Before
You Buy Your First Home - Tips for First-time Home Buyers
It's not uncommon for a first-time home buyer to say to me, "Gosh,
just last week I called you about buying a home and now I'm in
escrow! How did this happen so fast?" The answer is it didn't.
First-time home buyers start the search long before most even
realize it. Here's what you can expect from your home shopping
experience.
Figuring
Out the Benefits
You should buy a home. That's what you've been hearing from friends
and family, right? So, by now you have likely already weighed
the benefits and decided that home ownership was the best decision
for you. That's a major hurdle now passed. You are focused and
certain. Good.
Defining
Search Parameters
Almost 80% of all home searches today begin on the Internet. With
just a few clicks of the mouse, home buyers can search through
hundreds of online listings, view virtual tours, and sort through
dozens of photographs and aerial shots of neighborhoods and homes.
You've probably defined your goals and have a pretty good idea
of the type of home and neighborhood you want. By the time you
reach your real estate agent's office, you are halfway to home
ownership.
How
Long Should It Take to Find What You Want?
In seller's markets, often I show only one home. After all, how
many homes does one family need? A few buyers will look for years,
but buyers who do that aren't motivated. A motivated buyer will
find a home within two weeks. Most of my buyers find a home within
two days. Good
real estate agents will listen to your wants and needs and arrange
to show only those homes that fit your particular parameters.
Your agent should preview homes before showing them to you as
well.
How
Many Homes Will You See?
Studies show that the your memory dramatically improves after
consumption of carbs and slows upon consuming sugar. So, layoff
the soft drinks and have a hearty meal of carbs before venturing
out to tour homes. The average number of homes that I show to
a buyer in one day is seven. Any more than that, and the brain
is on overload. Therefore, don't expect to see 20 or 30 homes;
although it's physically possible to do so, you probably will
not remember specific details about any of them.
The
"Red Shoes" Experience
Women will relate to this. Say, you need a new pair of red shoes.
You go to the mall. At the first shoe store, you find a fabulous
pair of red shoes. You try them on. They fit perfectly. They are
glamorous. Priced right, too. Do you buy them? Of course not!
You go to every other store in the mall trying on red shoes until
you are ready to drop from exhaustion. Then you return to the
first store and buy those red shoes. Do not shop for a home this
way. When you find the perfect home, buy it.
How
to Rate Inventory
• Bring a digital camera and begin each series of photos
with a close-up of the house number to identify where each group
of home photos start and end.
• Take copious notes of unusual features, colors and design
elements.
• Pay attention to the home's surroundings. What is next
door? Do 2-story homes tower over your single story?
• Do you like the location? Is it near a park or a power
plant?
• Immediately after leaving, rate each home on a scale of
1 to 10, with 10 being the highest.
View
Top Choices a Second Time
After touring homes for a few days, you will probably instinctively
know which one or two homes you would like to buy. Ask to see
them again. You will see them with different eyes and notice elements
that were overlooked the first go-around. At
this point, your agent should call the listing agents to find
out more about the sellers' motivation and to double-check that
an offer hasn't come in, making sure these homes are still available
to purchase.
Making
the Selection
I'll let you in on a little secret. I generally know which home
a buyer is going to choose, and I suspect most other agents operate
the same way. It's an intuition. But I make it a practice not
to steer buyers, and I insist that buyers choose the home without
interference from me. It's not my choice to make.
Common
Questions from First-time Homebuyers
1. Why should I buy, instead of rent?
Answer: A home is an investment. When you rent, you write your
monthly check and that money is gone forever. But when you own
your home, you can deduct the cost of your mortgage loan interest
from your federal income taxes, and usually from your state taxes.
This will save you a lot each year, because the interest you pay
will make up most of your monthly payment for most of the years
of your mortgage. You can also deduct the property taxes you pay
as a homeowner. In addition, the value of your home may go up
over the years. Finally, you'll enjoy having something that's
all yours - a home where your own personal style will tell the
world who you are.
2.
What are "HUD homes," and are they a good deal?
Answer: HUD homes can be a very good deal. When someone with a
HUD insured mortgage can't meet the payments, the lender forecloses
on the home; HUD pays the lender what is owed; and HUD takes ownership
of the home. Then we sell it at market value as quickly as possible.
Read all about buying a HUD home. Check our listings of HUD homes
and homes being sold by other federal agencies.
