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الثلاثاء، 18 سبتمبر 2018

This Is Everything You Need to Know Before Buying Your First Home


When she turned 27, Adria Rebbecchi decided to buy a house. Like most first-time homebuyers, she had no idea what to expect. But in the months ahead, she’d get a whirlwind education.

“Looking at a ton of different houses was fun and allowed me to explore parts of my city that I had never seen before,” said Rebbecchi, a marketing coordinator who lives in Tampa. “The most stressful part — definitely — was gathering all the necessary documentation for the mortgage.”

Buying your first home is intimidating. It’s the biggest purchase of your life so far, and you get bombarded with strange new concepts like “escrow” and “pre-qualification” and “closing costs.”

Adding to the pressure, skyrocketing home prices are making it harder than ever for first-time homebuyers like you to save enough for that crucial down payment. That puts you at a disadvantage when you’re competing with older homeowners who’ve built up tens of thousands of dollars in equity.

Hey, you’re not alone. First-time buyers make up roughly a third of all homebuyers, according to the National Association of Realtors. We’ll walk you through it.

Are You Ready to Buy (or Should You Continue Renting)?

Before you start shopping, a few things to consider…

You’re better off renting if:

  • There’s a good chance you’ll move in a few years.
  • Your job situation is shaky.
  • The down payment to buy will take all your savings.
  • You hate yard work, housework and maintenance.

You’re better off buying if:

  • You expect your family to grow.
  • You want pets, and that makes renting difficult.
  • You have enough savings for a down payment, closing costs and moving expenses.
  • You want a place to call your own — something that appreciates in value over time.

Ready to buy your own place? You’ve got this. Educate yourself. If you do a little research and ask for advice, you can save yourself a ton of money and stress.

Here’s our step-by-step guide for first-time homebuyers:

1. Start Saving for Your Down Payment

The best time to start saving is now. Right now.

The good news is, as a first-time homebuyer, you won’t have to come up with a huge down payment of 20% of the home’s purchase price. Government loan programs for new buyers allow as little as 3% to 5% down.

But even a small down payment is a big chunk of change. For example, a “low” down payment of 5% on a typical $200,000 house is still a whopping $10,000. Start saving those pennies!

It’s best to stash your savings someplace where you’re not going to touch it. A quick and easy way to get started is with Stash, a popular microinvesting app.

Stash lets you start investing with as little as $5. You can set it up to automatically pull a certain amount of cash from your bank account every week or every month. It funnels your money into a set of simple investment portfolios reflecting your goals and interests.

Stash charges a $1 monthly fee for balances under $5,000. If you sign up through this link with the code PENNYH, you’ll get a $5 bonus — that’s like five months free.

2. Check Your Credit

Before starting your fabulous home-buying journey, check your credit score. The better your credit, the better your odds of getting a mortgage with favorable interest rates.

Clueless about your credit score? Credit Sesame is a free credit monitoring service that’ll keep track of it for you. It’ll offer you personalized tips and tools to manage your debt and raise your score. You can also look at your credit reports and dispute any errors that are hurting your credit score.

3. Talk to a Lender

We know, we know. You want to go house-hunting! Why aren’t we going house-hunting yet? That’s the fun part! My God, this is torture.

Patience, young Jedi. Now it’s time to reach out to a mortgage lender. Don’t skip this part.

Here’s an easy way to do it: Just talk to the bank you’re already doing business with. It’ll set you up with a loan officer. Or you could contact a major mortgage lender like Quicken Loans, Wells Fargo or Bank of America. They work with a lot of first-time buyers, so they’ll know how to talk to you.

You could also hire an independent mortgage broker to shop around and find the mortgage that works best for you. This will save you time and hassles. But you’ll have to pay your broker about 1% of your loan amount. (That happens later, when you officially close the deal.)

You have two reasons for talking to a mortgage lender: Get pre-approved for a loan, and check out options for first-time homebuyers.

Get Pre-Approved

You can get pre-qualified for a mortgage. That’s an estimate of how much a bank might be willing to lend you, based on your income and debts.

It’s better to go a step further and get a pre-approval letter. That’s when a lender goes over your finances in depth, then outlines in writing how much it’s willing to lend you.

This way you’ll know what your price range is, and you can narrow down your search. And when you find the house you want, you’ll be ready to make a serious offer.

Look at First-Time Homebuyer Programs

As a first-time homebuyer you may be eligible for various government loan programs. Ask your mortgage adviser about this. Here are some options:

  • FHA loans: The Federal Housing Administration insures these mortgages, so that protects your lender in case you default on the loan. These loans have smaller down payments and lower closing costs than conventional loans.

