12 must-do's for the first-time homebuyer
Are you a first-time homebuyer eager to get into the market? Here are steps to take to help you decide whether you're ready to take the plunge.
1. Check the selling prices' of comparable homes in your area. Web sites like Zillow and Homegain can give you a general idea of what you should expect to pay. You can also do a quick search of actual multiple listing service, or MLS, listings in your area on a number of Web sites, including the National Association of Realtors.
2. Use a mortgage calculator to get an idea of what your monthly mortgage payments would be if you bought today.
3. Find out what your total monthly housing cost would be, including taxes and homeowners insurance. In some areas, what you'll pay for your taxes and insurance escrow can almost double your mortgage payment. According to the Insurance Information Institute, the average yearly premium can range from $477 a year in Utah to $1,372 a year for unlucky Texans.
To get an idea of what you'll pay in insurance, pick a property in the area where you want to live and make a call to a local insurance agent for an estimate. You won't be obligated to get the insurance, but you'll have a good idea of what you'll pay if you do buy. For an idea of what you'll pay in taxes, Zillow publishes property-tax information for homes all over the country. Just remember that exemptions and the intricacies of local tax law (like Florida's Save Our Homes value cap) can create differences between what a homeowner is currently paying and what you can expect to pay as a new homeowner.
4. Find out how much you'll likely pay in closing costs. The upfront cost of settling on your home shouldn't be overlooked. Closing costs include origination fees charged by the lender, title and settlement fees, taxes and prepaid items like homeowners insurance or homeowners' association fees.
5. Look at your budget and determine how a house fits into it. Fannie Mae recommends that buyers spend no more than 28 percent of their income on housing costs. Go much past 30 percent and you risk becoming house poor.
6. Talk to a reputable Realtor in your area about the real estate climate. Do they believe prices will continue falling or do they think your area has hit bottom or will rise soon?
7. Remember to look at the big picture. While a buying a house is a great way to build wealth, maintaining your investment can be labor-intensive and expensive. When unexpected costs for new appliances, roof repairs and plumbing problems crop up, there's no landlord to turn to, and these costs and can quickly drain your bank account.
So consider whether you're ready for the expense and effort of homeownership before pulling the trigger.
Prepare for the huntIf the numbers make sense for you, taking a few steps at the beginning of the homebuying process can save you time, money and aggravation.
1. Examine your credit. Right now, blemished credit or the inability to make substantial down payment can put the kibosh on your homeownership plans. That's why it pays to look at your creditworthiness early in the home-buying process. Get your free annual credit report and comb through it for errors and unresolved issues. If you find mistakes, contact the credit reporting bureau to make sure they are corrected. It's also a good idea to get your FICO score, which will cost you a small fee.
2. Get your docs in a row. Collect pay stubs, bank account statements, W-2s, tax returns for the last two years, statements from current loans and credit lines, and names and addresses of your landlords for the past two years. Have them ready to show to the lender. This may seem like a lot, but in this age of tight credit, don't be surprised if your lender needs a lot in the way of documentation.
3. Find lenders and get preapproved. Getting preapproved for a mortgage helps you bargain from a position of strength when you are house hunting. The institution where you bank and a local credit union are good places to start your search. Applying to multiple lenders in the same month helps increase your chances of getting a loan approved at the best rate possible without dinging your credit score too much.
4. If at first you don't succeed, try, try ... the government? If you can't find a bank willing to lend to you -- and in the current tight credit market, it's possible you won't -- consider getting an FHA loan. The Federal Housing Administration has a program that insures the mortgages of many first-time homebuyers. As a result of this guarantee, lenders who might otherwise feel queasy about your qualifications will be more inclined to lend to you. As a bonus, the FHA only requires a 3 percent to 3.5 percent down payment from first-time homebuyers. You can find lenders that work with the FHA in communities across the nation.
5. Finally, don't forget about the enhanced first-time homebuyer tax credit. Get your hands on Form 5405 ahead of time and send it in with your tax return immediately after your home purchase to ensure you receive the $8,000 credit as soon as possible, especially since the credit is set to expire Nov. 30. How's that for a housewarming gift?
Credit Learning Articles
What is a Mortgage?How Do I Get a Mortgage?Fixed Rate MortgagesAdjustable Rate MortgagesAre You Eligible for an FHA Loan?Why Should I Refinance My Home?Subprime LendingWho is Fannie Mae?Who is Freddie Mac?What is "PMI"?What is a Reverse Mortgage?What is a Loan Origination?How long will your house last?The good-faith estimate.Should you Buy or Rent?Mortgage PointsPre-Qualified buyers have the edge?10 Things to ask your Lender?Which type of lender is right for you?Questions to expect from Lenders?Necessary paperwork for a buyerWhat to expect on Closing Day.Understanding the Escrow Account?10 Biggest home buying Mistakes?