3.
Can I become a homebuyer even if I have I've had bad credit, and
don't have much for a down-payment?
Answer: You may be a good candidate for one of the federal mortgage
programs. Start by contacting one of the HUD-funded housing counseling
agencies that can help you sort through your options. Also, contact
your local government to see if there are any local homebuying
programs that might work for you. Look in the blue pages of your
phone directory for your local office of housing and community
development or, if you can't find it, contact your mayor's office
or your county executive's office.
4.
Are there special homeownership grants or programs for single
parents?
Answer: There is help available. Start by becoming familiar with
the homebuying process and pick a good real estate broker. Although
as a single parent, you won't have the benefit of two incomes
on which to qualify for a loan, consider getting pre-qualified,
so that when you find a house you like in your price range you
won't have the delay of trying to get qualified. Contact one of
the HUD-funded housing counseling agencies in your area to talk
through other options for help that might be available to you.
Research buying a HUD home, as they can be very good deals. Also,
contact your local government to see if there are any local homebuying
programs that could help you. Look in the blue pages of your phone
directory for your local office of housing and community development
or, if you can't find it, contact your mayor's office or your
county executive's office.
5.
Should I use a real estate broker? How do I find one?
Answer: Using a real estate broker is a very good idea. All the
details involved in home buying, particularly the financial ones,
can be mind-boggling. A good real estate professional can guide
you through the entire process and make the experience much easier.
A real estate broker will be well-acquainted with all the important
things you'll want to know about a neighborhood you may be considering...the
quality of schools, the number of children in the area, the safety
of the neighborhood, traffic volume, and more. He or she will
help you figure the price range you can afford and search the
classified ads and multiple listing services for homes you'll
want to see. With immediate access to homes as soon as they're
put on the market, the broker can save you hours of wasted driving-around
time. When it's time to make an offer on a home, the broker can
point out ways to structure your deal to save you money. He or
she will explain the advantages and disadvantages of different
types of mortgages, guide you through the paperwork, and be there
to hold your hand and answer last-minute questions when you sign
the final papers at closing. And you don't have to pay the broker
anything! The payment comes from the home seller - not from the
buyer.
By the way, if you want to buy a HUD home, you will be required
to use a real estate broker to submit your bid. To find a broker
who sells HUD homes, check your local yellow pages or the classified
section of your local newspaper.
6.
How much money will I have to come up with to buy a home?
Answer: Well, that depends on a number of factors, including the
cost of the house and the type of mortgage you get. In general,
you need to come up with enough money to cover three costs: earnest
money - the deposit you make on the home when you submit your
offer, to prove to the seller that you are serious about wanting
to buy the house; the down payment, a percentage of the cost of
the home that you must pay when you go to settlement; and closing
costs, the costs associated with processing the paperwork to buy
a house.
When
you make an offer on a home, your real estate broker will put
your earnest money into an escrow account. If the offer is accepted,
your earnest money will be applied to the down payment or closing
costs. If your offer is not accepted, your money will be returned
to you. The amount of your earnest money varies. If you buy a
HUD home, for example, your deposit generally will range from
$500 - $2,000. The more money you can put into your down payment,
the lower your mortgage payments will be. Some types of loans
require 10-20% of the purchase price. That's why many first-time
homebuyers turn to HUD's FHA for help. FHA loans require only
3% down - and sometimes less.
Closing
costs - which you will pay at settlement - average 3-4% of the
price of your home. These costs cover various fees your lender
charges and other processing expenses. When you apply for your
loan, your lender will give you an estimate of the closing costs,
so you won't be caught by surprise. If you buy a HUD home, HUD
may pay many of your closing costs.
7.
How do I know if I can get a loan?
Answer: Use our simple mortgage calculators to see how much mortgage
you could pay - that's a good start. If the amount you can afford
is significantly less than the cost of homes that interest you,
then you might want to wait awhile longer. But before you give
up, why don't you contact a real estate broker or a HUD-funded
housing counseling agency? They will help you evaluate your loan
potential. A broker will know what kinds of mortgages the lenders
are offering and can help you choose a lender with a program that
might be right for you. Another good idea is to get pre-qualified
for a loan. That means you go to a lender and apply for a mortgage
before you actually start looking for a home. Then you'll know
exactly how much you can afford to spend, and it will speed the
process once you do find the home of your dreams.
