Buying Your First Home
However, using such measuring rod could be deceptive because since the mortgage loan would be taken out for close to 30 years, it is possible that the financial stand of the buyer could also change for the better or worse. Nevertheless, it is possible to approximate how much the median average income a homebuyer could earn in the future and basing most of the decisions on that is recommended. What the industry considers a sound decision is if the annual mortgage payment, taxes, and homeowner’s insurance should not exceed 28 percent of the annual income of the buyers.
That is for the long term, however, immediately and for the short term what every homebuyer’s concern is the down payment, which could be 20 percent of the home value or it could be brought down to three or five percent if the first time homebuyer qualifies for what the U.S. Department Housing and Urban Development (HUD) distributes for states and municipalities to be handed out for low and moderate income families that could amount to a $3,000 to $5,000 grant or it could be in a form of a loan. If the homebuyers stay in the home they bought for a certain period, mostly three years, the government will be forgive the loan.
Once first time homebuyers know what they need, before starting saving they are advised to bring their finance in order by starting paying outstanding loans, because any loan that charges a high interest rate will eat into the money they will save. At the same time when approaching lenders for the first home, the lenders do not allow the borrowers monthly debt service to exceed 40 percent of their gross income.
While in the process of paying off outstanding high interest loans and saving for the down payment and other related costs, it is possible to make oneself familiar with the Real Estate Settlement Procedures Act (RESPA) so that as a first time homebuyer it will be possible to know how to safeguard the investment from the outset, because borrowers have special rights that will have to be observed by the lenders, while at the same time there are predatory lending practices borrowers will have to be aware of.
After surpassing this stage, it is possible to go around and shop for the loan. As long as borrowers are in a position to pay from three percent in some cases up to 20 percent of the value of the house, there are a big number of financial institutions that are willing to lend money, provided that the buyers have steady income and reasonably good credit history. Lenders usually spread the loan over 15 to 30 years and the difference is the 15-year loan will require a higher monthly payment, but it avails a lower interest rate over the long haul.
The best recommendation is for the buyer to borrow approximately 2 to 2.5 times of their annual gross income. Consequently, a gross income of $50,000 could avail a mortgage of $100,000 to $125,000. But there are a few factors that make a difference and that depends directly on the expense, which means two borrowers with similar income but with different kinds of loans to pay might have to settle for different ranges. That is why big-ticket-item loans like car are not recommended to be outstanding while applying for mortgage loans, because they would affect the range. For those who have a steady income and good credit rating it is possible to find loans that will require only three percent down payment, although the downside of such an arrangement had always been the higher monthly payment, as well as the long term interest rate that will be higher.
For those who have a less than perfect credit rating it is advisable to look at what Fannie Mae’s “expanded approval” program can offer, because it is possible to qualify for loans that charge competitive rates, in most cases two percentage point less than the available alternative financing that are not part of the fair market value rates lenders. If what Fannie Mae is offering is out of reach, the Federal Housing Authority (FHA) offers an insured loan which could require only a three percent down payment and would wrap both the down payment and the closing cost into the mortgage. The process works best for those who are participating with HUD’s program that is worth looking up for first-time low-income homebuyers since it has many added incentives and the range covered could go as far as $300,000.
Another kind of loan is the piggybacked loan, mostly referred as 80-10-10s. It is possible to take two loans, one for the 80 percent and the other for the 10 percent, and it is possible to avoid paying mortgage insurance, while at the same time it is possible to lock a 15-year fixed-rate mortgage on the second loan with a much lower rate even if the closing cost tend to be higher, yet it is possible to make some gain by avoiding the insurance cost.
Once the lender is there the next step is to look for a real estate agent and here avoiding a few confusions is important. Things start from a broker or brokerage, an entity that is with a license from the state to buy and sell houses. The agents could sometimes work independently but usually will have to work through a brokerage house. Then there are realtors who are members of the Board of Realtors with a given code of ethics and conduct, whose agents or brokers would have to follow.
As far as finding the right house is concerned, the best method is to drive through a neighborhood of one’s choice to see if there is a house on sale or relate that information to an agent. There are various publications and brochures that are helpful too. Most of the time if buying in cities is preferred finding the dream house with the right price might not be possible, especially for a first home. However, knowing the best seasons when people would like to sell their house might make finding better houses easier, and May and June are said to be the best months. In the rest of the seasons, the market could be flooded with foreclosures that sell at bargain prices if bought from lenders who do not normally ask a high price for them. One thing to be aware of while buying foreclosure homes is liens and back taxes that pass to the buyers.
When the time comes to make the offer, the essential things to look at are price, terms, house inspection, and finally the money that would change hands. When it comes to price, it is important to know what other houses are selling for in the neighborhood and if the agent knows the area well, that information could come handy. In most cases houses would sell six percent less than the asking price, yet depending on why the seller is selling the house if there is some urgency the price might come down more.
The terms depend on how much is paid and it will be difficult to ask less if the price is already much lower than the asking price, but depending on the price it is possible to ask the seller to contribute to the closing cost or to provide a warranty if something goes wrong within a given time frame. It is also possible to add prorating of taxes, club dues, homeowner’s association fees and more to the list.
Inspection is key here because anything could go wrong after the deal is closed. If something is spotted in advance it could help in bringing down the price and sellers are required by law to disclose any defect the property might have in advance, in writing, and that could avail a good bargaining power to bring down the price. The money that is the key here is preferred to be on a pre-approved mode, because it is possible to bargain with full confidence with the seller.
The closing cost is an amount that will be paid for the lender for doing a good number of small things to make the contract binding and is required by law to a truth-in-lending estimate in advance about how much the closing cost will be. Once all the contract is signed, the payments had been made, and the ownership is transferred to the new buyer, it is possible to move in, in most cases with in seven days time, even much earlier if the house is vacant.
