish a good deal from a bad one.
Changes in the national average can give you a ballpark figure of what to expect, but don’t forget that your lender and credit ratings will also play a part in determining your interest rate.
Before you finalize a loan, be sure to shop around, and always ask for estimated interest rate changes.
Just because your monthly mortgage payment is less than your current rent, that doesn’t mean you’ll have rolls of cash at your disposal.
As a homeowner, your expenses go beyond a monthly check. In addition to the mortgage payment, you should plan on saving 1% to 4% of the home’s value for home maintenance costs — which will crop up sooner than you think.
Remember, too, that you have monthly insurance payments, as well as annual property taxes — those can be significant, so you should start saving for them well in advance of April 15.
If you have an escrow account, though, insurance and taxes are automatically added to each mortgage payment to ensure those bills are paid.
Mortgage insurance allows lenders to protect themselves in the event that their loan recipients aren’t able to make their mortgage payments.
Generally, if you put down more than 20% of the home’s purchase price, you won’t be required to have PMI (private mortgage insurance).
Although a smaller down payment would allow you to purchase a home you couldn’t otherwise afford, the PMI payments will increase your monthly payment, adding to the total amount paid for the home.
One of the most intimidating things about homeownership is how irreversible it feels. Mortgage, after all, is a word derived from Medieval French law, loosely translated as “death pledge.”
When you sign for a 30-year mortgage, it’s easy to feel like the next three decades are set in stone. But that’s not necessarily true.
You do have to invest some time in the home — selling for a profit in less than two years can subject you to a capital gains tax, and just think of the transaction fees piling up — but a home loan doesn’t doom you to the same address for the rest of your pre-AARP days.
You can always move, although to buy a new house while you have an existing mortgage, you would have to contact your lender for the payoff amount, and then decide if you want to move first or sell first. Your real estate agent is a great resource for navigating this situation.
Also keep in mind that you can qualify to refinance your loan later down the road if interest rates drastically drop, or if you’d like turn your adjustable-rate mortgage into a fixed-rate.
8 first-time home buyer mistakes to avoid
I was a first time home buyer once and I made plenty of mistakes the first time around. In this post I’ll go through 8 costly mistakes first time home buyers make so you can avoid them.
The most expensive thing you will ever buy will be your house. Buying your first house can be one of the happiest times as well as one of the most stressful times in your life.
It’s a really big decision. You have to decide on the size, location and the cost.
But there’s so much more to consider than that. It is precisely these “extra” things that new home buyers ignore that get them into trouble.
Here are 8 mistakes first time home buyers make.
There are many loan options available for first time home buyers. There’s adjustable rate loans (ARM), interest-only loans, 30 year and 15 year mortgages.
There are so many options, so how do you decide which one to choose?
The lowest payment may not be the best. What if you got stuck on an interest-only loan? Sure the payment is low, but you’re not even paying off your house.
Then, when the rate adjusts (because it can’t be interest-only forever), you’ll be faced with a huge payment increase and may not be able to make the payments.
So as a result your credit takes a hit and you end up losing your home to foreclosure as well.
So how do we avoid this? Simple, never get an adjustable rate mortgage. Stick with a 30 year (or 15 year) fixed rate mortgage.
Slow and steady wins the race, and there’s no tricking a mortgage. Don’t fall for any of the dirty tricks from loan officers and get stuck on an adjustable rate loan.
Before you even think of buying a house, make sure your credit is on point. If you wait until the last minute to check (and fix) your credit, you may be in for a bad surprise.
Just when you find the house of your dreams and are ready to make an offer, you go get a loan from the bank and they reject you for having a low credit score.
Then when you finally get your report you see that it’s full of mistakes and even debts you didn’t know you had. It can take months to fix your credit, so it’s best to get started as early as possible.
When you apply for a mortgage, the loan officer will check what is called your debt to income ratio. You need to keep it under 43%. The lower the better.
In order to have a better ratio, you’ll need to pay off your debt until you have zero monthly debt obligations.
To calculate your debt to income (DTI) ratio, get your monthly debt obligations and divide it by your monthly income.
Say your bills are $1400 per month and your income is $3100 per month. Your debt to income ratio would be 1300/3100 = 42%.
