10 things first-time home buyers should know
You’ve got the right idea. Buying a home is likely the most important and positive financial decision you can make to help your family. It will impact your family in ways that go far beyond the financial. Here are the 10 things you really need to know before you buy your first home.
Home prices go up and down
Despite the likelihood that your home will appreciate at about the rate of inflation over the long haul, its value will fluctuate over time, meaning that it is likely your home will, if only for a short time, be worth less than you pay for it and perhaps less than the mortgage on it.
Real estate agents are paid by the seller
Generally, in the United States, even when real estate agents sign agreements to represent buyers, the agents are paid by the sellers. As a buyer, there is no reason not to work with an agent — just be aware that the agent is working on commission and will be eager to see you get into a home and may not be as picky about it as you are.
Mortgage rates below 5 percent are great
Mortgage rates as I write this article are just below 3.5 percent, which may be the lowest rate for mortgages in the history of the United States. If you find yourself paying a rate of up to 5 percent, you should consider that a great rate. Any rate under 7 percent will generally allow home ownership.
No prepayment penalties are allowed
For most mortgages that are offered in the U.S., no prepayment penalty is allowed. You can pay off your mortgage anytime, including when you refinance the mortgage to take advantage of lower rates. This means that fixed rate loans are, in essence, adjustable mortgages that only go down. You just have to reapply and qualify for the new mortgage.
Down payments can be remarkably small
Traditionally, a home buyer needed a 20 percent down payment. That changed a generation ago with the advent of mortgage insurance. Private insurers and the federal government (FHA) insure mortgages with smaller down payments. These programs allow you to buy a home with as little as 5 percent of the purchase price down.
Closing costs add up quickly
The closing costs, largely associated with the cost of borrowing the money to buy the house, will total more than 2 percent of the purchase price of the house. In addition, you’ll have to pay certain other costs at closing that aren’t really closing costs, but feel like they are. At closing you may have to pay prepaid interest and make a deposit to cover a portion of property taxes and homeowners insurance for next year. These costs can easily total 1 percent of the purchase price. Most lenders will allow the seller to pay these costs if you negotiate that up front in the contract and the appraisal matches the purchase price.
Qualifying for a mortgage is a challenge
First-time home buyers have a small advantage in the current market; many buyers today are among those who lost homes in the Great Recession and as a result have tarnished credit. First-time buyers should have perfect credit. Generally, without a foreclosure or bankruptcy on your credit report, you need two years of perfect credit — paying all of your bills flawlessly on time — to qualify for a market rate mortgage.
Cosigners help to cover income gaps
If you do not earn enough to qualify for the mortgage you need to buy the home you want, a cosigner will help you to qualify. If you have poor credit, a cosigner does not help.
You can’t borrow your down payment
Your lender will look carefully at your file for any evidence that you might have borrowed your down payment, including recent loans. If any portion of your down payment is a gift, say from your parents, you and they will be required to assert in writing that the financial help is a gift and not a loan.
Don’t apply for any credit before buying a home
In the six months or so before you buy a home, do not buy anything else on credit. Reject store offers for new in-store credit accounts. Don’t buy a car and finance it. Don’t apply for any sort of credit. Just having someone pull your credit report goes on your credit report and is viewed negatively by underwriters who fear that you may either be borrowing your down payment or fear that you will run up new debts you can’t afford after closing on the purchase of your home.
With just this little bit of knowledge, you are more prepared than ever to go out and purchase a new home.