When it comes to buying a house for the first time, one of the biggest challenges a home buyer has is knowing what to do and what to avoid not doing. It can feel like a daunting task because there are hundreds of little and big decisions you have to make sure you are buying the right home.
Between the paperwork, the mortgage loans, and the down payments, home buying is overwhelming to first-timers who don’t understand how real estate works. However, knowing what you need to do before purchasing a home can help to make the buying process more enjoyable.
Here are the basics…
- Increase your credit score – No matter where your score is increasing, it will save you thousands of dollars. Having a higher credit score is an excellent way to ensure a lower mortgage interest rate. If you have a good credit score, there is still room to make it great to get better rates.
- Determine what you can afford – You will want to figure out what your price limit is to prevent purchasing a house you can’t afford. If a buyer is planning on putting down a 20% down payment, lenders recommend them to look at houses no more than 3-5 times their annual household income.
- Set a down payment goal – You’ll want to figure out how much money you can put down. Ideally, you’ll want to put down 20% of the house’s price, but it can be as low as 5-10%.
- Find the best mortgage for you – There are several different kinds of mortgages to choose from. Finding the best one for you will help boost your chances of approval.
- Get pre-approved for a loan – Getting pre-approved will allow you to understand your price range for picking out a house.
- Find a real estate agent – A real estate agent can provide you with helpful information on houses and neighborhoods. They can help with the buying process and negotiating.
- Go house shopping – Begin looking for houses that are in your price range. Before you begin your shopping, make a list of the features you want your new house to have.
- Make an offer – Make an offer! Your real estate agent can help with this.
- Get a home inspection – Getting a home inspection will determine if there are any issues with the house that will make you second guess your choice.
- Get a home appraisal – The lender of the loan will want to get an appraisal on the house to make sure it is a good investment.
- Close – This is when you will sign all the required papers and make any necessary payments.
Don’t Want to Pay an Extra $400 Per Month?
Private Mortgage Insurance is a fee a buyer pays each month for having less than 20% down on a mortgage. Some loan programs will advertise as no PMI with less than 20% down but the interest rates will be much higher.
So to avoid needing to pay private mortgage insurance, you will want your down payment to be 20% of the purchase. Depending on what kind of loan you receive and how low your down payment is, you may have higher mortgage insurance.
FHA Loan: pay an upfront mortgage insurance premium of 1.75% and an annual amount of 0.85%.
Conventional Loans: do not have an upfront PMI but an annual fee maybe 0.15% and 1.95%.
VA Loans: do not require a downpayment, but a funding fee of 1.25 to 3.3% is required.
One of the most common challenges a first-time homebuyer will face is coming up with a down payment. What is a down payment? A down payment is an up-front payment made towards a large purchase, and in this case, a house.
Many conventional mortgage lenders require a down payment of 10-20% of the final purchase price of the home. So, if you are looking to buy a house that costs around $200,000, you’ll need to come up with a $20,000-$40,000 down payment.
Although not all mortgage lenders require this, it is still beneficial in the long run to have a 10-20% down payment. Having a higher down payment can help lower your monthly mortgage payment and help you save, on average, $400 per month.
Down Payment Assistance
Down payment assistance is a tool to help homebuyers receive grants or low-interest loans to lighten the load of a large down payment. Depending on your location, there may be different types of down payment assistance options.
Some possible options are:
- Grants – This is money given to someone and does not need to be paid back.
- Zero-interest, forgivable loan – These are loans that are forgiven after a certain period, typically five years, if the borrower is still living in the house.
- Zero-interest, deferred-payment loan – This is a loan that does not need to be paid off until the borrower moves out of the house. The borrower turns over the title until the payment is made in full so that if the buyer passes away, the loan is paid off when the property resells.
- Low-interest loan – This is a loan that gets paid off in a more extended period to make the payments a smaller amount.
Depending on what program you go through, the amount of money you receive varies, but the average amount is $10,000.