8.
How do I find a lender?
Answer: You can finance a home with a loan from a bank, a savings
and loan, a credit union, a private mortgage company, or various
state government lenders. Shopping for a loan is like shopping
for any other large purchase: you can save money if you take some
time to look around for the best prices. Different lenders can
offer quite different interest rates and loan fees; and as you
know, a lower interest rate can make a big difference in how much
home you can afford. Talk with several lenders before you decide.
Most lenders need 3-6 weeks for the whole loan approval process.
Your real estate broker will be familiar with lenders in the area
and what they're offering. Or you can look in your local newspaper's
real estate section - most papers list interest rates being offered
by local lenders. You can find FHA-approved lenders in the Yellow
Pages of your phone book. HUD does not make loans directly - you
must use a HUD-approved lender if you're interested in an FHA
loan.
9.
In addition to the mortgage payment, what other costs do I need
to consider?
Answer: Well, of course you'll have your monthly utilities. If
your utilities have been covered in your rent, this may be new
for you. Your real estate broker will be able to help you get
information from the seller on how much utilities normally cost.
In addition, you might have homeowner association or condo association
dues. You'll definitely have property taxes, and you also may
have city or county taxes. Taxes normally are rolled into your
mortgage payment. Again, your broker will be able to help you
anticipate these costs.
10.
So what will my mortgage cover?
Answer: Most loans have 4 parts: principal: the repayment of the
amount you actually borrowed; interest: payment to the lender
for the money you've borrowed; homeowners insurance: a monthly
amount to insure the property against loss from fire, smoke, theft,
and other hazards required by most lenders; and property taxes:
the annual city/county taxes assessed on your property, divided
by the number of mortgage payments you make in a year. Most loans
are for 30 years, although 15 year loans are available, too. During
the life of the loan, you'll pay far more in interest than you
will in principal - sometimes two or three times more! Because
of the way loans are structured, in the first years you'll be
paying mostly interest in your monthly payments. In the final
years, you'll be paying mostly principal.
11.
What do I need to take with me when I apply for a mortgage?
Answer: Good question! If you have everything with you when you
visit your lender, you'll save a good deal of time. You should
have: 1) social security numbers for both your and your spouse,
if both of you are applying for the loan; 2) copies of your checking
and savings account statements for the past 6 months; 3) evidence
of any other assets like bonds or stocks; 4) a recent paycheck
stub detailing your earnings; 5) a list of all credit card accounts
and the approximate monthly amounts owed on each; 6) a list of
account numbers and balances due on outstanding loans, such as
car loans; 7) copies of your last 2 years' income tax statements;
and 8) the name and address of someone who can verify your employment.
Depending on your lender, you may be asked for other information.
12.
I know there are lots of types of mortgages - how do I know which
one is best for me?
Answer: You're right - there are many types of mortgages, and
the more you know about them before you start, the better. Most
people use a fixed-rate mortgage. In a fixed rate mortgage, your
interest rate stays the same for the term of the mortgage, which
normally is 30 years. The advantage of a fixed-rate mortgage is
that you always know exactly how much your mortgage payment will
be, and you can plan for it. Another kind of mortgage is an Adjustable
Rate Mortgage (ARM). With this kind of mortgage, your interest
rate and monthly payments usually start lower than a fixed rate
mortgage. But your rate and payment can change either up or down,
as often as once or twice a year. The adjustment is tied to a
financial index, such as the U.S. Treasury Securities index. The
advantage of an ARM is that you may be able to afford a more expensive
home because your initial interest rate will be lower. There are
several government mortgage programs,including the Veteran's Administration's
programs and the Department of Agriculture's programs. Most people
have heard of FHA mortgages. FHA doesn't actually make loans.
Instead, it insures loans so that if buyers default for some reason,
the lenders will get their money. This encourages lenders to give
mortgages to people who might not otherwise qualify for a loan.
Talk to your real estate broker about the various kinds of loans,
before you begin shopping for a mortgage.
13.
When I find the home I want, how much should I offer?
Answer: Again, your real estate broker can help you here. But
there are several things you should consider: 1) is the asking
price in line with prices of similar homes in the area? 2) Is
the home in good condition or will you have to spend a substantial
amount of money making it the way you want it? You probably want
to get a professional home inspection before you make your offer.
