Hey, guys! Zillow contacted me a couple of months ago and asked if I wanted to be their Financial Blogger of the Week. I said, “Sure! Can you do an article for FUTURE home buyers like myself?” So that’s what they did.
The timing is actually pretty crazy as Steve and I have started perusing Portland real estate for fun, because that’s what grown-ups do. Up until this point, we’ve never thought too much about homeownership and now it’s at the forefront of our minds. While we won’t be purchasing our own place any time soon (see: massive debt), I appreciate these tips for first-time home buyers and will definitely refer back when it is our turn to put down roots!
Okay, done rambling now. Enjoy this post by Zillow’s Jay Robert and I’ll talk to y’all Friday!
It’s not uncommon for first-time home buyers to get distracted by how a property “shows,” focusing more on the furniture layout and color palettes than on the square footage or the school district where the home is located. Before signing on the dotted line, home buyers should take a step back to ensure their purchases are right for them. After all, a home is likely one of the most expensive purchases a consumer will make in his or her lifetime, so it should be both desirable and affordable.
First-time home shoppers should answer these four questions before committing to a home purchase.
1. What’s Affordable?
Many first-time home buyers calculate monthly mortgage payments for properties and get excited thinking the prices are affordable. In reality, though, the cost of homeownership is significantly more than mortgage payments alone. Factor in the lump sum of a down payment, as well as maintenance costs (experts say to budget between 1 and 2 percent of the purchase price of the home annually), taxes, condo or homeowners association fees, and insurance (including homeowners, private mortgage insurance and other policies such as flood insurance). Experts recommend these costs combined do not exceed 30 percent of a homeowner’s gross monthly income. It’s also important to understand how the total monthly cost of the home impacts the amount of spending money homeowners have each month; shop with lifestyle finances in mind.
2. How Do Lenders Evaluate First-Time Buyers?
Lenders assess buyers’ credit scores, income and savings to determine whether they qualify for loans and at what interest rates. The first factor lenders evaluate is the potential borrower’s credit score, which is a number between 300 (poor) and 850 (excellent); the higher the score, the lower the interest rate and the less the borrower pays over the life of the loan.
Other factors lenders look for include a solid job history with two or more years in a single field; sufficient income to cover mortgage payments, taxes and insurance with only 30 percent of gross monthly income; and a reasonable debt-to-income ratio. The debt-to-income ratio (DTI) is the proposed housing expense plus the amount of debt a person has divided by his or her income. For example, a borrower who pays $1,000 per month for debts and brings in $4,000 in gross monthly income has a DTI of 25 percent ($1,000/$4,000). Lenders typically accept DTIs of less than 43 percent, depending on the loan type.
Borrowers should expect to provide lenders with proof of their income, their past two years’ tax returns, proof of assets, bank and brokerage account records and other financial documents — all of which the lender uses to verify whether the borrower is qualified for a mortgage.
3. What’s on the Market?
It’s common for first-time shoppers to fall in love with one of the first homes they see and make offers on the spot. It’s important for buyers to shop around before buying; experts recommend shopping for 4 to 12 months to understand the market and how properties are priced. Buyers should search properties online to get started, noting the number of bedrooms and bathrooms, amenities and prices of properties in the neighborhoods they’re considering. A real estate professional can also assist with this process.
4. What’s in the Fine Print?
When buying a home, buyers need to do their due diligence on a property or risk paying for it down the road. Buyers should get property inspections and thoroughly review reports, disclosures and old records before purchasing a home. Skipping this step may lead buyers into purchasing a lemon of a home with tens of thousands of dollars in necessary repairs. Also consider contacting former owners and neighbors to ask questions about the property or repairs made in the past.
In summary, first-time buyers can prepare to qualify for affordable mortgages by increasing their credit scores, reducing their debts, saving for a down payment and building steady work histories. Buyers should calculate the cost of homes that realistically fit their lifestyles and launch their home searches online to get an idea of a community’s market value. Before making the final purchase, do background research by reading all the documents associated with the home. These preparatory steps will guide a first-time home shopper in the direction of successful and satisfying homeownership.