In October 2014, 29% of home buyers were first-time home buyers, according to the National Association of REALTORS®.
So now, in November, with mortgage rates now averaging less than four percent; and with rents rising faster than home values, the percentage of first-time buyers is expected to climb. It’s cheaper to buy than to rent in many U.S. markets.
More than 6 million U.S. consumers will buy a home between now and the end of 2015. If you’re planning to be among them, you’ll want to make a plan for your purchase.
Follow these steps before you start your search. By asking good questions, you’ll have a firmer grasp of the home buying process and, also, of your finances.
Both will help you be a better buyer.
HAVE YOU PLANNED FOR HOMEOWNERSHIP?
Home buyers aren’t born overnight. The decision to buy a home is one which can take day, months, or even years.
There’s no “right” or “wrong” timetable for it.
For many people, buying a home just happens when the time is right. Maybe you’ve outgrown your current home, or are growing your family, or are moving to a new town. Or, maybe your rental lease is ending and you’ve decided against renting for another 1- or 2-year term.
Regardless, you won’t decide to buy a home overnight. And, with all the time you’ll spend asking “is it a good idea to buy a home?”, you’ll have ample time to plan ahead.
Pre-home buyers should take a realistic look at their personal finances, as well as their goals for the future.
Using a mortgage calculator may come in handy. There’s more to owning a home than low mortgage rates and a “good deal”.
HAVE YOU CONSIDERED THE COSTS OF HOMEOWNERSHIP?
Deciding whether to buy a home or rent? Make your current finances a major factor because, although mortgage payments may be lower than comparable rental costs in many U.S. cities, the ongoing costs of homeownership are often much higher.
Remember — homeowners with a mortgage are responsible for more than just the mortgage. Homeowners are also responsible for annual real estate taxes and, in some cases, annual or monthly assessments to a community.
Plus, the cost of homeowners insurance can be higher than the cost of renters insurance. Few home buyers plan for these increases in costs.
Furthermore, homes — even new ones — require maintenance and upkeep.
A good rule of thumb is to expect annual maintenance costs to average approximately 1.5 percent of your home’s value. A $200,000 home, therefore, will likely require $3,500 in annual upkeep.
This upkeep cost may include the cost of new appliances; landscaping costs; window washing and gutter cleaning; and more.
Have a grasp on your income, your debts and your ongoing credit obligations to make sure you’re using your available money wisely.
HOW MUCH HOME CAN YOU AFFORD?
“How much home can I afford” is among the most common home buyer questions. However, it may be the wrong financial question.
Instead of seeking your maximum home purchase price, it can be better to determine the maximum monthly payment you can reasonably manage, and then work backward using mortgage rates today to determine your maximum home purchasing power.
A mortgage rate change of just 1 percentage point, for example, can raise or lower your purchasing power 11%. Similarly, real estate taxes may be lower in a mature neighborhood as compared to one which is newly-built; and, association dues for a condominium can vary from building to building.
When you focus on a maximum monthly payment instead of a maximum home purchase price, you can be sure that you’ve made a budget which accounts for all of a home’s ongoing costs — not just its principal + interest.
HAVE YOU DECIDED ON YOUR DOWN PAYMENT, IF ANY?
Before buying a home, financial experts often recommend that home buyers have 6 months or more of cash reserves set aside to cover living expenses, real estate taxes, and other monetary obligations in the event of a catastrophe.
These funds should not be used for a home down payment. They’re a cushion against emergency. And, once those funds have been set aside, home buyers should consider their home down payment.
Down payments on a home can range from zero to twenty percent or more.
For buyers wishing to make the smallest down payment possible, the VA loan via the Department of Veterans Affairs and the USDA loan via the U.S. Department of Agriculture both offer no down payment loans.
There are also special programs via the Federal Housing Administration (FHA) and Fannie Mae which allow for $100 down or a similarly-low down payment.
However, each of these programs have unique eligibility requirements. For most home buyers, the minimum downpayment required is 3.5 percent, available with a standard FHA loan. Borrowers using conventional financing via Fannie Mae or Freddie Mac should expect five percent down, at minimum.
ARE YOU PREPARED TO PAY FOR CLOSING COSTS?
In addition to a down payment, home buyers should set aside monies for home and loan closing costs, while leaving an ample amount of funds for living expenses and emergencies.
The Department of Housing and Urban Development (HUD) suggests that home buyers plan to have 4 percent of a home’s purchase price ready at settlement to account for costs and expenses, which include lender fees, title fees, government taxes and real estate taxes.
Closing costs vary by state. According to Bankrate.com’s 2013 Closing Cost Survey, closing costs are highest in Hawaii, Alaska, and South Carolina. Costs are lowest in Wisconsin, Missouri, and Kansas.
Some real estate contracts are written such that the home seller pays for all, or a portion, of the buyer’s closing costs. This is an arrangement known as Seller Concessions. Sellers may contribute toward closing costs and prepaid items up to 6% of home’s purchase price.
Your lender can also help you to lower your closing costs using a zero- or low-closing cost mortgage. If bringing cash to closing will deplete your personal reserves, have a talk with your lender about your options.
HAVE YOU REVIEWED YOUR CREDIT REPORT FOR ERRORS?
For most mortgage loans, the rate you get from the bank is linked to your personal credit score. This is because your credit score reflects the likelihood of your loan defaulting and your home going into foreclosure.
Higher credit scores are linked with lower default rates. This is why home buyers with high credit scores get access to the lowest rates available — the loans represent less risk to the lender.
However, it’s been said that as many as one-quarter of all credit report contain an error. Some of these errors are minor and have little effect on the overall report. Some, however, are major and can affect a score by 100 points or more.
By law, U.S. consumers are permitted to receive one free copy of their credit report per year. As earlier in the home buying process as possible, you should execute on this right. Order your free credit report and review it for errors carefully. Correct or dispute the issues you uncover.
DON’T WAIT TOO LONG TO BUY
With mortgage rates at six-month lows, first-time buyers with a plan to purchase in spring or summer of 2015 may want to move their time frames ahead. Home affordability may be worse later in the year.