A Comprehensive First Time Home Buyers Guide - Are you at a point in your life where you're considering buying your first home? If so, you're not alone. As the housing market in the United States slowly begins to rebound more and more people are beginning to think that now is the time to buy. Many are taking advantage of the drastic drop in real estate prices to get bargains that were unheard of just a few years ago.
Yet even though things are starting to look up, there are some important things every first time home buyer needs to know. These things will save you tons of aggravation if you're prepared for them ahead of time. In the interest of helping your journey down this road being more successful, we offer you this comprehensive first time home buyers guide.
In this guide we will talk about several important home buying factors including:
- home buyer credit rating
- choosing a real estate broker
- hunting for the perfect house
- making an offer
- costs of purchasing
- closing the deal
Home Buyer Credit Rating
Right off the bat, it's important that you understand the role your credit rating place in whether or not you'll be able to buy your first home. Especially in today's current sluggish economy, banks are more reluctant than ever to supply mortgages to individuals who are deemed a high risk. As a result, credit restrictions are tighter than they've ever been - with no sign of letting up anytime soon. If you don't have at least a decent credit rating you're not likely to get a mortgage.
Your credit rating, also known as your credit score, is measured as a number between 0 and 850. The higher the number, the better you are at handling money and the more likely you are to get a mortgage. Achieving a score of 850 is nearly impossible, but it's not hard to break the 800 mark.
In today's economy you probably won't be able to get a mortgage without credit score of at least 700. If you are consistently late paying your bills, you've defaulted on loans within the last five years, or you have any outstanding liens against you, you should probably plan on renting for at least a while longer.
The best way to maintain a good credit score is to always pay your bills on time and not overextend yourself financially. If you're going to be late in paying a bill, contact your creditor ahead of time and work things out in advance. This increases the likelihood of them not reporting it to the credit agencies. You should also be careful of credit cards and outstanding balances. Since credit card debt is considered unsecured debt, even if you pay all your bills on time excessive credit card debt will work against you.
If you have no credit, you need to establish some before you can purchase a home. Do so by getting a prepaid credit card, using it for a year or so then upgrading to a standard credit card. If you keep your credit card balances low and always pay your bills on time, this is a great way to build credit from scratch. You can accomplish the same thing by purchasing a used car through a dealer who self finances.
If you believe your credit score is sufficient enough for you to get a mortgage the next thing you'll need to do is work out a budget. Ideally, the cost of your monthly housing payment should not exceed one week's salary. Exceptions can be made if you don't have car loans, student loans, etc. A good place to start is to consider your current housing payment if you're renting an apartment. Let's just say that payment is $750 per month, not counting utilities.
If you can make that $750 comfortably, that's a starting point for your housing budget. Keep in mind that in addition to paying your mortgage, taxes, and homeowners insurance, you're going to have everyday expenses that you don't have in an apartment. You'll need a lawnmower and gas to run it, you'll be paying your own water bill, and you'll need to pay for all of the repairs and maintenance. Realistically, if your mortgage, insurance, and taxes come to $750 per month, the real cost will be closer to $950 a month when you add in all the incidentals.
Choosing a Real Estate Agent
Your choice in real estate agents is an important one, especially since you'll be locked in to a contract for at least three months at a time. Look for an individual with a proven track record as a buyer's agent. You can investigate potential agents by asking friends and family who they have used, contacting agencies and asking questions, and even asking agents to supply you with a list of happy customers they have dealt with. Call these customers and ask for references before making a decision.
When you do choose a real estate agent you're going to be required to sign a contract making that person your exclusive buyer's representative. Never sign a contract for more than three months at a time. That way, if you're unsatisfied you can leave that agent after the contract has expired and sign on with someone new. You also might want to interview several agents to find one whose personality you can live with. You'll be spending a lot of time with this individual so make sure you choose someone with whom you can get along.
Finally, be careful about choosing an agent who is too pushy and trying to get you to accept the first deal that comes along. You are paying him 3% of the purchase price, so make him earn it.
Hunting for the Perfect House
The biggest frustration for first time home buyers is not being able to find the perfect house they're after. You can take comfort in the fact that it's nearly impossible to find such a house on your first go around. Almost all first time home buyers purchase something they can live with, build up some equity and then turn around and search for a second home. It's usually the second or third purchase that ends up being the perfect one.
Be realistic and don't expect to find everything you're after. Most of the time you're going to have to compromise on what you want in order to get something you can live with. You may have to compromise with your real estate agent; husbands and wives may have to compromise between one another; and you may even have to compromise with a home owner. The point is, don't go into the home buying experience with unrealistic expectations. If the perfect house existed, everyone would want it.
