Am I ready to buy my first home?
Purchasing aÂ home isÂ probably oneÂ of the largestÂ investments you will ever make.Â As a renter, once your monthly rental payments are made, theyÂ are gone forever.Â Â When you own your home, however,Â you can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes, saving you a lot each year byÂ covering a chunkÂ of your monthly payments. You can also deduct property taxes you pay as a homeowner. Typically, the value of your home may go up over the years.Â Best of all,Â you'll enjoy owning something that's all yours - a home whereÂ you can express yourÂ own personal style.
Take a look at your financial situation and know your credit score. Take a look HERE to find out how your credit score is derived.Â The better your credit score, the better rate you'll get for a mortgage and the lower your payments will be.Â Your credit score is a critical piece to the home-buying puzzle.
How much money will I need to purchase a home?
AÂ number of factors influence how much money you'll need to have on hand, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money - the deposit you make on the home when you submit your offer,Â demonstrating to the seller that you are serious about wanting to buy the house. Your real estate broker will put this money into an escrow account and if the offer is accepted then the money will go towards closing costs and if the offer is rejected then it will be returned to you; the down payment, a percentage of the cost of the home that you must pay when you go to settlement. This can range anywhere from 3.5% for a FHAÂ Insured LoanÂ up to 20% as required by many lenders; and closing costs; the costs associated with processing the paperwork to buy a house, typically 3-4% of the cost of the home.
*Another cost for the buyer, although minor, is the cost of the inspection and appraisal of the property once an offer is accepted.Â Â
The Game Plan
Get decided-approved for a loan!Â
One of the first things buyers should do is talk to a qualified lender andÂ obtain a pre-approval-approved for a mortgage so you know what you can and cannot afford. This is also something that will be required when placing an offer on a home.
The entire mortgage approval process can take from 3-6 weeks so get a head start gathering your documents that will be required, including:
- W2 statements (or 1099 income statements) for the last two years
- Federal tax returns for the last two years
- Bank statements for the last few months
- Recent pay stubs and proof of other income
- Proof of investment income
ObtainÂ a great buyers agent! Buyers can rely heavily on knowledgeableÂ Realtors to help themÂ with the entire home purchasing process, from contract to closing!. After all, buyerâ€™s agents have a fiduciary responsibility to the buyer exclusively â€” and should be looking out for your best interests.Â Use an agent recommended by a relative or friend. Interview the candidates regarding their experience; ask if they haveÂ worked with first-time buyers before and what kind of service youâ€™ll get from them.
Shop for a mortgage lender.Â Â There are many different types of mortgages available - pick oneÂ to meetÂ your personal financial goals. You should compare rates and servicesÂ from a few lenders and decide on which lender to use. As with Realtors, there is a difference!
Fixed-rate vs. adjustable-rate loans. The most common type of mortgage is a fixed-rate mortgage. With a fixed-rate loan, the rate stays the same over the life of the loan. The bigÂ advantage to this type of mortgage is the peace of mind that comes with knowing that your monthly mortgage paymentsÂ will remain the sameÂ from year to year.
On the other hand, adjustable rate mortgages, or usually as theyâ€™re often called, have an interest rate that changes based on what happens to interest rates in the economy. If interest rates drop, your mortgage payment should drop. But if they go up, your payment will go up. TheyÂ typicallyÂ appeal to manyÂ first-time home buyers because their initial rates and monthly paymentsÂ are lower, making them easier to qualify.
30-year vs. 15-year. This refers to the term of the mortgage, or theÂ number of years it takes to pay off the mortgage. 30-year mortgages are the easiest to qualify for and are the most common. 15-year mortgages are much harder to qualify for and have higher monthly payments because youâ€™re paying off the house in half the time. The obvious benefit to a 15 yearÂ is that you pay off the loan and build equity faster than you would with a 30-year mortgage. If you have a goal to pay off your home as quickly as possible, you can make extra payments on a 30-year loan as long as your loan doesn't have aÂ condition- payment penalty.Â
Balloon mortgages.Â The way this mortgageÂ works is that you make small monthly payments for a fixed number of years â€” usually five to seven â€” and then youâ€™re required to pay off the loan in one giant lump sum. Balloon mortgages are a dangerous proposition andÂ can result in foreclosure and bankruptcy.
FHA loans. An FHA loan is a home loan insured and backed by the federal government. FHA loans offer low down payments and lower interest rates than traditional home loans. Theyâ€™re geared towards first-time homeowners who might not have cash to pay the full 20% on a down payment. To apply for a FHA loan, youâ€™ll need to find a FHA-approved lender and meet a few requirements. There are some downsides to FHA loans. First, youâ€™re required to purchase an upfront mortgage insurance premium of 1% of the total loan. You also pay a modest fee with each monthly payment for the life of the loan. Check out theÂ Federal Housing Administration'sÂ website for more info about applying for an FHA loan. '
Start shopping! Your real estate agent will take you to a number of homes that meet your specifications. Click HERE to obtain a useful form to help you narrow down your choices during your home search.Â Once you have decided onÂ 'your top choice', it's time to make an offer.
When you make an offer, the possible answers are yes, no, or a counteroffer. Donâ€™t expect to get a â€œyesâ€ on your first offer. The buyer will likely return with a counteroffer. You can either accept it or give another counter. Once a verbal offer has been agreed upon by both parties, a "Purchase Contract" is drawn up.
