By Andrew Housser
Thanks to historically low mortgage interest rates, more people are buying their first homes. In fact, pending home sales hit a six-year high in June, according to the National Association of Realtors. Owning a place to call home is part of the American dream, but for those who are not careful, this major life purchase can quickly become a nightmare. Make your first home-buying experience a success by following these steps.
1. Get pre-qualified. Before beginning your house hunt, obtain pre-approval for a mortgage loan. A mortgage lender will evaluate your income, debts and assets to identify the amount it determines you can afford. The resulting pre-approval letter is not a commitment to grant you a loan. Rather, it shows sellers that you have the financial ability to complete a purchase. The lender might pre-approve you for more than you feel comfortable paying. Be sure to do your own math to decide how much you can really afford. Calculate your monthly budget, and remember to factor in additional house-related expenses like homeowner association dues, property taxes, insurance, maintenance and utilities. Do not buy a more expensive home than you can really afford simply because a lender will give you the loan.
2. Find a reliable realtor. The right real estate agent can help you find the right home for you. If you decide to work with a realtor, referrals from friends and family provide a good starting point. Meet with several agents to find one whose personality and work style mesh with yours. Consider hiring an agent who is a member of the National Association of Realtors. They must abide by a strict code of ethics. Be sure your agent will only represent you, not the seller of the home, because you should feel confident that your agent is looking out for your best interests.
3. Choose the right mortgage. Your lender can advise you on the best mortgage programs for your situation. For instance, first-time buyers may qualify for a state-backed, lower-interest mortgage program that requires little money down. Federal Housing Administration (FHA) loans are government-backed loans. They require a low 3.5 percent down payment and may be easier to qualify for, especially if you are just starting your career or have a lower credit score. With traditional mortgages, many first-timers opt for a 30-year loan with a fixed rate of interest over the life of the loan. If you think you will be moving within five to 10 years, some sources suggest an adjustable-rate mortgage (ARM). Be cautious with ARMs, though – if you wind up not moving and rates increase rapidly, or if the loan requires a balloon payment at the end, you could be stuck with more payment than you can afford.
4. Make a sensible down payment. A 20 percent (or more) down payment will save you from having to make monthly private mortgage insurance (PMI) payments. PMI offers lenders some financial protection should a homebuyer default on a loan. However, it is not a good idea to deplete 100 percent of your savings simply to forego the PMI cost. It is better to have an emergency fund and to pay a little extra each month for PMI.
5. Hold off on purchases. When the contract is signed and the closing date set, it is tempting to start shopping for major home purchases such as a new refrigerator, washer and dryer. But think carefully. Do not open a new line of credit before your closing date. Lenders often pull credit reports right before the closing to make sure your financial situation has not changed since the loan was approved. A new line of credit, or even having had a company check your credit rating, could cause your score to drop.
It is difficult to find a home – especially a first home – that has everything on your wish list. Making a smart, money-wise choice on a home in which you feel comfortable is a good start. With good fortune, the home will appreciate in value so that you can apply some equity toward your next home purchase. Keep in mind that your first home should be a sound investment that is affordable, bringing you peace of mind as well as daily shelter.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.