Making an Offer
When it's time to make an offer your real estate agent will draw up the paperwork, explain it to you, and get your signature. The offer will list the price you're willing to pay, any contingencies you attach, and the time frame for acceptance. Your real estate agent will then submit the offer to the home owner's agent who will respond within the time limit.
From there your offer may be accepted, rejected, or countered. If the owner counters, he will return your offer with a new price and possibly new contingencies. Then you'll have the opportunity to accept, reject, or counter yourself. When you both have deal that you can live with, the homeowner will accept the offer.
When you make an offer be careful to respect the seller and the fact that his home is personal to him. Most sellers list their houses for slightly more than they really want to get, expecting they'll have to come down. But throwing him a low-ball offer just to see if you can get away with it is rude and disrespectful. It's a surefire way to get a "no" answer without any bargaining room. If you're willing to bargain back and forth in smaller increments you're a lot more likely to get a deal more to your liking.
Costs of Purchasing
The next thing you need to know is that there is more to purchasing a house than simply coming up with the mortgage. You have what are called "closing costs." These costs are fees that are associated with processing the transaction and facilitating the mortgage. Calculating your closing costs is not possible with a simple mathematical formula, because there are so many variables involved. But your real estate agent will be able to give you a good idea based on what is common in your area.
Closing costs include such things as home inspections, appraisals, transfer fees, attorney’s fees, mortgage fees, and financing points. You'll also have to come up with some sort of down payment in most cases. As a general rule, expect your closing costs to be between 6% and 8% of the purchase price. Depending on your financial circumstances you might be able to get some financial assistance in covering your closing costs.
Financing for your new home comes in the form of a mortgage. Mortgages are typically 30 year loan agreements - although you can get them for 20 or 15 years. Where mortgages are concerned you normally have two options: a conventional mortgage and an FHA mortgage. There are other targeted mortgages aimed at special groups of people such as military veterans, farmers, and disabled individuals.
A conventional mortgage is the least complicated but the most difficult to get. This type of mortgage comes directly from a bank or other lending institution with no other parties involved. Conventional mortgages tend to have higher interest rates and higher closing costs, but they are often assumable and can be paid off early without penalty.
An FHA mortgage is also issued by a bank or other lending institution but it is backed by the Federal Housing Authority. What we mean by being "backed" is that the FHA guarantees the loan will be repaid even if you default. In such a case, the government would repossess the home, pay off the bank on your behalf, and then sell your home to recover its costs. FHA mortgages are the easier of the two to get. They typically come with lower interest rates, lower closing costs, a lower down payment, and the less stringent credit requirements.
A third financing option is for the current owner to hold the mortgage. In such a case you would make your mortgage payments directly to them the same as you would to a bank. The homeowner files a lien against the house which remains in effect until the loan is completely paid off. If you default on the loan he can take possession of the home again. The advantage to this sort of arrangement is that the terms of the loan are left up to the two individuals involved. Between the two of you, you can decide on down payment, interest, monthly payment amount, and so on.
Closing the Deal
By the time you've made it to closing you have already undergone a long and arduous process. But before you can close the deal there are some things that your lawyers need to do. They will run a title search, file for transfer taxes, order surveys, review all the paperwork, contact the banks, and so on. In a nutshell, the attorneys will make sure that all loose ends are tied up from the point your mortgage is approved until the time you sign the paperwork. Closing typically takes a minimum of six weeks if no problems are encountered.
When closing day comes the sellers most likely will not be in attendance. They will probably have signed all the paperwork ahead of time and left the keys to the home with their attorney. Present at the closing will be the seller's attorney, your attorney, and you. At this meeting you'll sit down and sign a stack of paperwork that could take you a half-hour or more to get through. This is the time to ask any questions you have before you start signing. Your attorney is obligated to answer your questions and make sure you know exactly what you're getting into.
The closing is also where the money for the deal changes hands. Your attorney will have a check from your mortgage lender and you will provide a check for your portion of the closing costs. That money goes to the seller's attorney who will deposit into his account and then disperse it accordingly. Once the closing is over, you are the new legal owner of your home and you’re ready to move in.
Depending on the circumstances of the seller you may be asked to hold off on moving in for a time, and instead, rent back the home to the seller. This is usually done if the seller is buying a new home himself and it's not ready for him to move in. Renting back is a common practice which is generally no longer than one or two weeks. Before you do move in however, do a final walk-through of the property to make sure nothing has been damaged or removed in violation of the purchase agreement.