Your agent may generally know which home you are going to choose, due to experience and intuition. However, make sure that you don't feel your agent is trying to steer you toward any specific property, and choose the home without interference from the agent because it's your choice as the buyer alone to make. Keep in mind, however, that real estate agents are required to point out defects and should help buyers feel confident that the home selected meets the buyer's stated search parameters.
Your mortgage lender will also be working on the underwriting for the loan, including an appraisal of the property to ensure the purchase price matches its value, based on other sales of similar properties in the area. If the appraiser determines the house isn’t valued at the agreed-upon sale price, you may have to come up with cash to make up the difference, or try to negotiate the price down with the seller. You'll likely have to provide updated proof of income, details on your existing debts and assets, information about your tax return and, of course, the address of the property you're buying along with the price of the house and amount you'd like to borrow.
A mortgage is defined as a secured loan that uses your home as collateral. The key here is to identify what monthly mortgage payment you can afford without losing any sleep at night. Expect that figure to be around 15%-to-30% of your monthly income (depending on your local tax rates and the amount of your homeowner insurance). This step ties into step one -- the more money you save, the less you'll have to pay on your mortgage loan interest (see next step below.)
3. Savings for down-the-road expenses. Of course, you also have to take into account maintenance and other potential costs that may come up as a homeowner. If you live in a particularly competitive or pricey market, such as San Francisco or the District of Columbia, it’s reasonable to expect your monthly costs to be higher than 28 percent at the start.
As a first-time home buyer, you probably don’t have a ton of money saved up for the down payment and closing costs. But don’t make the error of assuming that you have to delay homeownership while saving for a huge down payment. There are plenty of low-down-payment loan programs out there, including state programs that offer down payment assistance and competitive mortgage rates for first-time home buyers.
FHA loan: Depending on property location and other, personal factors, you could qualify for a home loan from the Federal Housing Administration. In most cases, you'd be expected to make a down payment of approximately 3.5% (with a 1.75% insurance premium, and at a 4.25% interest rate). A down payment on our $300,000 model: $10,500. Together with closing costs and a buffer, savings required would be $26,916-$28,416. Notice, however, that you're paying a great deal more than in the non-FHA model when it come to the higher mortgage-insurance premiums -- some $43,485 over 103 months. Still, the FHA plan may be more manageable for some, as the initial down payment is smaller and insurance payments are spread out.
You will have to provide proof of employment and proof of income to qualify for your mortgage. This shows the lender that you are creditworthy. It’s usually not great to quit your job during the home-buying process for this reason. Some lenders may ask for employment verification later in the home-buying process, so your approval could actually change if you take a lesser paying job during the home-buying process.
Once you've got your savings growing, your down payment set, and you are pre-qualified and pre-approved, start the search for your home. Begin by using sites like Zillow.com or Realtor.com to zero in on the home you want and the community you want to live in. Factor in key lifestyle needs -- like good schools, decent commute to your job, manageable property taxes, and ultimately, a home that has a good chance of appreciating in value if you ever want to sell it.
"Many first-time homebuyers will begin to look at properties prior to speaking with a lender, but this is a huge no-no," says Colin McDonald, a licensed real estate agent at Berkshire Hathaway HomeServices Blake, in Delmar, NY. "Most Realtors or sellers will not start to show houses to buyers until they've actually spoken with a lender and can provide a pre-qualification letter."
Beyond pride of ownership, it's important to realize another benefit. First, real estate moves in cycles, sometimes up, sometimes down, yet over the years, real estate has consistently appreciated. The Office of Federal Housing Enterprise Oversight tracks the movements of single-family home values across the country. Its House Price Index breaks down the changes by region and metropolitan area. Many people view their home investment as a hedge against inflation.
Speaking of mortgages, Gilmour recommends that payments generally not exceed 28% of your monthly gross income—but if you have other high costs, such as private school tuition, it can be wise to pare down this percentage even more. If you're not sure what's realistic, consider seeking help from a financial professional, who can help walk you through an appropriate breakdown, based on your individual situation.
Property tax is the amount of money that you are required to pay based on the property’s assessed value. Property tax can be very costly, depending on where you live. This is something you’ll want to consider when calculating how much you plan on spending on your overall homeownership expenses. Property tax payments are usually due annually, but more often than not, they are divided into and included in your monthly escrow payment.
Before you start looking for a house, you need to have a prequalification letter in hand. This letter is basically proof that a lender will loan you a certain amount of money. This is your ticket to putting an offer on a house. People with excellent credit scores, can have their pick of lenders and the most competitive rates. If your score is somewhere in the middle, you might have to spend more time shopping around to get the lowest rate.