First Time Home Buyers Guide

If you are a first time home owner you are about to enter a process that is exciting, potentially confusing, and uncertain, all at the same time. The best thing you can do is to educate yourself with our First Time Home Buyers Guide, so that you avoid surprises. Surprises are not a good thing when buying a home.

Searching for a home has never been easier. The internet has put hundreds of thousands of homes at your fingertips with a few clicks of your mouse. You can compare home based on a variety of variables, view pictures, 360 degree photos, and video online, and view the ownership information including previous purchase prices. You can do a lot of your leg work, eliminating homes from consideration, and focusing on seeing those home that meet your defined criteria.

With the dramatic real estate downturn, its definitely a buyers market. That means when purchasing your new home you are in the drivers seat. If you’re patient, and avoid falling in love with a home you just have to have, you have the upper hand in bargaining for price and concessions. If you’re willing to walk away from any home, then you’ll be able to choose the home that best fits your financial situation.

How much can you afford?

One of the first things you need to do is to determine how much house you can afford. Determing your budget is usually based on a monthly price you can afford, so you’ll need to work with your agent or at a minimum utilize some mortgage calculators to find your monthly payment based on the homes cost, interest rates, insurance, and escrow. A good rule of thumb is that you can typically afford a home that is 2.5 times your annual household income. So if your annual household income is $100,000, then your high price range will be around $250,000. This number can go up or down depending upon your level of debt.

A good rule of thumb is that you can typically afford a home that is 2.5 times your annual household income. So if your annual household income is $100,000, then your high price range will be around $250,000.

One thing to keep in mind is that the home you purchase might require some updates or remodeling. Also if you’ve been living in an apartment, you’ll find that you may need to purchase additional furniture and home fixtures. Let’s assume that the house you’re purchasing needs $25,000 in repairs or remodeling, and new furniture will cost $25,000. In this case you would want to subtract this $50,000 from your $300,000 amount, leaving $250,000 to purchase you’re home.

Finally while it’s nice to know how much home you can afford, your goal should not be to buy a home at the top of your limit. A little wiggle room in your budget is never a bad idea.

Getting a loan

When you purchase a home you are going to have to make a down payment. Ideally your down payment would be at least 20% of the home purchase price to avoid to avoid having to pay for mortgage insurance, also known as Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP). Mortgage insurance protects the lender in the case that you cannot make your monthly mortgage payment. Another advantage of making a larger down payment is that it could reduce your interest rate. If 20% down is not possible, many lenders now allow you to either buy out of having to pay mortgage insurance with an up-front fee or a slightly higher interest rate.

When you take out a loan you will have to determine the duration of the loan. 30 years is the typical loan duration but there are other options such as 15 year and adjustable rate mortgages that remain fixed for a period (5 years for example) and then fluctuate with the prime rate after the fixed period.

A 30 year loan will have lower monthly payments than a 15 year loan, but in the long run will cost you more. If you can afford a shorter duration then definitely consider that option.

A 30 year loan will have lower monthly payments than a 15 year loan, but in the long run will cost you more. If you can afford a shorter duration then definitely consider that option. Another alternative is to take the 30 year loan but make additional payments or add an extra amount to your monthly mortgage payment. Over time this will reduce the time until payoff and save you interest costs.

There are certain things that your lender will consider when you apply for a loan:

  • Employment History – its important to have held steady employment for two years pro to applying
  • Your Credit Score – interest rates change based on your credit score so you will want to do as much as possible to clean up your score prior to applying for your loan
  • Income – Lenders typically want to see that your income is two to three times your monthly mortgage payment
  • Down Payment – typically 3 to 20% of the purchase price

Closing Costs

When using mortgage calculates to estimate your monthly costs, you need to make sure that the calculator takes into account closing costs. Typically closing costs average 2 – 3%. If you are going to pay the closing costs out of pocket then you do not need to consider them in your loan. If you are going to roll them into the cost of the home then they become part of the mortgage payment equation.

Some typical closing cost fees include:

  • Loan application fees and credit report
  • Loan Origination Fees
  • Title Search and Insurance Fees
  • Lenders Attorney costs
  • Appraisal Fees
  • Inspections
  • Surveys
  • Recording Fees
  • Transfer Taxes
  • Buyers Attorney Fees
  • Escrow Deposits for Taxes
  • Homeowners Insurance
  • Mortgage Insurance

Adding these fees up, for example on a $200,000 loan, can amount to $10,000 to $20,000 in costs. These are in addition to your down payment. It’s easy to see why many buyers roll the fees and costs into their loan.

As we mentioned above we are in a buyers market, so LaPorte Realty (Columbus Ohio real estate agent) may be able to negotiate for the seller to pay some of these costs.