Planning & Research
Take advantage of tools and tips to help you assess your buying power, decide where you’ll live, plan your search, and more.
Assessing Your Buying Power
Benefits & Responsibilities of Home Ownership
Owning a home verses renting has several financial advantages. Instead of rent checks paid and gone, when you make your monthly mortgage payment, you are in essence investing in your home and your future. As you pay down the mortgage loan amount and make home improvements, you build equity: the difference between what you owe on the loan and the home’s fair market value.
Another benefit of homeownership is that you can often deduct mortgage loan interest amounts and property taxes from your federal income tax if you itemize your return. Consult your tax advisor about your specific situation and see www.irs.gov/publications/p936/ar02.html. In addition to the financial benefits of owning a home, there are important responsibilities to anticipate: maintenance, repairs and improvements.
Get Your Credit in Order
Request and review your credit reports before you start looking for a home or going through the loan pre-approval process.
Mortgage lenders will be taking a close look at your financial history including income, credit score, debts and assets. You’ll be asked to disclose to the lender all outstanding debts, including any loan or financial obligations such as credit card balances, alimony and child support payments, car loans, medical bills, etc. Lenders will also want to see how much money you have in savings, after deducting your down payment amount.
You’ll also be asked for your employment history and will need to show job and income stability and security.
Understanding the Credit Score System
The best-known and most widely used credit score model in the United States is the Fair Isaac Corporation (FICO) score and is calculated statistically with information from a consumer’s credit files. It provides a snapshot of risk that banks and other institutions use to help make lending decisions. Applicants with higher FICO scores may be offered better interest rates on mortgage or automobile loans.
Visit annualcreditreport.com. This is the only authorized online source for totally free credit reports.
By federal law, you are entitled to a free credit report once every 12 months. This site gathers your information from each of the three nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. Check your report and look for any misinformation. If you find an error, you should address and correct it right away with the individual credit bureaus.
Take these steps to improve your credit score:
- Always pay all bills on time, even if it means making only the minimum amount due. Your payment history counts for 35% of your FICO score, the most heavily weighted category.
- Pay down your outstanding debt. Lenders look at the amount you owe verses your credit limit on charge cards. If the amount you owe is close to the limit the company has set, it is likely to have a negative effect on your score. You can also ask for a higher line of credit to change the ratio, but don’t be tempted to increase your outstanding balance.
- Don’t start applying for more credit cards or other types of loans while you are house hunting.
Determine How Much Debt You Can Afford
Take a realistic look at how much future income you anticipate to have and how many expenses you expect to incur. Most lenders use the debt-to-income ratio that includes mortgage, property taxes and insurance, which is generally 28 to 36% of your monthly gross income. Remember, the lender will tell you how much you are qualified to borrow, not necessarily how much you can afford. Only you know how much you can comfortably handle, what your other expenses are, how much you need to save and what kind of lifestyle you wish to maintain.
When calculating your monthly budget, don’t forget to include homeowner insurance premiums, property taxes, any homeowners’ association fees, utilities and monthly maintenance in addition to your other expenses. Your Realtor® can tell you how much property taxes are for each property.
Get Pre-Approved for a Mortgage
The pre-approval determines two things: if you are qualified for a home loan and the maximum mortgage amount you can afford. Lenders will review your financial circumstances including income, debts and assets to determine the loan amount for which you qualify. The lender will issue a letter indicating the amount you are qualified to borrow. Mortgage pre-approval gives you a couple of advantages. First, it lets you know how much money you have to work with. Second, it signals to sellers that you are serious about an offer and that you can indeed qualify for the necessary mortgage to complete the purchase. If you make an offer on a house with multiple bids, being pre-approved can often give you an edge over other purchasing offers.
Save Enough for an Adequate Down Payment
There is a wealth of online mortgage calculators that can help you determine what you can afford.
A down payment is a percentage of the cost of the home that is paid up front. Down payment requirements vary, but 10 to 20% of the home’s price is often needed to secure the best mortgage rates. The higher the down payment, the lower your monthly mortgage payments will be. Federal Housing Authority (FHA) loans, however, require roughly 3.5% of the home price as a down payment, which is why these loans are often attractive for first-time buyers or those with lower credit scores.
Deciding Where You'll Live
Different Home Sales on the Market
In addition to traditional home sales, you may come across U.S. Department of Housing & Urban Development (HUD) foreclosed homes on the market. When someone with a HUDinsured mortgage can’t make the payments, the lender forecloses on the home and HUD takes ownership. Typically, HUD strives to sell the homes at market value very quickly. For this reason, a HUD home may be good a deal for first-time homeowners. Previously foreclosed homes, sometimes known as real estate owned (REO) properties, may also be good opportunities for first-time buyers. These properties are usually owned by banks that are eager to sell.
