A Short Guide to Buying Your First Home
Understanding the Real Estate Market
The real estate market is constantly changing. There are markets that favor the seller and markets that favor the buyer. The economics of supply and demand dictate which type of market you are operating in from one minute to the next.
As a first time homebuyer, it is always good to know where you stand so that you can be realistic about how much leverage you have in the marketplace. If you’re lucky, you are buying your first home in a buyer’s market where the supply of homes is plentiful and you can get a good price.
Conversely, if you happen to be looking for your first home in a seller’s market, then as the buyer you are at a disadvantage. Typically, there is a shortage of homes for sale. What this means is that you have to be willing to make a quick decision when you see something you want, or risk losing the property to another buyer. Be prepared to engage in a bidding war on any property you want to buy.
The Importance of Good Credit
Your credit will determine the interest rate you pay for your home. A buyer with excellent credit can obtain financing at a lower rate than a buyer with average or poor credit. The interest rate that you pay has a huge impact on the loan amount you can afford.
Prior to buying your first home, it is very important to do whatever you can to improve your credit rating. Paying your bills on time or early is critical. It is also important that you have adequate credit to establish your rating.
Even if you don’t like the idea of borrowing money, you must do so to establish your credit rating. Financing a car or bank loan is a great way to get started.
The credit score to keep in mind per Zillow is 680 or higher if you want to qualify for the best interest rate. Granted, this credit score requirement can change based on market conditions and the banking community’s reaction to changing supply and demand sources.
Deciding on a Realistic Budget
One of the first things any buyer wants to do is to decide on a budget for their first home. After paying all your other bills, how much can you afford to pay monthly for your house payment? Before going to see a mortgage advisor, it is a good idea to write down all of your expenses.
While your banker will tell you the amount of mortgage you qualify for based on criteria like your income to debt ratio, it is always a good idea to have a budget to refer to so that you know what you are actually spending every month. Don’t forget all of the incidentals like that coffee you buy every morning and your dry cleaning bill.
A good rule of thumb to remember is that your house payment should be no more than 28 percent of your gross income. Your total monthly debt that includes your house payment, car payment, taxes and interest on your home loan, credit card payments and all other obligations should not be more than 36 percent of your gross income. This 36% ratio does not include the coffee drinks and clothes you buy for qualifying purposes. Granted, high-income borrowers are allowed higher debt ratios.
The Down Payment and PMI
When possible it is ideal to save at least 20% of the sales price as a down payment on your home. By putting 20% down, the lender will not charge you private mortgage insurance (PMI). Basically, this fee is charged by the lender so they can protect their investment. Unfortunately, the borrower is charging you a fee to protect them in the event you default on the loan.
Selecting Your Realtor
Hiring the best real agent for you will make your search for a home much more pleasant and productive. While it is important to find a person who you feel comfortable spending time with, it is also important to assess their competency. Forbes suggests that you review the listing materials they use and evaluate their professionalism. Getting referrals from friends who have been through the process is always a good idea.
Remember that trust is key as you select a professional real estate agent to guide you through the largest investment you’ll probably ever make. While it is not always easy to determine who you can trust and who you can’t, there are recognizable signs that can help. Agents who push you too hard to make a fast decision are not always trustworthy. If you get the feeling that their commission is guiding them more than your needs, then you need to find another realtor.
The Importance of the Inspection
The absolute worst thing a first-time homebuyer can do related to inspection is to decide not to have one. Inspectors have been trained to conduct a thorough evaluation of your future home that includes the major systems and structural integrity of the home to assess both safety issues and imminent problems that will require large expenditures.
Hiring the right inspector is as important as signing with the right realtor. Considering the large financial and emotional investment inherent in a home purchase, you definitely need to know exactly what you are buying. Buyers who don’t understand the ins and outs of the inspection process risk buying a home in bad repair that will cost them more money in the long run than they are willing to spend.
There are certain inspection traps that you need to be aware of before moving forward with the inspection. First, it makes sense to hire your own inspector rather than simply accepting the inspector that your real estate agent recommends. It is understandable that realtors have their favorite inspectors and send them a lot of business. Due to the relationship between an inspector and a realtor who work together often, it is easy to understand why an inspector who depends on that realtor for future business will be hesitant to report bad news on the inspection report for fear they will kill the deal.
Realtor.com reports that another common mistake that first-time buyers make is not showing up for the inspection. There is no substitute for asking questions as your inspector points out problems they will add to the report. While an inspector is obligated to report everything they find, being able to determine how serious certain inspection findings are by asking an objective inspector good questions can provide the buyer the information they need to make an educated decision without overreacting or dismissing problems altogether.
Finally, it is very important to have the negotiated repairs inspected to ensure that the problem has been properly addressed to your satisfaction. Don’t drop the ball at the last minute in the rush to the closing table. You may live to regret your decision.
It is easy to become overwhelmed when it is time to buy your first home. Suddenly your “To Do” list is very long and the clock is ticking. By following the suggestions above, you can stay calm and move forward with confidence.