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Buying your first home is a lot more complex than it may seem. Luckily it gets easier each time you do it, which is why you should get a realtor to help you out in your search. Here are all the things I want my clients to understand before I sign with them.
PRE-APPROVAL
1. First and most important, always get pre-approved before house hunting (unless you are paying in all cash).
2. Shop around for loans, get educated on options available for you, and all the different requirements.
3. Determine what you think you can afford to put as a down payment and a comfortable monthly payment range you would like to fall in to.
Most first time home buyers think they will need to put down 20% as a down payment, but that's not true.
4. The average down payment for first time home buyers is only 6%.
5. VA loans for veterans require 0% down. (620+ credit score typically, but no set term)
6. USDA loans require 0% down. (640+ credit score)
7. FHA loans only require 3.5% down. (580+ credit score, certain FHA lenders take as low as a 500 with a higher down payment)
8. Conventional 97 loans require 3% down. (620+ credit score)
You can always put more down to get a lower interest rate and a lower monthly payment. If you put 20% down, it gets you out of paying mortgage insurance. Mortgage insurance is typically 0.55%-2.25% of the original loan amount per year. This can be an extra few hundred dollars on top of the principle and interest each month. There are a few other ways to avoid paying mortgage insurance, but they will all cost you in some way. Once you have shopped around and picked out the best lender for you,
Be aware that deals can fall apart at any time.
If you finance a car or forget to pay your credit card balance that month, it can alter your credit score and could put you below your lender's requirements for the loan terms they previously offered. Talk to your lender, ask where you fall in their requirements and how to keep the deal alive.
Once you know what amount you are pre-approved for, you can start looking at houses in your range. I recommend starting at the low end of your budget. If you can find homes you want to live in at that price, there's really no reason to search the high end of your budget. Even if the high end of your budget is only $15,000 more than the low end of your budget, the interest on that 15,000 could end up costing you double that.
WHAT OTHER COSTS TO PLAN FOR
Preparing a budget for your monthly principle payment and interest is a great start, but there are a few more costs to owning a home you need to add in to the budget.
Taxes
Property taxes are calculated as a percentage of a home's appraised value. So when you are looking at an appraisal report on your future home, calculate your real estate taxes from this. You can also ask your realtor as they have access to previous tax year reports. In Hamilton county, property taxes average at 0.86% of the appraised value annually. For a home appraising at $150,000, expect taxes to be around $1,300 annually.
2. Closing costs
Closing costs are one of the things that are hard to plan for before you have picked your home. Sometimes the seller agrees to pay for certain closing costs, sometimes it all falls on the buyer. Closing costs can include your appraisal, title insurance, attorney fees, prorated taxes, and more. Typically the rule of thumb to calculate what you will spend is 2-5% of the home's cost. Often the closing costs can be included in your mortgage, rather than out of pocket.
3. Homeowner's insurance
If you are relying on having a mortgage to pay off your new home, you will be required to have homeowner's insurance. Regardless, if you are paying cash for your home, you likely want your investment protected from natural disasters and possibilities like water damage, house fires, theft, hail damage, and even bodily injury. Your annual cost depends on how much it would cost to rebuild your home, what kind of coverage you want and which insurance carrier you decide to go with. Some car insurance companies offer a bundle discount if you add homeowner's insurance. In Tennessee, the average price for home insurance is $1,240. Taxes and insurance are a much smaller portion of your budget than your mortgage, but it is still very important to know all your set expenses.
4. Land survey
A land survey may be required by a mortgage company, but often the title company providing verification of the property's dimensions will work instead. If the home sits on multiple acres or you are just buying property, chances are you will have to pay for a survey.
5. How much does a realtor cost?
If you tell your realtor your budget is 200,000 for a house, the agent's commission simply gets taken out of the offer price at closing. So realtors are essentially free to buyers in most scenarios. In some rare cases when seller is unrepresented by an agent, the commission may actually be paid by the buyer. Even in these "for sale by owner" cases, the owner usually offers to pay the buyer's agent commission because it helps bring qualified buyers. The seller is the one netting from the sale, so they are the one seeing the seller and buyers agent's commission come out. So your housing budget is already set up for you to be represented by an agent for your first home purchase!
HOME INSPECTIONS
I highly recommend getting a home inspection on any home you go under contract on. You might think not getting an inspection could save you money, but if there are major hidden issues, it could cost you much more in repairs. Buying a home and taking out a mortgage is a huge expense, if you can not afford repairs, make sure you spend the extra money upfront with a trusted home inspector. Seeing pictures of some of the things home inspectors find are shocking. I would feel uneasy helping a client buy a house without getting it inspected first. I want all my buyers to get a great home and a great deal with no surprise maintenance right after closing on the deal.
HOW FAST TO PUT IN AN OFFER
In a hot seller's market, it may be necessary to make an offer quickly in order to not lose out on your dream house. As a realtor I can advise you on a reasonable offer to put in, what the home has sold for before, what other comparable homes sold for, but I can't put in an offer for you. A big regret a lot of buyers seem to have is not putting an offer on the first home they saw. They think they need to see more homes to make sure they are really in love. If you know what you want in a home and you find it- Don't hesitate. Realtors typically show you the home they think best suites your wants/needs first to give you a chance to put an offer in early, and to get your feedback before they show you more.
On the other side of that, in a market with more inventory, you are probably safe to sleep on putting an offer in. How well you sleep that night might be your answer. The longer the home has been on the market, the more room for price negotiation. Almost no offer is too low to put in writing and hope for a counter. If you are not needing to move right away, spend time in each area you are looking at houses in. Talking to potential neighbors and asking them what they like and do not like can help narrow down your search. In this type of market you probably do not have to put in a full price offer in order to get the house. You have a little more time to deal with negotiations and counter back and forth. In both markets, listen to your lender and realtor when it comes to making offers on your dream house.
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