I know several of you mentioned having financial goals of saving up for a down payment and purchasing a home in the next year or two. There are so many things to consider when purchasing your first home and although my husband and I researched and educated ourselves the best we could. Two years later, there are things I wish we knew back then.
- First Time Home Buyer Course
We attended a first time home buyer’s course a few months before talking with the bank’s loan officer and real estate agent. In the state of Washington in order to qualify for certain loans you are required to take this course. Although I wish we had done a little more research, because our income was too high and we didn’t qualify for a single program. We learned very little useful information (for us) and wasted a day in a classroom, but at the very least it was “free”.
- Debt-Income Ratio
Both my husband and I had excellent credit scores and had enough income to qualify for a loan on the modest home that we were seeking. But I wish I would have known how large a factor our debt to income ratio was in securing our loan. At the time of getting a mortgage (pre-Dave Ramsey) we had two auto loans, a large student loan, and I still but EVERYTHING on a credit card. I paid it off every month. I never carried a balance. But get this, the bank counts all current purchases on your credit cards as debt even if they aren’t “due” yet. If I would have known this I would have stopped using my credit cards a few months before applying for a mortgage. Get this, our debt owed was roughly 75% of our gross income at the time. Yikes! Pay down that debt before purchasing a home! Don’t necessarily close the “older” accounts though you don’t want your credit score to take a hit before applying for a mortgage.
- Interest Rate
Shop around for the best mortgage you can get, consider interest rate as well as closing costs and fees associated with your mortgage. Don’t have a bunch of banks pull your credit report but do call around and get estimates. Consider using a mortgage broker, often they can get you the better rate but they will charge you a fee for their service. So make sure the savings is worth the cost. We used a small local bank because we figured they would be the easiest to deal with, but they were too small and don’t carry mortgages. Our mortgage was of course sold to my 2nd least favorite bank of all time. They are a pain to deal with!!! If you don’t think 0.5% makes a difference… think again… on a $200K mortgage. It is a $60/month and $22,000 in interest difference.
- Real Estate Agent
Interview several real estate agents before you settle on one and even after you settle don’t be afraid to “fire” if you are not happy. A good real estate agent can save you time and money. We went with a well-known agent who ended up being way to busy to help us. So, finding a home and negotiating a deal was left up to us with very little to no direction which is NOT what you want as a first time home buyer.
Questions to ask your agent before hiring them: make sure they are able to show you homes and be contacted during the hours that work for you, their preferred method of contact (phone, email, etc.), their specialty (if you are looking at foreclosures or short sales you want an expert), the neighborhoods/cities they are most familiar with, and anything else that may be unique to your situation. HERE (Redfin Blog) are some good questions to get you started.
- Don’t Waste your Time (or your Agent’s)
If you know what you want or don’t want in your future house, I am talking about the ultimate deal breakers don’t compromise or waste your time even looking at houses that have these deal breakers. Deal breakers that can not be changed or would cost more than its worth to fix. Such as neighborhoods you would never live in or homes with pools or another major feature you do not want. Fixer-uppers if you don’t want spend the time or money to fix it up.
- Property Taxes
Know the rate of property taxes in the neighborhoods you are looking at to purchase a home. It makes a huge difference! Our house is on the edge of city limits. If we were less than 10 blocks further south our property taxes would be dramatically lower. One of my previous co-workers has a home that is just outside of city limits (same city as our home). Their house is double if not triple in house size, lot size, and over-all value and they pay the same property taxes as we do. You can easily find property tax information on Zillow.com
- Fixer Upper vs. New-ish Home
Your budget and the location you plan on buying a house will determine how much of a house you can afford. Our goal was to keep to as close to $150,000 as possible. In the city and neighborhoods we were looking at, this buys a 1970’s or older home that needs some cosmetic work. Although livable, you are going to have to ask yourself do you want to live with constant projects that cost a lot of time and money and that cheap vinyl flooring and bright red counter top for years??? Yes, you get to put in a lot of blood, sweat, and tears to make it your own… but is that what you want? Although, I love our fixer-upper home; I think next time we will go for a “new-ish home”.
- VA Loan
Given the fact that my husband is in the military we assumed our best route would be to apply for a VA loan. But, this was not the case. If you have a sizable down payment it is usually better to go with a traditional fixed-rate mortgage. The VA loan “helps” people get a loan who don’t have a down payment but there are much higher fees with a VA loan. I can NOT think of one good reason to get a home with 0% down! Don’t do it! Bad idea! Two reasons: You will pay a ridiculous amount in fees and interest and it makes it so easy to get upside down on your mortgage and get yourself into a lot of financial trouble in a hurry.