This means that if you make $3100 monthly your new mortgage and all of your other bills must equal less than $1300 in order for you to qualify for a loan.
So if you’re anywhere near 40% or higher, you must first pay off your debt and get the percentage lower.
If you want to buy a house but don’t have a lot of money saved up, you will end up having to pay something called private mortgage insurance (PMI).
You will pay this until the difference between the value of your house and the loan are 20% apart from each other. This means that for a house valued at $500,000 you will pay PMI until your loan is $400,000.
The solution here is to only buy a house when you are able to put a 20% down payment. By doing so, not only will you enjoy a lower monthly mortgage payment, but you won’t have to pay PMI.
Just like you stay on budget when you go shopping, you need to also adhere to a strict budget when you’re buying a house.
Big houses are beautiful, especially if you’ve been living in an apartment. But don’t go overboard when you’re looking for homes to buy.
You should use a mortgage calculator to calculate how much house you can afford. Then, stick to your budget and get a house that is too big.
Even though the bank may be willing to give you a loan on an expensive house, don’t take the bait. They are banking on you not being able to afford the high payments and soon enough your dream home will be theirs.
How much house can you afford? Only get a mortgage payment that is one third or less than your monthly income.
Keep in mind that when I say mortgage payment, I mean principal, interest, homeowners insurance and county taxes combined!
First time home buyers should avoid buying a house that needs a lot of work.
You’re new to the whole process of buying and maintaining a home. What this means is that you have yet to fully experience the high costs of being a homeowner.
It is nothing like renting. When you own a home, you are responsible for fixing everything, paying for insurance and taxes.
If you choose to go with a fixer upper, you may soon find out that the costs to repair the home could skyrocket out of control. Then, your so called good deal turns into an expensive nightmare.
There’s a big debate about whether buying a house is better than renting. I stand on the side that being a homeowner wins every time.
The reason being that when you’re done paying the mortgage off, you get a huge relief and you’ll spend less in retirement.
Another reason why owning a house is better than renting is because rent prices go up while your fixed rate mortgage payment will stay the same.
But I understand that owning a house isn’t for everybody. Some people are just not ready to buy a house yet. Here are some of the reasons you may be better off renting:
- Your income is not stable.
- Your job is not secure.
- Your job may relocate you soon.
- You are not very handy around the house.
- You haven’t saved up for a down payment.
Often times when first time home buyers are looking for their dream home, they look at pictures of the house.
But did you know that the house itself isn’t what matters? It’s the location that counts more toward the value of the home.
A mistake first time home buyers make is they do not fully research the community.
Did you check the crime rate? Did you check to see how many sexual predators live nearby? Did you check the parking situation? Did you check the rating of the nearby schools?
When you buy your first home, you’re picking a place to raise a family, so the neighborhood is just as important, if not more important than the house itself.
Should you sell your house first before you buy?
If you need to or want to move to a new home, should you sell your house before you buy your next house? For as long as people have been moving houses they have been asking this question.
There really has never been a single right answer. In making this decision, there are various factors at play that affect your decision.
Here are some benefits to selling your home first before buying a new one.
You’ll be paying just one mortgage
When you sell your old home before buying a new one you benefit from getting rid of your old mortgage before taking out a new one.
This means you won’t be paying two mortgages at once. You also won’t have to worry about convincing a bank to extend you a new mortgage while you are repaying your old one, which can be difficult in the current economic climate.
Negotiate the sale price
When you are selling your old home first, you are in no hurry to settle and move into your new property. Instead, you have the time and the space to negotiate on price, and you don’t have to take the first offer a buyer makes.
This will often mean you can secure a higher sale price because the sellers know you’re not desperate to sell and can’t push you to a lower price.
Sell subject to buying a new home
If you are selling your old home and haven’t found your new home yet, you can insert a clause into the sales contract which states that the sale is contingent on closing concurrently with the purchase of your new home.
This means you can sell your old house before you’ve found a new one and use the settlement period to find your new home, and with the concurrent closing contingency in the contract, you don’t have to sell your old home until you find a new one.
If you can’t get a sales contract which is subject to you buying a new home, you can still ensure a long settlement period so that in that time you have a good chance of finding a new home.
