October 29, 2007
By: Jim Oosterman
Home, Sweet Home. Buying your first home can be an exciting, as well as a life-altering experience. Going from renting to owning a home is a huge step. A home is an investment, with many benefits. Among them, you can deduct the cost of your mortgage loan interest from your federal income taxes. The value of your home is very likely to grow over the years, building equity that will help you with your future financial goals. You will enjoy something that is all yours, making your home a true reflection of your own personal style. With some careful planning and the guidance of good professionals, the purchase of your first home can be a dream come true.
Before you purchase your first home, it may be wise to pay off as much debt as possible. Use the money you have saved for a down payment and eliminate credit card and other high interest debts, even if this means that you put down less money on a home. The average interest rate for a credit card is around 14 percent, or more than double the national average for a 30-year fixed rate mortgage. Credit card debt will limit how much money you can borrow, as lenders often will not allow your monthly total debt to exceed approximately 38 percent of your gross (i.e. pre-tax) income. Determining how much house you can afford, is another step in the home buying process. Sellers respond best to a first time homebuyer who has a pre-qualification or pre-approval letter in hand and is willing to pass papers in 30 to 60 days. Many real estate agents encourage potential buyers to get pre-approved before showing homes. A pre-approval letter makes sellers much more confident in your ability to complete the home buying transaction. Pre-approval provides a maximum loan amount that a lender will provide, based upon your income and expenses. This avoids wasting time in looking at what many real estate agents refer to as “too much house”. Any qualified lender will be happy to take you through the pre-approval process in person, over the telephone, or online. As a general rule, your monthly mortgage payment, with taxes and homeowner's insurance should not exceed one-third of your gross monthly income. Also, determine how much money you will have for your down payment. First time home buyers with a steady job and good credit can typically make a minimal, or even no down payment. Make sure you budget an extra three to five percent of additional money to pay for closing and other incidental costs that may arise. Another important consideration is to choose the type of home you want, i.e. single family, condominium, or multi-family. Condos and two-family homes can generally be a good option for the first time homebuyer, but they are not for everyone.
There are different types of mortgages including fixed rates and adjustable rates, or some combination of both. The government agencies called Fannie Mae and Freddie Mac offer a wide variety of mortgage programs that are geared for first time homebuyers, and these programs are made available through banks and mortgage companies. Community banks and other lenders also have many other programs available for first time homebuyers, offering creative financing. Each year, the department of Housing and Urban Development (HUD), gives states money to help low to moderate-income families with down payment assistance programs. State funded programs like MassHousing also have programs designed specifically for the first time homebuyer. Many homebuyers may qualify for these programs, but there are restrictions and limitations, too. A good lender will know about these programs and discuss all of the mortgage options available, to assure you get the home loan that is right for you.
When evaluating a home, choose three or four neighborhoods that you are interested in based upon your needs, such as schools, safety, shopping, recreational facilities, and other criteria. Do not expect to see more than five to seven homes in one day as you simply will not remember them all. When looking at homes, carry a notebook or notepad with you to write down what you like and dislike about each of them. After looking at several homes you will begin to form comparisons and get a sense of which homes and properties you like best. Ask to see them again, because each time you look, you will notice more elements to the house that may have been overlooked the first time around. After seeing your favorite homes more than once or twice, buy the home that is the best match for you. When putting in an offer, consider the following: Is the asking price in line with the prices of similar homes in that area? What is the condition of the home? How long has the house been on the market, and how much of a mortgage is going to be required? You want to make sure that you can afford the home in its entirety. It is very important you really like the house you choose, because chances are this will be your largest investment to date. By following some of these guidelines, and by working with a real estate agent and a mortgage lender you trust, your first home buying experience can be truly wonderful and rewarding, with many years of happiness ahead.