Certainly buying a first home can be a little bit intimidating. Not only is it a very large purchase but unlike renting an apartment it’s not really something you can change your mind with. If you want to move to a different part of town after your 12-month lease is up, so be it. With real estate, you don’t have that flexibility. But just ask any homeowner today if they did the right thing and they’ll answer in the positive. They’ll also tell you buying a home moves rather quickly once the contract is signed. But if you’re not sure if you’re ready but thinking about it, here are five questions you should ponder.
Do I have enough money to close? Your loan officer can provide you with a good estimate regarding how much cash you’ll need at the settlement table. For most loan programs you’ll need a down payment. There are first-time buyer conventional loans that ask for a down payment of just 3.0 percent of the sales price and FHA only need a 3.5 percent down payment. Homebuyers in more rural locations might find the 100% USDA loan a great choice. There are also closing costs associated with any purchase transaction, both for you and the sellers. Again, your loan officer can provide you with a list of closing costs you can expect.
Finally, depending on the loan program you choose, you may need to have some money left over called “cash reserves.” This is the number of months’ worth of house payments that should be in your account after the loan has closed. Most loans ask for a cash reserve requirement of three months of payments.
Am I ready to pay for maintenance costs? When you rent and the hot water heater goes out, you simply make a call to the landlord or property manager. The hot water heater belongs to the owner and that person or business is responsible for its upkeep. The hot water heater is fixed or replaced for you at no charge. When you own, you’ll need to be prepared to pay for regular maintenance and appliance upkeep.
How much house can I afford? This is a function of current market rates, loan program and your qualifying income. Lenders will consider your current monthly credit obligations and by adding an estimated house payment, this total is compared to monthly income. This can also vary but a common “debt ratio” for a house payment is around one-third of your income. It’s also a good suggestion to let your loan officer know what you’re comfortable paying each month, not necessarily buying the most you can qualify for. Many first time buyers are somewhat shocked at how much home they can afford but won’t be very comfortable with much higher monthly payments. This increase in payments is referred to in the industry as “payment shock.”
Where do I want to live? Where you want to live largely depends upon how much you can qualify for. Your loan officer will provide you with a prequalification amount which can get you started. You should also take it a step further and submit a completed loan application and start shopping with a preapproval letter in your hand. With this, all you need is a property address. Once you have an idea on what fits your budget, your real estate agent will provide you with areas that meet your requirements. Many homeowners start their search near their work for an easy commute.
Do I need a real estate agent? Most certainly. Real estate agents work full time in the industry and understand local real estate trends, neighborhoods and demographics. They also know how to navigate the many moving parts involved in the home buying process. Your agent will check that you’ve applied for a mortgage and received your preapproval letter. Without this letter, many agents won’t even get in the car with you. A preapproval letter lets the agent and the sellers know you’re serious about this and you’ve already applied for a loan. The agent takes your qualification amount and searches for homes in areas where you want to live and within your budget. Also, keep in mind the realtors are paid by the home seller, so the buyer typically will not pay their commission.
There are countless other considerations and don’t be surprised when new questions pop up as you begin your search. Work closely with your loan officer during this period and once you have a signed contract, the wheels begin to turn. At this stage, multiple parties start to work on your loan file. Ask questions and don’t feel intimidated buying your first home. Remember, you’re the boss here and nothing happens until you find the right home at the right price with terms you can afford.
Questions? Please call Coast 2 Coast Lending 7 days a week to learn more