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What You Need to Know When Buying a House

Do you think you’re ready to purchase your first home? Congratulations! Buying a home is one of the biggest financial decisions you can make and it’s a process that can make you feel very insecure. Am I making the best choices? Have I researched all of my options? Navigating the complex real estate market can be tricky, but we’re here with some tips to help you through the process.

1. Get Pre-Approved and Know What You Can Afford

Whether you’re a first-time or veteran homebuyer, it’s a good idea to be pre-approved for a mortgage loan. Pre-approval simply means that your lender has reviewed your credit history and is willing to make a loan to you, which is key if you want to be taken seriously by sellers.

While pre-approval is important, keep in mind that the amount the bank will approve you for and the amount you can actually afford in monthly payments might be very different.

Initially, you may be excited about what size house you could afford under the bank’s pre-approval number. However, that figure could put a financial strain on your budget once you factor in ongoing expenses associated with homeownership. Instead, you may want to evaluate the mortgage numbers. For example, if you are buying a house with your significant other, you may want to calculate the monthly payment based on just one salary. From there, you can determine what a mortgage with that payment would look like.

Whether you’re looking to buy a home with a trusted partner or alone, a common rule of thumb is that your mortgage payment—including taxes and insurance—should not exceed 28% of your gross annual salary. Also remember that any homeowner association fees should be taken into consideration.

2. Save for a Down Payment

Saving for a down payment shows you’re ready to put a cash investment into your new home. Since 2008, most lenders now require a down payment that can range from 3%-20% of your home’s purchase price, depending on a number of factors. Regardless of the minimum down payment your bank requires, keep in mind that a down payment that’s less than 20% of your new home’s purchase price will result in your need to carry Private Mortgage Insurance (PMI). PMI is designed to protect your lender in the event that you stop making payments on your home. The amount you’ll pay in PMI premiums per month is directly related to the cost of your home, but PMI could cost you thousands of dollars in higher payments. Some lenders will offer loans with no PMI for a down payment that’s less than 20%, but that can result in higher interest rates.

Ask your lender to provide you with a detailed breakdown of the costs to be sure you’re making the best choice for you.

3. Know Your Credit Score

If you’re not already familiar with your most recent credit score, get all the information you need prior to looking for a home.

Every American is entitled to free credit reports and scores every 12 months. Visit annualcreditreport.com to see your report and note any errors or discrepancies, as these errors can cause problems with your application if not corrected.

While you’re checking on your finances, now is also a good time to take a look at any loans (student, car, personal) or other outstanding debt you might have. All of these numbers will factor into the bank’s decision to lend to you and knowing what you have will help you through the process.

4. Make Choices for Future-You

Ideally, you may not want to buy a home unless you’re planning to stay in an area for five or more years. Five years is a long time and many life changes can happen during that time. Think about what you hope your life will look like in five years and keep your future-self in mind when making choices. For example, a two-bedroom home might suit your needs today but if you plan to start a family in the future, you might need more space.

5. Work with a Trusted Realtor

A trusted realtor knows your local real estate market, as well as the rules and regulations for your jurisdiction. They can help you narrow your search and have the knowledge to tell you if you’re making a good offer on a property. Think of a realtor as your personal advisor in understanding and navigating your local real estate market. Plus, keep in mind that the seller’s agent does not work for you—they work for the sellers. A dedicated buyer’s agent will work for you—and your best interests.

6. Know Your “Must-Haves” vs. “Nice-to-Haves”

Some people enjoy older homes with classic designs and character; others are looking for a new property that has all the modern bells and whistles. Whatever side of the spectrum you fall on, knowing where your buying partner stands and what they can and cannot tolerate will help make your home-buying process go smoother. Have a discussion about the things you really feel you cannot live without; make a “Must-Have” list, a “Nice-to-Have” list, and a “Can-Live-Without” list. As you embark on your home search, you can reference these lists and narrow your search based on your shared preferences.