Your real estate broker can help you arrange one. 3) How long
has the home been on the market? If it's been for sale for awhile,
the seller may be more eager to accept a lower offer. 4) How much
mortgage will be required? Make sure you really can afford whatever
offer you make. 5) How much do you really want the home? The closer
you are to the asking price, the more likely your offer will be
accepted. In some cases, you may even want to offer more than
the asking price, if you know you are competing with others for
the house.
14.
What if my offer is rejected?
Answer: They often are! But don't let that stop you. Now you begin
negotiating. Your broker will help you. You may have to offer
more money, but you may ask the seller to cover some or all of
your closing costs or to make repairs that wouldn't normally be
expected. Often, negotiations on a price go back and forth several
times before a deal is made. Just remember - don't get so caught
up in negotiations that you lose sight of what you really want
and can afford!
15.
So what will happen at closing?
Answer: Basically, you'll sit at a table with your broker, the
broker for the seller, probably the seller, and a closing agent.
The closing agent will have a stack of papers for you and the
seller to sign. While he or she will give you a basic explanation
of each paper, you may want to take the time to read each one
and/or consult with your agent to make sure you know exactly what
you're signing. After all, this is a large amount of money you're
committing to pay for a lot of years! Before you go to closing,
your lender is required to give you a booklet explaining the closing
costs, a "good faith estimate" of how much cash you'll
have to supply at closing, and a list of documents you'll need
at closing. If you don't get those items, be sure to call your
lender BEFORE you go to closing. Be sure to read our booklet on
settlement costs. It will help you understand your rights in the
process. Don't hesitate to ask questions.
Look
at Eight Reasons to Buy a Home
Pride
of Ownership
Pride of ownership is the number one reason why people yearn to
own their home. It means you can paint the walls any color you
desire, turn up the volume on your CD player, attach permanent
fixtures and decorate your home according to your own taste. Home
ownership gives you and your family a sense of stability and security.
It's making an investment in your future.
Appreciation
Although real estate moves in cycles, sometimes up, sometimes
down, over the years, real estate has consistently appreciated.
The Office of Federal Housing Enterprise Oversight tracks the
movements of single family home values across the country. Its
House Price Index breaks down the changes by region and metropolitan
area. Many people view their home investment as a hedge against
inflation.
Mortgage
Interest Deductions
Home ownership is a superb tax shelter and our tax rates favor
homeowners. As long as your mortgage balance is smaller than the
price of your home, mortgage interest is fully deductible on your
tax return. Interest is the largest component of your mortgage
payment.
Property
Tax Deductions
IRS Publication 530 contains tax information for first-time home
buyers. Real estate property taxes paid for a first home and a
vacation home are fully deductible for income tax purposes. In
California, the passage of Proposition 13 in 1978 established
the amount of assessed value after property changes hands and
limited property tax increases to 2% per year or the rate of inflation,
whichever is less.
Capital
Gain Exclusion
As long as you have lived in your home for two of the past five
years, you can exclude up to $250,000 for an individual or $500,000
for a married couple of profit from capital gains. You do not
have to buy a replacement home or move up. There is no age restriction,
and the "over-55" rule does not apply. You can exclude
the above thresholds from taxes every 24 months, which means you
could sell every two years and pocket your profit--subject to
limitation--free from taxation.
Preferential
Tax Treatment
If you receive more profit than the allowable exclusion upon sale
of your home, that profit will be considered a capital asset as
long as you owned your home for more than one year. Capital assets
receive preferential tax treatment.
Mortgage
Reduction Builds Equity
Each month, part of your monthly payment is applied to the principal
balance of your loan, which reduces your obligation. The way amortization
works, the principal portion of your principal and interest payment
increases slightly every month. It is lowest on your first payment
and highest on your last payment. On average, each $100,000 of
a mortgage will reduce in balance the first year by about $500
in principal, bringing that balance at the end of your first 12
months to $99,500.
Equity
Loans
Consumers who carry credit card balances cannot deduct the interest
paid, which can cost as much as 18% to 22%. Equity loan interest
is often much less and it is deductible. For many home owners,
it makes sense to pay off this kind of debt with a home equity
loan. Consumers can borrow against a home's equity for a variety
of reasons such as home improvement, college, medical or starting
a new business. Some state laws restrict home equity loans.
