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First Time Home Buyers Guide
Buying a house for the first time is a big deal. Before making an offer on a home it’s important to thoroughly research the purchasing process and consider the many factors that go into it, like financial planning and hiring a real estate agent. You may feel stressed when you realize the amount of preparation that needs to be done before making an offer on a house, and that is completely normal. However, if you do sufficient research and ask the right questions, you can feel confident and in control when buying your first home. The following tips will help guide you through some of the main processes and important things to consider before making your first offer on a home.
Determine How Much You Can Afford.
This may seem obvious, but there are a few factors that need to be sorted out in order to determine how much you can afford to pay for a house. Take a couple months to analyze your spending and track where your money goes; figure out what you spend per month on average. Using a table that tracks fixed expenses like bills, rent, etc. as well as variable expenses like going out to eat, buying clothes, and entertainment, can help you prioritize your spending and cut costs. In general, prospective home prices should be two to three times your annual income and mortgage payments should be under 30% of your monthly gross income. You will want to get a credit report for yourself and and your co-borrower, if you have one, to make sure that your credit score meets the lenders minimum before applying for a mortgage.
Save For a Down Payment.
You will want to make sure that you have enough money saved for a down payment. If possible, save 20% of the expected purchase price. This will allow you to avoid paying for private mortgage insurance, which is required if a buyer puts down less than 20%. Saving for your down payment will also get you in the habit of budgeting and financing in a cautious, well-prepared manner. As a homeowner, there are various unexpected issues that can arise while living in your home, and maintaining the habit of setting money aside for future maintenance and unforeseen circumstances is smart.
Save For Closing/Up-front Costs.
Once you have found and are in the process of closing on your new home, you will have closing costs to consider such as lender fees, title insurance fees, and credit report fees. You will also have prepaid expenses which may include the first year premium on your homeowner's insurance policy, pre-paid interest charges, and real estate taxes. Generally, you should expect to pay around 3% of your home’s purchase price in closing cost fees, not including your down payment. There are other options if you can’t save enough to cover all of these fees, like asking the seller to pay some of the costs. Your closing costs, prepaid items, and the rest of your down payment must be paid on the day you sign closing documents, so save for that extra 3% too, as you build your down payment savings.
Find a Mortgage Lender.
Your next step will be to meet with a mortgage lender to determine how much you can afford and the types of loans available. You will need to prove you have multiple lines of credit and a credit score above the lender’s minimum. The lender will verify that you are financially responsible, and are a good bet to make your mortgage payments. Once your lender has analyzed your debt-to-income ratio and determined which lending program best fits your circumstances, you can ask for a pre-approval letter to present to the seller of the home you wish to buy. A pre-approval letter is extremely helpful for the seller to see that you’re a qualified buyer, and provides incentive for an agent to show you available homes.
Make a List of Your Needs.
Now comes the exciting part of this whole process: figuring out what you need in a home. Make a list of essentials that you must have; this may include a certain number of bedrooms or bathrooms, a garage, proximity to amenities, neighborhood safety ratings, and so on. Once you’ve nailed down your list of must-haves, you’ll be able to narrow down your search and make a more informed decision. Try to keep your list of needs shorter rather than longer, so that you won’t exclude a potential dream home you may have missed out on otherwise. Remember, wants are not things you should consider as much when house-hunting, as they can often be implemented by you in the future. Examples of wants could be things like interior decorations, wall paint color, appliances, or a pool.
Find a Real Estate Agent.
As a first-time home buyer, you most likely want plenty of guidance and input from a knowledgeable source regarding the process of buying a home. Hiring a real estate agent that you trust will provide you with necessary information and assurance you need throughout your home-buying experience. Your real estate agent should be your ally, have substantial knowledge in the area you are looking to live, come recommended, and clearly understand your needs in order to effectively help find a house within your budget.
Close the Deal.
Once you’ve found a home that meets all your needs, it’s time to put in an offer! In order to make a reasonable offer that the seller will accept, there are a few things to keep in mind. Your realtor should be in communication with the seller’s realtor based on your expectations and limitations. If you find a great home yet the roof or the flooring needs to be modified, you may wish to make a higher offer but ask the seller to make these changes before the deal is closed. If you are comfortable with taking on DIY projects, you might want to ask your realtor to make a lower offer since the house will then be a fixer-upper.
Another factor to consider is the average selling price of similar homes in the area. The prices that houses nearby have sold for are a good indicator of how close your offer should be to the asking price. You may also want to think about how long the house has been on the market. If the house has been up for sale for a long period of time, the seller may be more inclined to accept a lower offer. However, if the house was recently listed and local real estate is selling fast, you may need to be more aggressive with your offer so that you don’t lose to someone else.
Your offer will consist of your price, earnest money, other fees, and any additional terms you wish to include, such as renovations that you’d like taken care of by the seller. From there, your offer will either be accepted, rejected, or you will be given a counter-offer. Your offer may also include contingencies. For instance, you may make an offer that is pending an inspection of the home, and if no major issues are found then you are good to go. If a notable problem does come up in the inspection, then you are able to back out of the deal, penalty-free.
Pay close attention to the seller’s information in the offer, which will include disclosures about the house. Disclosures consist of material defects with the home that affect its value, such as a leaky roof or cracks in the floor.
Finally, it is time to close the deal. At this point you will have a bunch of paperwork to sign, various fees to pay (including closing costs), a final walk through of the home, and the finalization of the purchase of your new home. Once everything has been signed and the required payments have been made, you will be the owner of your first home - Congratulations!
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