The purchase contract essentially puts everything you negotiated verbally into writing. The typical clauses you see in a purchase contract include the following:
- Legal description of the property, including zoning information
- Purchase price and terms of the sale
- Down payment to be held in escrow, and future payment structure
- Closing date â€” when the deed will change hands
- Any items included in the sale, such as appliances and furniture
- Seller's Disclosure - Required in Pennsylvania but my vary from state to state. Sellers fill out a PAR document (for PA) with questions regarding various questions about the condition of the home, defects and structural changes.
- Disclosure of lead paint (lead-based paint disclosure form for buildings built before 1978)
- Home warranties and warranties on appliances
- Commissions, if any. (Typically not customary for a buyer)
- Initials, signatures and dates.
Your purchase contract will likely have contingencies that could void the contract if theyâ€™re not met. Common contingencies includeÂ home inspections,Â and appraisal contingencies,Â loan approval independent commitment, andÂ a free and clearÂ title (Title Search).
Home Inspection & Appraisals are arranged and paid for by the buyer. The buyers agent can often set these meetings up on behalf of the buyer.
It is important to obtainÂ an independent inspection. Although someÂ homes have been inspected by the sellers inspector, don't rely on this information, it is best to obtain an independent inspection to address your specific concerns. Even on new construction!
Appraisals -Â The mortgage broker will typically provide a list of approved appraisers. The mortgage broker wants to make sure that the home is actually worth what theyâ€™re giving you the mortgage for. If the appraiser reports that the value of the home is less than the contracted price, your lender will likely not give you the loan. The appraisal contingency will provide you two options. 1) renegotiate with the seller for a lower price or -Â 2) walk away from the deal. The buyers also reserve the right to purchase the home if more than 20% is put down or it is a cash offer. (Check with your lender, Realtor or attorney!)
Home Owners Insurance
After the home passes inspection and this contingency is removedÂ and the appraisal is approved,Â home owners insurance will need to be obtained.Â Â This insurance willÂ be required by your mortgage brokerÂ prior toÂ finalizing your loan approval and most definitely prior to settlement. Ask friends, family or your RealtorÂ which insurance companies they use and call those companies for a quote. Obtain more than one quote and compare coverages and cost.Â The cost of homeownerâ€™s insurance (as well as property taxes) is often rolled into your mortgage payment. The mortgage lender puts that money in an escrow account and pays the cost of homeownerâ€™s insurance and taxes when due.Â You may also have the option to pay this yourselves depending on the lender.
Finalizing Your Loan
In the few weeks leading up to the closing date, your mortgage broker will be underwriting your mortgage application. The underwriter will likely ask for more documents or theyâ€™ll have questions about the documentsÂ that you may haveÂ already provided. Be prepared to provide documents sometimes up to the day before closing!
Depending on the complexity of the sale, closings usually takes about an hour.Â As a buyer, youâ€™re going to have a huge stack of papers to sign and initial. To ensure that the closing goesÂ smoothly, bring the following items (required by your lender):
- A certified or cashierâ€™s check. Federal law requires that you be told the exact amount of the check you need to bring to closing at least one day before settlement. You will have to pay the down payment, plus the closing costs â€” usually 3 to 5 percent of your home purchase price minus your earnest money deposit. The closing agent will tell you whether you need one check or two and to whom they should be payable.Wiring money is also an option. Â Do not bring personal checks or cash.
- Proof of insurance. The closing agent needs to see proof you have the insurance in effect on closing day. Your lender likely has a copy of your proof of insurance, but bring an extra copy just in case.
- Photo ID. The closing agent needs to know you are who you say you are. A driverâ€™s license and a second form ofÂ identificationÂ or current passport will do the trick.
- Your Realtor or Attorney. Especially if you are a first-time buyer, you should have someone with you who understands the process and represents your interests. In some states, youâ€™re required to have an attorney present. Check your local laws to find out if thatâ€™s the case for you.
- Purchase and Sales Contract. Just in case you need to double-check a detail against closing costs.
- HUD-1 - According to the RESPA act, the HUD form is to be used by all lenders of loans providing funds for real estate purchases and refinances of real estate loans and must be given to the borrow at least one day prior to the date of settlement.
- The deed and other paperwork must be filled out by both the sellers and the buyers.Â The bulk of the paperwork is signed and initialed by the buyers but the sellers have paperwork to sign as well.Â Both parties or assigned representatives must sign the HUD-1 form.
- After all the paperwork is reviewed, signed and notarized, the sellers will hand over the keys, garage door openers and home warranty (if offered) Â and other information.
Now you have purchased your new home! This is a very exciting time especially for first time home buyers! So, ENJOY! Please feel free to contact me if you have any questions or visit my website for tons of information!
Frank DolskiÂ Â MBA, ABR, e-PRO
Certified Relocation Specialist
Previews Luxury Home Specialist
Coldwell Banker Hearthside Realtors
Ranked #1 In The State of PA in 2012 For All Affiliated Coldwell Banker International Realtors
2012 Coldwell Banker International Presidentâ€™s Elite Award
2010-2011 Coldwell Banker International Presidentâ€™s Circle Award