We started looking for a home the first week of January and did not close on a house until mid-May. During this time, we had 2 offers fall through on short sales, 2 house inspections, 1 contractor estimate, and viewings of more than 20 homes and spent hours each week combing through real estate websites. Be patient and do NOT settle! You will be living in this home for years and spending a lot of money to do so. You need to be 100% happy with your decision.
- 3-5 Years
We knew as a military family there would be a good chance we would be moving in the next several years. We were hoping it would be 3 or more years after we bought our home and it ended up being 2 years, 2 months. Financial experts recommend to live in a home for the very minimum of 3 years. The reason being it (hopefully) gives your property’s value enough time to increase to cover the large fees to sell your home. In today’s market(depending on where you live), it seems to be taking even more time.
- Short Sales
Short sales are NOT fun or “short” in time. What is a short sale? It is a property that is listed for a price less than what is owed on it. Most likely, the current residents have done everything in their power to sell their house but they can not get a price even close to what they owe the bank. Therefore, the current residents along with their real estate agent systematically lower the price of the home until there are offers. However, the bank has the final say in the matter. After an offer is presented to the bank, they can out right deny, or accept and forgive the deficiency that is owed, or accept but make the current resident pay the deficiency, or submit a counter-offer. The bank tends to take its sweet time making this decision.
One of the short sales we put an offer on was listed for $165,000. In reality the house was probably worth closer to $180,000 so of course there was a lot of interest. We put an offer in at 169,000 (the very top of our budget). We were the high offer and so it was submitted to the bank. It took the bank over a month to come back with a decision. They came back with a counter offer of $192,000 (that’s what was owed on the property). We told them to go ahead a keep their mess of a financial situation. 🙂
- Good Faith Deposit
Did you know the moment you submit an offer on a property you have to write a check? Neither did we. It is called a good faith deposit and you technically decide the amount of the check. In our price range, it typically ranged from a few hundred to a few thousand dollars. It is deposited in a third party account and basically ensures the current property owner that you are serious about purchase. You do get your money back if they deny your offer and you are unable to negotiate a deal with them. Or if during the housing inspection something significant is revealed that makes the purchase no longer feasible for you. But if you back out of the deal without good reason, the money is theirs to keep.
8 Things We Knew, but not Every First Time Home Buyer Knows
- PMI (Private Mortgage Insurance)
If you have a down payment of less than 20% of your purchase price you will have to pay for PMI. PMI rates vary between o.3% – 1.15% (2013 via Bankrate) per year of your original mortgage. On a $150,000 mortgage, it would be $38-$144 extra each month you will be paying. This extra payment does absolutely nothing for you. It helps protect the bank if you don’t pay your mortgage but you will still owe the bank the full debt. So, a complete waste of your money. Once you own 20% or more of your current home value, you can call your mortgage holder and request the PMI be removed. Avoid the headache and wasted money, and save up for a 20% down payment!
- 30 year vs. 15 year loan
Obviously, the less time to pay back your loan the less interest you will pay. Plus, your monthly payment is NOT a big difference. For a $150,000 mortgage the current approximate rates with outstanding credit is 4.52% for a 30 year and 3.55% for a 15-year mortgage (via Bankrate 1/09/13). Your monthly payments would be $761.81 (30-year) vs. $1076.01 (15-year) a $314.20 monthly difference. But here is the real kicker. You would pay $124,252.15 in interest (30-year) vs. paying $43,681.92 (15-year). Just by paying an extra $300/month, you will save yourself 15 years and $80,570!!! I don’t know about you, but that is a lot of money in our house!
You may be saying… “wait a minute Nichole, don’t you have a 30-year mortgage?” Yes, I do. Believe it or not we made this decision after months of serious consideration and it was pre-Dave Ramsey. The reason we selected a 30-year over a 15-year is because we knew there was a very good possibility of our current situation. Paying for a mortgage and rent simultaneously. We didn’t want to stretch ourselves thin and get into a world of financial hurt. So we selected a 30-year mortgage. However, we spit shook and pinky swore that we would pay off the mortgage in 15 years, if not less. Why didn’t we refinance? We did the math (believe me I’m a nerd, I did the math 100’s of times) and we would pay more in fees than we would save in interest because we will most likely have it paid off in less than 8 years. With all this said, I still recommend going with the 15-year (or less) mortgage!
