You are so ready. You have some money saved. You have great credit. You just went to the bank and they preapproved you for an obscene amount of money. You went to Realtor.com or local real estate websites and looked at houses and thought….
Can I really afford that?
If you did all the above, you are ahead of many homebuyers, and actually you are in pretty good shape. Buying your first home is one of the most important investments you will ever make. It involves more care than pointing and clicking on a website, or strolling into an open house on the weekend.
It’s important to know what you want, what you need, and what you really can afford. That giant mortgage that you were pre-approved for may not have been explained to you in monthly payments – chances are the figure does not include property taxes and other costs of owning a home. How much can you spend monthly? Once you have a handle on that, then you have an idea on what you can really afford.
The high cost of houses in many markets is troublesome for many first time buyers. Consider these ways to enter the world of homeownership if you are in a market where fixer uppers start at $300,000 and up….
1. Shop around for a mortgage, not just for the rate. A knowledgeable mortgage broker can tell you about types of loans you may qualify for with lower monthly payments, or flexible monthly payments. As a first time buyer, you may qualify for some attractive programs. Your bank may limit the types of loans they offer to only their loans, and a loan from another institution may better fit your needs. Be sure in shopping for mortages to get an estimate of the monthly payment, including the property taxes on the house you want to buy. Also, with any lender, be sure to find out about all fees and closing costs. You do not want to be enticed by a low rate and find that there are so many fees presented at the closing table that the deal does not go through. A reputable lender is supposed to provide you a written disclosure of all charges associated with your loan.
2. Work with a licensed Realtor. Yes, you will find information about houses on the internet and in the paper, but not all of it will be current or even correct. In most places, working with a Realtor costs you nothing – the seller pays the commission. A Realtor will assist you with the mortgage, monthly breakdowns, and can possibly identify properties that are good for you that you did not even know are on the market! They can also tell you if the house you saw on the internet is already under contract, or if the house you saw over the weekend on an “open house” is as good as one that may not be shown through open houses. They also will represent you through the entire transaction, working with your attorney if you have one, and negotiate the offer for you. Many people think they should just call the agent who lists the house they like – that agent represents the seller. They can also represent the buyer, but some disclosures will apply in some states.
3. If you are totally priced out of owning a house, consider a condo or a co op. These are often good entries into the real estate market for first time buyers. The maintenance of these units is paid for on a monthly basis, and it may be a good way for you to get accustomed to home ownership while building equity – and your nest egg. My first home was a co op in New York City – the monthly maintenance was cheaper than rent, I got a tax deduction, and I turned the profit when I sold into a down payment on a house after several years.
4. Know how long you will live in the home – are you staying there for a few years, or is this the lifetime purchase? Your future plans determine a lot about the type of loan you want to apply for.
5. Find ways to increase your down payment. If an elderly relative was going to “gift” money to you, now is a good time for that to happen. If mom or dad have said they would make you a low cost loan or want to help, don’t let your pride get in the way – but be sure the expectations and obligations are clear. Perhaps there is a way to look at the family budget to see where some savings can occur. Do you really need the brand new car, or would a used one at half the price do just as well? If you have anything of value that you do not use and are not sentimentally attached to, maybe you can sell it! Just be certain that you really put that money away toward a down payment.
6. Keep your FICO score high. Do not open a lot of new department store accounts, and please don’t buy a new car for at least 6 months before you apply for a mortgage, and certainly don’t buy one when you are under contract to buy a house. Your FICO score determines what interest rates you are eligible for, and also what types of loans you could apply for. It can plunge if you suddenly incur a new large debt due to buying a new car or another big ticket item. Mortgage companies may revoke that “approval” and not issue the mortgage – leaving you under contract to buy a house that suddenly you cannot afford.
7. Consider downpayment assistance programs. Your Realtor can share information with you about programs available through HUD or privately funded programs such as Nehemiah. There will be more on these in future articles. They do not work in some high priced markets, but they can make a difference in some areas.
Realistic expectations, careful planning, and reliance on qualified ethical professionals will get you the keys to your new home, and open the door to home ownership for you!