7. Research Neighborhoods

If you already have an area in mind to purchase your home, you’ll want to further narrow your choices by doing some research in advance. Sit down with your partner and discuss your five-year plan. Will you need to think about the quality of local public schools? Do you prefer a place that’s walkable or will you rely on your car to get you around? What kinds of amenities would you like to have near home? These are all important questions to answer. Every neighborhood has different characteristics that make it appealing to different people. If you think you love an area, take a walk or drive at two very different times—maybe during a weekday in the evening or on a Saturday night. See what the place looks like during the day and at night, and make sure you’re comfortable with both.

8. Look Beyond the Surface

Design choices can be very personal: One family’s dream home could be another’s nightmare. When you’re touring homes, keep in mind that decorations, fixtures, and paint can easily be changed to match your personal style. The wallpaper you don’t like in the bathroom can be removed and the bright orange accent wall can be painted over. Don’t pass up a home with great potential because the current design isn’t ideal. Plus, the process of designing your new home to be truly “yours” is fun!

9. Enlist Some Help

If you’ve fallen in love with a property, it can be difficult to see anything bad about it. Yes, it’s an old house but it has original crown moldings and a beautiful fireplace! This could wind up costing you in the long run. Bring a trusted friend or family member with you to tour the property as they might be able to see some issues that you might have missed.

10. “Shop” for Your Mortgage

Finding the right mortgage that fits your situation today is like shopping for many other consumer products—you can shop for your loan at traditional banks, mortgage companies and credit unions, as well as many online mortgage providers. When assessing which lender is right for you, make sure you understand exactly what they’re offering.

Rates

  • The rate you receive on your mortgage indicates what percent of interest you will pay on your loan. This number will change based on the current market, the amount of your down payment, and the type of mortgage you select.
  • Ask the lender for a list of their available rates and know whether those rates are fixed or adjustable (ARM). Keep in mind that a fixed rate maintains the same rate for the life of the loan, but an adjustable rate will rise as interest rates rise, thus increasing your monthly payment.
  • Understand the term of the mortgage loan (typically 15 or 30 years).

Points

  • Points are fees that the buyer pays to the lender to lower your interest rate. Typically, one point equals 1% of the mortgage balance. Sometimes, you can negotiate with the seller to get them to pay part or all of your points, as well as any closing costs.
  • If you’re considering paying points, make sure your lender tells you what a “point” means for you in dollars, not just in the number of “points.”

Fees

  • Mortgage loan fees include processing fees, underwriting fees, closing costs, and broker fees.
  • Know that many of these fees can be negotiated with your lender.
  • Make sure you understand exactly what fees you’re paying and the service provided by each fee.

Get as much information from each lender as you can and compare the rates, fees, and points associated with each loan so that you can choose the one that’s best for you. Know that once you apply for a mortgage loan, the lender is required by Federal law to provide you with a number of documents, including a loan estimate and disclosure so that you can see exactly what the mortgage will cost you. For more information, download your copy of the U.S. Department of Housing and Urban Development’s booklet on shopping for your home loan.

11. Be Present for Your Home Inspection

Regardless of the age of the property, make sure you hire a trusted and experienced home inspector to take a look at all aspects of the home. The inspector will do a walk-through and point out any issues you might want to address with the sellers. This can range from minor issues, like burned-out lights, to major problems, like leaks or prior damage.

If at all possible, do the walk-through with your home inspector and have them point out issues to you. This way, you’ll go into the purchase of your home being fully aware of any problems that might arise. Any major issues found during your inspection could delay your closing and send you back into negotiations with the seller, so it’s best to know exactly what’s going on.

And finally, on the day of settlement, walk through the house to ensure that any repairs that the seller agreed to make have been completed and that there is no additional damage since your earlier walk-through.

Buying a new home is no easy task, but with a little advanced planning and the help of family, friends, and trusted professionals, you can be confident knowing that you chose the home that’s best for you. Let Jemma Financial help you in your home-buying decision by putting it in perspective with your other long-term financial goals.

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