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The Home Buyer’s Guide to Success!

What are the advantages of buying versus renting?

When you own a home, it’s more than just a residence: it’s an investment, and for many people it’s the largest investment they will make. Money that is put into a mortgage will create value in several areas. As the loan principal is paid down, you build equity in the home. You can deduct mortgage interest and property taxes from your Federal and State income tax returns. The net worth of your home can also increase over time, as local property values appreciate. By comparison, money spend on a rental is a pure, expense with no added value or return on investment other than the use of the residence.

Am I ready to buy a house?

Purchasing a house is not a casual decision for anyone, and that’s especially true for first time buyers. When weighing the pros and cons of home ownership, it’s important to take a clear appraisal of your finances. While everyone has a different situation, there are a few rules of thumb to keep in mind-

  • Stable income and employment history- having a reliable source of income is critical.
  • Paying bills on time- good habits for keeping bills up to date are a solid indicator that you are ready for the responsibility of a mortgage.
  • Existing debts- if you are already stretched thin by a car payment, credit card debt, or personal loans, you’ll want to reduce or eliminate those debts before taking on a mortgage.
  • Making the down payment- saving money to make a down payment will give you more options as a buyer, and also serve as a reality check of your commitment level.
  • Making the monthly payments- when you sign your name to a mortgage you are making a long term commitment of payments month in and month out, as well as upkeep and maintenance costs.

What are my first steps?

Once you’ve decided you’re ready to buy a home and have calculated your finances, you should make a list of your requirements. Include everything you can think of, from how many bedrooms and bathrooms you need to what the perfect yard would look like. Once you have a complete list, rank the items in priority order. This will help as you begin to research available homes in your desired areas. You can drive through local neighborhoods and get an idea of what houses are selling, and for how much. The local newspaper and online classified ads are a great way to familiarize yourself with local real estate trends.

How much money will I need?

Actual dollar amounts will be dependent on such things as the price of the home and the terms of the mortgage, but there are three primary expenses that you’ll need to plan for. The first is the deposit you put on the house when making an offer, demonstrating that you are a serious buyer. This money is usually held in escrow, and would be returned if the deal is not completed.

The down payment is the largest of the lump sum payments you’ll need to make. Typically 10-20% of the total purchase price, you’ll want to make the biggest down payment you can afford to reduce the cost of your mortgage. First time homebuyers can qualify for FHA backed loans, which allow for as little as 3.5% down.

Lastly, the closing costs are paid at the purchase settlement when the last of the paperwork is signed. Closing costs will average roughly 4% of the total price of the home, and cover things like lender fees and other related charges.

What other expenses will I have?

Compared to renting an apartment, home, or condo, there are some differences in monthly costs when you own your own home. You’ll need to make deposits and open service accounts with all your utility providers- something that often comes bundled with rentals. You may also be subject to annual association fees. It’s also important to budget for maintenance and repairs, for anything from plumbing or roof leaks to lawn care. You’ll be responsible for taking care of everything on your property.

What does my mortgage payment cover?

There are four primary components to your mortgage payment-
  • Payment on the loan principal- this is the amount of money actually borrowed
  • Interest paid to the lender- earnings paid to the bank or financial institution
  • Insurance- covering the property in case of flood, fire, and other catastrophic losses
  • Taxes- any state and local property and other taxes
  • Interest can account for the major share of the money you spend over the life of a mortgage, something which can be mitigated if you are able to make additional payments towards the principal. The lender wants to get paid however, and most mortgages are structured so the bulk of the interest is paid early on.

How can I find the home that’s right for me and my family?

The best way to find a home that fulfills your needs is to determine those needs in advance. As mentioned earlier, make a list of everything you think your perfect house would include. This might entail things such as proximity to schools or convenient shopping, ranch style floor plans versus split level designs, a yard big enough for a swimming pool, or maybe a three car garage. By prioritizing this list you’ll be able to decide what features are ‘must haves’, and balance your requirements with your budget.

What is a fair offer?

Your agent will help you throughout this process, but generally speaking, you should make an offer that is in line with other similar, local properties that have had recent sales. If the home is in need of an inordinate number of repairs, factor that into your offer. It’s a good idea to have a certified home inspection done by a neutral party. Other things to consider-

Has the house been on the market for a long time, and are there other homes for sale in the neighborhood? If so, the seller may be motivated to take a lower offer.

How much can you afford? By getting pre-qualified for a mortgage, you’ll know exactly what your top limits are.

How badly do you want the house? Sometimes we just really want something, and are willing to pay a premium. There’s nothing wrong with that, but ideally you will set your limits in advance, so you can avoid making an emotional decision that doesn’t fit your budget or requirements.

My offer was rejected, what next?

This is common in any real estate transaction, and typically is just the start of the negotiation process. There are many areas of potential compromise in a home sale, from splitting closing costs to covering repairs or even including things like installed appliances and furniture. As you negotiate, stay level headed and focused on your budget and requirements.

My offer was accepted, what happens now?

When it’s time for the closing, it’s common for all the concerned parties to have a meeting to sign the paperwork. This could include yourself and the seller, your respective brokers, and a closing agent. There is going to be a lot of paperwork, so don’t be afraid to read things carefully and ask questions. Prior to the closing, your lender should give you a packet of information that explains the various costs and any required documentation.

What about homeowner’s insurance?

You’ll be required to have proof of insurance at the closing, to protect you as well as the lender. Your insurance agent will play an important role in your life as a homeowner, and it makes sense to involve them in the process early on.

Should I get a home warrantee?

A home warrantee can safeguard you from unexpected expenses, like repairs to appliances, plumbing, or electrical systems not otherwise covered under the homeowners insurance. A warrantee will typically cover the first year you are in the house, which is attractive for buyers who may be on a tight budget as they adjust to new expenses.

Do I need an escrow account?

The escrow account for your mortgage is normally set up by the lender as a mechanism to store funds needed for annual insurance and tax payments. By keeping this money in escrow, the payments are assured of timely remittance, protecting the borrower and the lender.

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