Welcome to First Things First! This series will help you prepare for a range of life changes. Think of each installment as an instruction guide that will either give you time to locate a safe landing spot or help you hit the ground running. Each article will contain a handy checklist you can reference so you can remain calm, cool, and in control of whatever life hands you.
Buying Your First Home
When you really start adulting, buying your first home fills you with the thrill of making a commitment. You’re putting down some roots at last! The flip side to the thrill of buying your first home? You’re taking on an investment commitment often in hundreds of thousands of dollars, complete with all the attendant taxes, costs, and fees.
Buying your first home can be a huge, scary adult step. You need to consider both how expensive of a house you can afford and how much mortgage loan you can assume. Plus, you’ll also want to determine how much care and up-keep this new home will require as well as any repairs or improvements.
Yup — there’s that dreaded responsibility thing again!
Take heart! Folks do this every day. You’re not alone, so relax. We want to help you feel right at home by giving you a solid foundation of what to expect when you go house-hunting.
Let’s Talk about Mortgages
1) How Much House Can I Afford?
The web is bulging with home affordability calculators all asking the same two questions:
- How much is your income?
- How much debt do you have?
Remember that because your monthly expenses can change when you buy a house, your debt-to-income ratio (DTI) changes as well. You calculate your DTI by dividing all your monthly debt payments by your gross monthly income. Your debt will include monthly cost of living, credit cards, car payments and insurance, and other loans, plus estimates for homeowner’s insurance, real estate taxes, the mortgage payments, interest rate, and term of loan.
Most lenders prefer borrowers with a DTI of about 28%. The highest allowed for a mortgages is a whopping 43%.
2) Organize Your Finances!
Before you go mortgage-shopping, gather up your financial information – all of it! You likely need to show a lender:
- Two years of W2 statements (or 1099 income statements)
- Federal tax returns for at least the last two years
- Most recent monthly bank statements
- Proof of income — pay stubs, deposit statements, etc.
It’s also a good idea to check out your credit rating, because this will have a definite impact on your mortgage interest rate.
3) What’s in a Mortgage?
Take the time to understand a mortgage so you can shop for the best qualified deal:
- Qualified mortgages are loans that meet specific lender rules to help make it more likely that you’ll be able to afford your loan and pay it off.
- Mortgages come in several standard fixed term periods: 30-year, 15-year, and 10-year. The rate is at a fixed interest rate that doesn’t change for the length of the mortgage.
- Adjustable Rate Mortgages (ARM) start off with low initial fixed rate of interest for 1-5 years. After that, the rate will change based on an index — which can go up or down.
- The Interest-only “jumbo” rate is for houses over $600,000. While most first-time home buyers won’t need it, the rate allows you to just pay the interest for the early years, and then after the preset term expires, you pay the normal interest and principal.
- Federal Housing Administration (FHA) mortgages are loans made by approved lenders that are insured by the government. New home buyers may not have the best credit, so these loans require a 3.5% down payment and have lower closing costs.
- Points are lender fees equal to 1 percent of the loan amount. That doesn’t sound like much but a $100,000 home with a 1 point loan = $1,000 that you’ll have to pay for.
- Origination points are those the lender charges to cover the costs of making the loan, and they are tax deductible.
- Discount points are prepaid interest on the mortgage loan, with each point lowering your interest rate by one-eighth to one one-quarter of your interest rate. Borrowers can purchase discount points at closing so they lower the amount of interest they have to pay over the life of the mortgage.
4) How Do I Shop for a Mortgage?
Like anything for sale, you sometimes have to shop around to find the best deal. Compare rates, interest, points, and terms. Consider that seeming financial obstacles can be refinanced into a mortgage and removed with a little financial help from a savvy loan officer.
5) Get Pre-approved or Pre-qualified for the Mortgage!
This can be done over the phone or online. Pre-qualified means the lender has looked over your qualifications and, based on some assumptions, is willing to lend you the mortgage. Pre-approval makes your offer more credible to the seller, as it shows them you are able to get financing.
Let’s Go House-Hunting!
Learn about prices in the locations that interest you. Real estate web sites like Trulia, Realtor, and Zillow all show home locations with current pricing. You can also learn information about distance to shopping, homeowners associations, entertainment, school districts, and commute times.
1) Pay Attention to Flood Plains
Look over flood maps for the areas that interest you – this is especially true if you’re looking to live in East and Southeast Texas. Many of these can be accessed through county websites and may include flood prediction modeling. The term “100-year flood” is deceptive because it comes from geologist jargon for an area having a 1 in 100 chances per year to flood. That means there is a chance for a flood in that area every year.
If you do choose to buy a home in a flood plain, you will need to buy flood insurance from the federal government.
2) Know Your DIY limits
Buying a fixer-upper and doing the work yourself can be an adventure of discovery, both good and expensive. Doing It Yourself can save you money, but it can save you a lot of time and backaches to understand your limits first.
3) Find a Good Real Estate Pro
This technically doesn’t cost you anything because the seller pays all the fees associated with the sale. The good ones will know where to find the houses in the price range you’re looking for and also have insight into those that fit your style. Plus, they’ll know back stories about distressed properties and motivated sellers. They’ll also help you put together your offer and smooth out any problems between signing the sales contract and closing.
4) Hire a Home Inspector
The average home buyer doesn’t know what problems to look for when they tour a home — hairline cracks at the top of door frames, grey mold-like discoloration around outlets, the right amount of attic insulation, and so much more. A home inspector can identify problems with the home and warn you which ones are severe, which ones could affect your energy usage, and which ones are easiest to improve.
Let’s Make the Offer!
Your real estate agent will guide you through the process of making a purchase offer on the property. This includes comparing sale prices of similar homes in the area and helping you determine what a suitable offer might be.
You should also expect to put down a deposit called “earnest money” to show that you really do intend to buy the home. This amount is usually 1-2% of the total purchase price and will be later applied to the sale at closing. The check should not be made out to the seller. Earnest money funds are held in escrow until closing.
Once the sales agreement is signed, many things need to occur to complete the transaction:
- The title will be researched to make certain no one else has a claim to the property. Your purchase contract will include information about buying owner’s title insurance policy. This is a one-time expense.
- The property will also be surveyed to make sure the description is correct and accurate. The title company will issue a title commitment. Texas real estate buyers should review Schedule B of the document as it lists covenants, conditions, or restrictions on the property.
- You will receive the formal loan commitment letter from your lender stating the terms under which it agrees to lend money to you, and you will need to review it.
- The closing date must take place when the lender’s commitment expires and while the interest rate lock-in period remains valid. You will also get to make a final walk-through inspection.
Closing the Sale!
Closings can occur at attorney’s offices, bank offices, or title agency, but all are officiated by a title company representative or attorney so the process is completed smoothly and properly. As buyer, you will need to bring:
- Proof of homeowner’s insurance
- Proof of title insurance
- Funds due at closing (certified check or electronic transfer)
Congratulations! You’ve purchased your first home! And now it’s time to move in – which is another issue all its own.