With a credit score of 580 or more, you can qualify for an FHA loan with a down payment of 3.5% of the home’s purchase price, according to the FHA. If your score is lower than that — between 500 and 579 — you’ll have to put 10% down.

  • USDA loans: The U.S. Department of Agriculture backs mortgages in this program, which focuses on homes in certain rural areas. No down payment is required. No minimum credit score is required, but it’s faster and easier if your score is at least 640, according to the independent Mortgage Research Center.
  • VA loans: The U.S. Department of Veterans Affairs guarantees parts of mortgages for active-duty military, veterans and surviving spouses. No down payment needed. The VA’s lenders typically require a credit score of at least 620, says Veterans United.
  • Fannie Mae and Freddie Mac: These government-sponsored enterprises offer mortgages to low- and moderate-income borrowers. They require as little as 3% to 5% down. You typically need a score of at least 620 for a loan from Fannie Mae or Freddie Mac. (The main difference between the two is the kind of banks they work with — Fannie Mae works with big commercial banks, while Freddie Mac works with smaller banks.)

4. Figure out How Much House You Can Afford

Don’t just look at houses at the top of your price range. Look lower, too.

Keep in mind that you’ll need to have enough money for:

  • A down payment.
  • Closing costs, usually 2% to 5% of your loan amount.
  • A home inspection, which HUD advises will likely cost $300 to $500.
  • Monthly mortgage payments.
  • Maintenance.
  • Property taxes, which will be rolled into your mortgage payments.
  • Homeowners insurance.

(Your real estate agent typically gets paid by the home’s seller when the sale goes through.)

We’d recommend going with a fixed-rate mortgage instead of an adjustable-rate mortgage (ARM). With an ARM, you might have lower monthly payments at first, but they’ll get more expensive later. A bank that sells you an adjustable-rate mortgage is betting that interest rates are going to rise and make your payments go up.

If you want the smallest mortgage payment possible each month, get a customary 30-year mortgage. But if you can afford higher mortgage payments, think hard about getting a 15- or 20-year mortgage instead. You can get a lower interest rate that way, and you’ll pay off your house a lot sooner.

Talk to your real estate agent about the likely cost of property taxes and home insurance in your area.

5. Get a Real Estate Agent

This is crucial. Get an agent you’re comfortable with. Think of your agent as your guide through this whole process.

Your real estate agent will help you find homes that fit your needs and your price range. They’ll tour these homes with you. When you find a home you like, they’ll help you make an offer, and they’ll negotiate on your behalf. They’ll even guide you through the paperwork blizzard that follows.

Your agent will calm you down if you feel like you’re going to puke.

There are approximately eleventy bajillion real estate agents in the U.S., so how are you supposed to choose one? Ask for recommendations from friends, relatives and co-workers. A whole lot of them own homes, after all.

6. Go House Hunting!

Finally, you get to the fun part! Woo-HOO!

Your real estate agent can find you plenty of homes for sale. Also, feel free to drive around your favorite neighborhoods, scanning the yards for “For Sale” signs.

There’s also this thing called the internet. Every year, sites like Zillow and Realtor.com are posting more and more information online about homes for sale. And first-time homebuyers are more likely to use the internet to find the home they’ll eventually purchase, according to the National Association of Realtors.

When you’re touring houses, keep your eyes open and ask a lot of questions: How old is the roof? What about the air conditioning system? Those are super expensive! Most American homes have shingle roofs that last 20 to 25 years and central AC units that last 15 to 20 years, according to most of the experts we’ve seen.  

When first-time homebuyer Timothy Moore went house-hunting, he was wowed by homes with fresh paint and new laminate flooring. But his partner knew to look for what really indicated quality: solid construction, good insulation and windows, a newer or good-condition roof, and a new or well-maintained HVAC system.

If you look at a lot of houses, they tend to blend together in your mind. Snap photos as you tour homes. At each new location, take a photo of the house number so you’ll know which place was which later on.

Adria Rebbecchi, the Tampa marketing coordinator, found house-hunting to be exhausting: “After a while, it did get to be frustrating. I had a hard time remembering which houses I had already looked at, and why I did or didn’t like them.”

7. Make an Offer

You’ve found the house you want? Make an offer on it. Don’t dawdle.

Your real estate agent can help you figure out how much to offer. The home’s sellers will either accept your offer, take someone else’s offer, or get back to you with a counter-offer.

If you and the seller agree on a price, you’ll hand over what’s called an “earnest money deposit,” showing that you’re committed to buying the house. It’s typically 1% to 2% of the purchase price.