Homes known as short-sales (meaning the seller’s lender accepts less than the amount owed on the home to release the mortgage) and auctioned homes may also be attractive deals. Be prepared as these types of listings often require maintenance and repair work, as the homes may have been empty for a while or may have been neglected.
There also may be programs sponsored by your state or local government or other organizations to help you buy your first home.
What Type of Home do you Want?
What is your ideal home? After you’ve determined what type of home you want, there are some other more specific questions you should answer.Download the checklist
Single family home with a yard; a condominium with no lawn maintenance, a town home, a co-op or a zero lot line? If you aren’t sure, tell your real estate professional that you are open to several types. It’s fine to dream big, but now that you are serious about buying, it’s probably best to limit yourself to visiting areas that are within your budget. Generally speaking, it’s best not to buy the biggest or most expensive house in the neighborhood, especially for your first home purchase. That’s because you want to make sure you can get your money back at resale for any changes or improvements you make to the property.
Old or New Home? Town or Country Setting?
Think about the proximity of different neighborhoods to leisure activities, work, friends and family. Some neighborhoods blend both individually styled, old and new construction, but subdivisions generally feature homes built in the same era with 8 or 10 basic models available. You must also consider if you want to walk to amenities like the library, dining and entertainment. If you prefer a more country-like setting with such necessities and amenities a drive away, a subdivision may fit your wants.
Do Your Research and Ask your Real Estate Professional for Guidance
What are neighborhood demographics and median incomes? How is the school district? Don’t forget to check crime statistics, too. You can view neighborhood statistics at realtytrac.com. It’s also a good idea to get out and walk in the neighborhoods you are considering and get a feel for the areas. Are the other homes well tended? What is the traffic like? Are there any visual distractions, such as large power lines, water towers, signage, unsightly walls or unattractive commercial buildings? Visit the neighborhoods at different times of the day to see how traffic and noise levels might change.
Don't Forget Commuting Time
How far do you want to travel to work? Calculate how much commuting time will be needed each day and how that will affect your schedule, budget and lifestyle.
Planning Your Search
Work with a Real Estate Professional
First-time buyers need an experienced, full-time real estate professional who has access to the MLS or Multiple Listing Service. Having a seasoned professional to guide you will be invaluable. Most real estate professionals are paid a commission based on a percentage of the home’s sale price, usually paid by the seller at closing. Commission percentages vary depending on the market and state where the property is located.
With most transactions, there are two realtors involved; the buyer’s agent and the listing agent. In this case, the two agents split the commission, and a portion of the remaining commission (usually 30 to 50%) is usually paid back to their respective real estate brokers or offices. A buyer’s agent means that the real estate professional does not ever represent sellers. Ask friends and family for referrals, or check newspapers and websites to see which agents have active listings in the areas you are interested in living. Since first-time buyers often need more assistance and guidance than veteran buyers, don’t be afraid to ask questions about how the agents work, how available they are to answer questions, and how much time they have to devote to you and your home search. Choose a knowledgeable agent with whom you are comfortable and compatible, and with whom you can develop a long-term relationship.
Use the Internet
The Internet is a great tool to help you get started on your search and to narrow down those properties you’d like to tour in person. Ask your real estate professional to recommend some good search sites. You can also use the Internet to research mortgage rates, neighborhoods, tax records and comparable properties.
Other Considerations When Purchasing Your Home
Buy with re-selling in mind
Although you should plan to stay in your first home for a while to build equity and to maximize investment advantages, keep in mind that few people remain in their first home forever. First homes are often used as spring boards to future, more valuable real estate purchases. That’s why it is especially important to consider resale value when you choose your first home.
Know your abilities and limits
Many first-time buyers choose homes that need remodeling and put in “sweat equity” – work they perform themselves. While this can be a great idea from an investment standpoint, be sure to assess your abilities, time constraints and commitment level truthfully when it comes to renovation work.
If professionals will be needed, have you accurately projected how much their services will cost? Will the needed improvements be good investments, or do you run the risk of over-improving the property when compared to surrounding homes?
Save the sales literature on each home you view, along with notes to remind you about details. Properties tend to “blend together” when you are shown multiple homes on one day. Some people even take a digital camera along (ask your agent if that is acceptable) for photos. Be sure to jot down your impressions right after you leave each property so you can refer to them later. Take a measuring tape with you, as well as the measurements of key pieces of furniture that you’ll be bringing. Be clear about what is included in each sale, such as appliances, window treatments, and fixtures – this information will affect your decision and your offer. Don’t hesitate to ask to tour homes a second time or even several times.
Remember, the current homeowner’s furniture is not your furniture. You need to look at the spaces as possibilities with your personal touches to make them your own. A fresh coat of paint in your favorite color can make a world of difference to each room in the home.