- ARM vs. “Normal” Fixed Rate Mortgage
ARM (Adjustable Rate Mortgage) is a mortgage that has an “initial interest rate” that is typically 3-5 years long. After this time, the mortgage is an adjustable rate (most likely adjusting sky-ward). Typically your interest rate will then adjust every year. Why are people tempted into these mortgages? The initial interest rate is significantly lower (currently 2.8-2.9%). Meaning, you can “afford” (read: not afford, but qualify for a higher mortgage) a bigger, more expensive home. People tell themselves, we will make more money in 3-5 years or we will sell our house before then so we don’t have to worry about the increased interest rate. Well, life happens, housing markets go down or become stagnant, and you are “stuck” with a house you can’t afford (couldn’t afford it in the first place). These mortgages have gotten a lot of people in a world of hurt and have ruined them financially. Simple advice, stay far, FAR away! Go with a fixed rate mortgage, you can send me a thank you email when you can afford your monthly payment in 5 years and your neighbor has to foreclose because they went with the ARM.
- Neighborhood is everything
The most important factor when buying a home is the neighborhood. The quality of homes around you. The crime rate. The quality of schools. Lot sizes. Eye sores or obnoxious sounds (highways, train tracks, etc.) Also, it never hurts to get a home with a magnificent view. Although, never pay extra for that view if there is a chance of a structure blocking that view in the future. This will all determine the value of your home and the ability to sell your home in the future. Even in poor markets, homes in good neighborhoods that are competitively priced will sell. It is also, the one thing you can not change about your home once purchased. So you need to make sure you are happy with your neighborhood before purchasing.
Have your future in mind when viewing possible homes. How many years will you live in this home? Will you have children in that time? Pets? In-home business? Visiting guests? Will you grow old in this home? Make sure your home will fit all your needs for at least the next 5 years if not 10 years or more. You don’t want to out-grow your home in just a couple years time. It would be an expensive and stressful mistake.
- No New Debt
Once your loan is being processed you may think it is okay to go purchase those kitchen appliances you need for your new home on a new store credit card, because you save 10% by using their card. Or maybe, you have had it with your old clunker of a car and go to a dealership and have them run your credit, and maybe even purchase a car with a payment plan. DON’T DO IT! Any type of new loans or hits on your credit rating can make you no longer qualify for your mortgage. I never support going into debt. But this would be an especially bad time to do so. Your new house is not yours until you sign the closing papers and the keys are handed to you.
- Costs Add UP
You have the 20% down payment! Great! 🙂 But you do have more cash than that right??? You will also need money to pay for inspection fees $500-700, closing costs typically 2-4% of purchase price. Moving expenses, which can range from $100’s to $1000’s. Oh, you want electricity, water, sewer, and garbage for your home? Right? If you were not a previous customer with some of these companies they may charge you deposits to start an account with them, which can add $100’s. Then you get the keys and you are so excited but soon realize that the carpets need to be professionally cleaned and the walls need to be painted. Surprise! The previous owners furniture seemed to disguise these issues when you last looked at the home. Not huge expenses but adding a few $100’s. If you have a yard you will be needing a lawn mower and other tools to keep things tidy. Then someone did tell you that houses do need occasional repairs, right? My best advice, have as much money saved as possible, so your first home will be a blessing and not a nightmare! 🙂
- Home Warranty Insurance
If you are purchasing an older/fixer-upper home look into adding a negotiation of the seller purchasing Home Warranty Insurance for you. This will cover plumbing, electrical, appliances and other issues that may come up in the first year of owning your new to you home. If the seller is unwilling to purchase it for you, look into buying it yourself. Depending on your coverage, it will cost you $300-$600 for the year and you will have to pay a small (ours was $60) co-pay if you do have to use it. This could save you from a huge financial headache if something major goes wrong in your first year of home ownership. You can buy this insurance at anytime, you don’t have to be a new home owner.
I am sure I forgot something but, my hope is that at the very least I gave you some things to consider with your first time home purchase. Please remember I am NOT an expert. My advice is based on my personal experiences and the research I have done regarding buying a home over the past several years.
Do you have any advice for a first time home buyer? Or what do you wish you knew before purchasing your home?
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