During the contingency period you can also still back out of the sale contract and you don’t have to sell your home if the house hunt doesn’t go well.
Rent from your buyer
If you sell your home before buying a new one you also have the option to continue to rent your home from your buyer after the sale.
Some buyers won’t want to move in right away and will let you rent from them after the settlement while you find your new home.
Selling is harder than buying
Selling your old home will be the hardest part of the process because even in the best real estate market you will find it easier to buy a home than to sell one.
As a buyer, you have a range of choices, but when you are selling you are at the mercy of the market. Therefore, it is best to get the hardest part of the process out of the way first.
Houses are on the market at the moment for an average of nine months, so if you had already bought a new home and were trying to sell your old home during the settlement or escrow period, you would be hard-pressed to do so.
You’ll know your sale price
If you buy a new home before selling your old one you are guessing at what your old house will sell for and how much of a profit you will make in equity.
However, the reality of your sale price could be very different and when you sell your house first you have the benefit of knowing exactly what sort of financial position you are in.
Make your life easier
Buying and selling a home are both major transactions, so undertaking just one at a time gives you the benefit of reducing your stress levels and some of the pressure of the transactions.
You’ll be an unimpaired buyer
Many home sales fall through because the buyer was waiting to sell their old home and had to pull out of the sale.
As a result, many sellers will avoid signing a contract with a buyer who has yet to sell their old home, but if you do this first, you can enter the market as an unimpaired buyer – a seller’s dream.
6 steps to buying your first home
If you’re ready to settle down and buy a home, you may be so excited by house-hunting to think clearly about the entire process. Instead of being overwhelmed and confused, use this guide to walk through the 6 steps of buying a home.
Your pre-approval for a mortgage as well as your interest rate are tied to your credit score.
Before you buy your home, you’ll want to obtain copies of the three credit reports and go through them to look for any wrong information.
Correct any mistakes you find and then apply for a loan for the best odds of getting the loan and a rate you can afford. It can take time to dispute erroneous items on your report so start this process early.
When buying a home, it’s important to get a buyers agent to represent you. This realtor will have your best interests at heart and can not only show you houses, but present offers and give advice on what’s a good deal.
You’ll want to work with someone that pays attention to your needs, has time to work with you and knows the area you’re looking in. If you’re not comfortable with your agent, keep shopping around until you find someone you can work with.
Shop for a mortgage lender and get pre-approved for a mortgage. This way you’ll know how much of a house you can afford and about how much your monthly payment will be.
Going into the buying process with a pre-approval makes you a more attractive buyer to home sellers. If you’re getting offers from multiple lenders, you’ll want to make all of your applications at once.
Every time a lender checks your score it’s a hard inquiry and causes a dip in your score. Fortunately, all inquiries for mortgages made within 45 days are treated as just 1 inquiry which minimizes the impact to your score.
You’ll probably get a pre-qualification within minutes. When you go to make an offer, the buyer will know you’re serious and that you have a good chance of getting the necessary financing to complete the purchase.
Finally you’re ready for the fun part of house hunting – looking at homes. Get your realtor ready and take a look at all of the listings that meet your criteria.
During your first few outings you may just get familiar with different neighborhoods and figure out what you don’t want in a home, but eventually you’ll find the perfect place to settle down and call your own.
If you have a deadline in mind, make sure you give yourself plenty of time to not only find a house, but to also close on it. In competitive markets, it can often take much longer to find a home you love and that you can secure before other buyers.
Once you’ve found a house you love, it’s time to make an offer. Your agent will help you make an appropriate offer with the right contingencies to protect yourself.
In competitive markets, it’s not unusual for sellers to reject contingencies, so be prepared to compete with other buyers and to make changes to your original offer.
Once the offer is accepted, you’ll be closing on your new home in a bit over a month.
During this time you’ll have a home inspection, an appraisal, a title search and your loan will be prepared.
You’ll put a down payment down and provide money for any closing costs you’re responsible for.
Finally, you’ll review and sign many documents and you’ll be handed the keys to your brand new home.
Congratulations on taking the leap to homeownership!
The process can be intimidating, but if you do a little research before you begin the buying process and follow this advice, you can make buying a home much easier.