First-time Home Buying 101
Whether you’re considering a condo, townhome or traditional house, the same financial strategy applies.
Google "home buying," and the process can seem incredibly overwhelming. Terms like "points," "closing," "pre-approval," "foreclosure," "escrow" and "renovations" jump off the screen.
Yet despite the perceived challenge, more than 79,484,000 people owned their homes in 2013, accounting for 65 percent of the U.S. households, according to the National Multi-family Housing Council. Of the people who owned their homes, 23 percent were under the age of 30, which means there are a lot of first-time homebuyers out there.
Whether you’re considering a condo, townhome or traditional house for your first purchase, the same financial strategy applies.
1. Know where you are.
Your credit score is a good place to start building your financial picture. Lenders will use your creditworthiness to determine the terms of your mortgage, or even whether you qualify for one. See if any errors need fixing by requesting a free credit report at www.annualcreditreport.com or www.gofreecredit.com. Be prepared to pay about $20 to obtain a one-time “snap shot” of your credit score from MyFICO.com.
Next, organize your financial documents and take a good look at your monthly budget. Your most recent W-2s, paystubs, tax returns and bank statements are required paperwork during the home buying process. And knowing how much you earn versus spend on rent, utilities, insurance and other expenses can help you figure out whether you can comfortably afford a home. Lending and real estate agents will want these numbers, as well.
2. Calculate what you can afford.
To see how much of a loan you qualify for, Bankrate.com suggests calculating your back-end ratio. Add up all of your monthly debt, including housing, and figure out how much of your monthly income goes to cover it. Lenders prefer for the ratio to be less than 41 percent. They will also consider how much debt you’re carrying and how long you’ve been at your job before determining your loan amount.
Going through the pre-approval process also removes some mystery of how much house you can afford. According to firsthomebuyers.net, a lender’s pre-approval verifies the borrower’s information and documentation to calculate exactly how much it would be willing to lend to that borrower. While time-consuming, getting pre-approved can speed up the underwriting and actual loan approval, so you can buy the house you want faster.
3. Keep current with your options in Arizona.
Many new homebuyers may qualify for a loan from the Federal Housing Administration (FHA), which normally requires a lower down payment than a conventional loan. However, in 2014, the maximum amount of a FHA loan dropped to $271,050, from a max of $346,250 in 2013.
4. Understand the process.
For the majority, their home is their biggest investment. So it stands to reason that it takes time to buy one. Factor in these steps from Investopedia.com into your timeline:
- Find a home. Listings, agents and word-of-mouth are all part of the search.
- After getting pre-approved, make an offer. This may call for a bit of negotiation with the seller, at which point you make a good faith deposit and head into escrow. Escrow is the period where the house is off the market with the contractual expectation that you will buy it, barring any serious problems.
- Get the home inspected. If you find serious problems, you can rescind your offer and get your money back or negotiate further.
- Close. In the final stages, you might have to get the home appraised, conduct a title search and/or obtain private mortgage insurance. Then break out your favorite pen and get ready to sign a lot of papers.
5. Save enough cash.
HGTV.com surveyed first-home buyers to comprise its list of 23 things every newbie should know. The most recommended advice was to save, save, save. Having more cash on hand was beneficial for making a larger down payment to build equity faster or to beat out a competitive bid, to make unplanned renovations and repairs, and to have a strong financial profile.
Although Arizona home values have risen about 3.7 percent from 2013 to 2014, and Zillow.com predicts that they will rise to 4.7 percent into 2015, no one can accurately predict the best time to buy. If your personal situation indicates that it’s time to take the leap, then follow these tips to make the most knowledgeable deal on your very first home purchase.