Buying your first home takes years of financial preparation. But now that you've finally saved enough money to get your own place, you might be wondering…how the heck do I start?
From beginning to end, the average homebuyer will take about 30 to 60 days to shop for a place, 14 to 60 days to close the contract, and about 14 to 45 days before the first mortgage payment is due.
So what is it that eats up all that time? And do you begin at the lender? The realtor? Your mom? Below is everything you need to know about buying your first home:
Step 1: Figure out how much you can spend
While you may have imagined yourself paying the full price of the house before move-in day, that actually only happens with fewer than 10 percent of homebuyers. Chances are, you're going to need financing (AKA take out a loan).
But, if you've saved enough for a big down payment (which is the money you give upfront), you'll have lower monthly payments. Typically, people put between three and 20 percent of the home's sale price down in cash to qualify for a loan. So, how do you determine how much you can afford to spend each month?
The general rule of thumb is that your monthly mortgage payment should equal no more than 28 to 33 percent of your gross income (your total pay before taxes). And your entire debt (your anticipated mortgage plus your car loan, credit card balance, student loans, etc.) should not surpass 43 percent of your gross income.
Lafayette Federal Credit Union recommends using a budget worksheet to determine how much income you can spare each month to put toward a mortgage payment. Start by subtracting your expenses from your total income. Do a "practice run" for two months by saving the difference in your anticipated monthly mortgage, taxes, and insurance payment and your current rent payment. See if you can maintain the lifestyle that you are accustomed to while not neglecting other savings activities (such as your IRA and college savings for the kids). If you find yourself falling short, you may want to consider a smaller mortgage.
Step 2: Get your credit in check
Lenders (the people who determine if you can get a loan), often look at your cash reserves-they don't want you to empty your savings accounts to afford mortgage payments. So, try to avoid making any expensive purchases the year leading up to buying a home.
Get a copy of your credit report from each of the three credit bureaus: Experian, Equifax, and TransUnion. Make sure that there are no mistakes on it that could cost you-or even prevent you from getting financing. The better your credit rating, the more you'll be able to borrow-and at a better interest rate.
Step 3: Apply for a loan
This can be the most challenging part of buying a home. The bank will ask you specific details about your income, assets, and debts. (Psst! Make sure you've checked off all the boxes on the application checklist).
Lafayette Federal Credit Union recommends getting this part out of the way early by getting pre-approved. Yep, that means applying for a mortgage loan before you find a home. If you apply for a mortgage in advance and are approved, it assures real estate brokers and sellers that you are a qualified buyer (which may give you more of an edge over other buyers).
Once you're approved, you'll have to choose what type of mortgage you want. The most common type of mortgage is a fixed-rate mortgage, which means the interest rate and monthly payment remain the same throughout the loan period. Regular fixed-rate mortgages terms are usually for 15, 20, 25 or 30 years. Keep in mind, the shorter the term, the lower the interest rate and interest charges over the life of the loan. However, even though you are saving over the life of the loan, a shorter term means a higher monthly payment.
The other option is an Adjustable-Rate Mortgages (ARMs). Adjustable-rate mortgages are 15- or 30-year loans with monthly payments that change over the term of the loan due to increases or decreases in the interest rate. The primary advantage of an ARM is an initial low-interest rate. Regular ARM adjustments are made at pre-negotiated periods of time (six months, one, three, or five years). Don't worry -- most ARMs have rate caps to protect you. These may be in the form of limits per adjustment or a lifetime limit for the loan.
Find a lender that's easy to work with, and who you trust. Many places even offer first-time home buyer programs that simplify everything.
Step 4: Choose a real estate agent and go shopping
Real estate agents show you homes, answer your questions, help you get insurance and loans, handle settlement paperwork, and act as liaisons between you and the seller. Legally, they can play one of three roles: seller's agent (they were hired by the homeowner or developer), buyer's agent (they work for you to get you the home you want at the best possible price and terms), or dual agent (when the company represents both you and the seller). It's important to know what role your agent is playing.
Once you start house hunting, there are many factors to consider. It's important to narrow your focus before you hit the ground running. Start by making a list of "needs" versus "wants." Needs might include the minimum number of bedrooms or bathrooms, whether you need a garage or office space, or the size of the yard. Be sure to list anything you absolutely don't want. Then go on to list things that are preferences (assets you're willing to be flexible on).
Share your list with your real estate agent, who will take you on tours. Once you find something that you like, evaluate it objectively. Your agent will help you choose things that are inexpensive changes versus major renovations.
Make a list of pros and cons for each home that you like. Make sure to also consider the location: neighborhood, your commuting distance to work, the quality of nearby public services and schools, and the convenience of grocery stores and other necessities.
Step 5: Make an offer
Once you've found a home that meets your needs and your budget, it's time to make an offer. Your agent will play a critical role in the negotiation--one of the reasons to carefully select your agent. They should be working to get you the best deal and terms.
Your agent should provide you with comparable sales to show you what the current market value of the home is. You don't want to make your offer higher than market value (unless you intend to pay the difference in cash).
Depending on the current market, your agent will advise you on what the initial offer should be. You may be advised to start low so you can negotiate up to your desired purchase price. However, if there are a lot of buyers in the market, you'll probably be advised to make your highest and best offer at the first pass.
Once you and the sellers have agreed on price, it's time for the home inspection. Your buyer's agent should be able to recommend an inspector, or you can find one on your own that is a member of the American Society of Home Inspectors (ASHI). The inspection will cost you between $300 and $600, but it's well worth it. He or she will look for flaws in the structure, electrical systems, appliances, etc., and write up a report and estimate the cost of repairs. It's recommended you tour the home with your inspector--being present during the inspection will help you make an objective decision about any negative findings.
Want to learn the ins and outs of home-buying from industry experts? Join Lafayette Federal Credit Union at Nationals Park for one of six home-buying seminars. Come for the expert advice, stay for a night at the ballpark! Learn more about how you can register for free at www.lfcu.org.