A title company will hold the money in reserve, explains Zillow, in what’s called an “escrow account” while the house is taken off the market and you prepare to buy it. The deposit will eventually go toward your down payment and closing costs.

The next important step will be the home inspection.

8. Be There for the Home Inspection

Hire a licensed home inspector. (Your real estate agent can hook you up.)

This trained professional will examine your dream home, looking for any defects. The most common problems they find are things like faulty wiring or plumbing, poor ventilation, clogged gutters, mildewy basements or missing roof shingles, according to the National Association of Realtors.

If the inspector finds serious defects that weren’t disclosed, you can take back your offer or renegotiate. Sometimes the seller will agree to make repairs.

Tagging along for the home inspection is highly educational — you get to learn about everything that’s wrong with your new house! (Spoiler alert: There’s always something wrong. It’s usually not a deal-killer.)

Pay attention, because this knowledge will be super useful once you actually buy the place. You should also get a written report, so you’ll have a permanent record that you can refer back to.

9. Compare Mortgage Rates

At this point, you’re still not locked into one mortgage lender. Even if you’ve been pre-approved for a mortgage, you can still switch lenders in search of a better deal.

Getting quotes from multiple lenders puts you in a better bargaining position, says the Consumer Financial Protection Bureau. If you prefer one lender, but a different lender offers you a better rate, show the first lender the lower quote, and ask for a match.

“Essentially, you can start a mini bidding war,” first-time homebuyer Lana Axelrod says about her experience.

10. Time for Closing Costs

Finally, it’s time to close the deal. This is when you officially sign up for the mortgage, and the ownership of the property is transferred to you.

Closing mostly involves going through a thick stack of paperwork and signing your name over and over and over again. Professionals will walk you through the process. Your real estate agent will be there and probably a loan officer from whichever bank is giving you a mortgage. If you hired a mortgage broker, they’ll be there too.

No lie: Getting ready for closing is a lot of work.

Before her closing, Rebbecchi put in a lot of time gathering all the documentation she needed: “I have moved a LOT in the past few years and had a variety of jobs — so providing all my income tax returns, proof of employment and justifying previous addresses was exhausting.”

As a rule of thumb, closing costs run from 2% to 5% of your loan amount. This pays for things like having a property appraiser assess the value of the home, as Realtor.com explains, and having a title company do a title search to make sure nobody else has a claim on the property.

(You don’t have to find these people. Your lender will choose the appraiser. Your real estate agent will hook you up with a title company.)

Alternatively, you can negotiate with the seller to cover all or part of your closing costs. One common method is to have your closing costs added to the home’s purchase price, and ask the seller to pay them. That way, the seller nets the same amount of money, but your closing costs get included in your mortgage. Talk to your real estate agent about it.

11. Shop Around for Homeowners Insurance

Now that you own a home, you’ll likely need to insure it.

It’s mandatory if you have a mortgage — when you borrow money from a bank to buy a house, it’ll require you to insure that asset. In fact, your insurance premiums will be included in your monthly mortgage payments.

Homeowners insurance covers the cost of repairing or rebuilding your home if it gets damaged by fire or the kind of natural disaster insurers call “acts of God” — earthquakes, lightning, etc. It typically doesn’t cover damage from flooding or hurricane winds, so you may need to purchase separate insurance policies for those, depending on where you live.

To find affordable insurance, shop around.

Start by getting a free quote. We recommend the online insurance company Lemonade, where homeowners insurance starts at $25 a month. Instead of profiting extra when it doesn’t have to pay out claims, the company keeps a set 20% of your premium for itself, and 80% goes into a pool for paying claims and charity.

Lemonade offers homeowners insurance in New York, California, Texas, Illinois, New Jersey, Nevada, Ohio, Pennsylvania, Maryland, Arizona, Rhode Island, Georgia and the District of Columbia, and it’s expanding to other states.

Private Mortgage Insurance

If your down payment was less than 20% of your home’s value, you’ll be charged an additional monthly fee: private mortgage insurance (PMI). It protects the lender if you stop making payments.

Once you’ve made enough mortgage payments to reach 20% equity in your home, you can cancel your PMI. You might have to keep after your mortgage lender to actually stop charging you for PMI.

12. Home Sweet Home

After it’s all said and done, bask in the glory of home ownership.

Follow the example of Rebbecchi, who put a lot of work, strategy and shoe leather into finding just the right house. Even though home ownership has been a bit more work than she bargained for, she’s still glad she made the move.

“I love my house,” she said. “It’s small and quaint and has a great vibe.”

Mike Brassfield (mike@thepennyhoarder.com) is a senior writer at The Penny Hoarder. He has bought two houses in his life, and he hopes that’ll be it.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.



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