WSHFC offers downpayment assistance to buyers who are using their home loan programs, Home Advantage or Opportunity. This is for people who have a household income of under $145,000 and a credit score of at least 620. This interest rate of 0% to 4% is mixed into the mortgage payment so that you don’t have to worry about making two separate payments.
Seattle Downpayment Assistance Loan Program
- a second mortgage loan program
- combines the Home Advantage or Opportunity first mortgage loan program
- allows up to $55,000 in downpayment assistance, payments deferred 30 years, at 3% interest
- must not own a home in the past 3 years
- must attend Home Buyer Education Seminar
- buyer must have 1% of the purchase price or $2,500 whichever is greater
Arch East King County Downpayment Assistance Loan Program
- allows up to $30,000 in downpayment assistance at 4% interest
- do not need to be a first-time homebuyer
- must be your principal residence
- attend a Home Buyer Education Seminar
State Bond Programs
With a state bond program, you receive a loan that is paid out by using mortgage revenue bonds. These bonds are issued by local or state Housing Finance Agencies to finance affordable mortgages for low-middle income people.
The best thing about these loans is that buyers can get an interest rate that is lower than the market interest rate. This allows for lower monthly payments, allows buyers to purchase higher valued homes, and can lower the total cost of a home over time.
Save $40,000-$60,000 on Interest
What if you applied for a loan and the going interest rate was 3.5% and the rate you got from multiple lenders was 4.5% because of your lower credit score. Let’s look at how much a 1% interest rate can mean in different price ranges. To simplify things we will leave out the downpayment and other fees. These are just numbers if you were to take out a loan at this amount and if interest rates went from 3.5% to 4.5% and what the difference in the interest rate you will pay over the loan.
One of the most common credit problems is the borrower doesn’t use enough credit for the creditor to look at the payment history. People with no credit can have a very hard time applying for a loan to purchase a house.
Banks have programs for people who are trying to build their credit. These are called secured credit cards. The person with the credit card deposits an amount of money into the bank in exchange for the secured card. Slowly the borrower can make money payments and build a credit history. If you are looking to build your credit from scratch you can learn more here.
The second is denied credit application. The borrower might have had inaccurate information on the credit report. The best way to handle this is to find the creditor on the report and contact immediately so that they can look into the issue and resolve it for you as soon a possible.
The third is fraud or identity fraud, someone has your name and social security number and is using your credit.
Prepare for Upcoming Issues
With all the different aspects of buying a home, unfortunately, things don’t always go as planned. It is a good idea to be prepared for any upcoming issues you may face.
Some issues include:
- Inspection – During the inspection, unknown issues can pop up that may be costly to fix. Try renegotiating with the seller to either fix the problem or consider lowering their price so that you can make the improvements.
- Appraisal – In a hot market when home prices are appreciation fast or the market is changing, you might get a low appraisal. If this happens, you will want to make talk to your agent or broker before that time comes.
- Loan issues – Loan approvals are based on the information you provided. If there is a significant change in that information, banks are allowed to withdraw their offer.
- Changing closing dates – Sometimes, you may be expecting a specific date to close on the house, but that date can change.
- Losing earnest money – Earnest money is when the buyer puts down some money to initiate a contract. If something goes wrong or someone backs out of the sale, you may lose that earnest money.
The Contract Will Protect You, So Know It Well
When purchasing a home, you will be signing a contract that is created to protect both you and the seller. It is essential to understand your contract in case any problems arise and so that you fully understand what you are committing to.
The purchase and sale agreement is the written agreement between a buyer and seller to transact real estate. The buyer will agree to pay the price of the property, and then the seller will agree to transfer the deed to the property.
Items the contract generally includes are:
- Target closing date
- Offer deadline
- The earnest money deposit amount
- Who pays for inspections and such
- Details about property taxes and adjusting utilities
Before signing a contract, there are some things you will want to consider:
- How long of a contingency period you’ll need
- Your commitment to buying the property
- Whether you have the money and mortgage to complete the transaction
There are a few different contingencies that you want to pay attention to in your contract – inspection contingency, financing contingency, and appraisal contingency.A contingency clause defines a condition or action that needs to be met within a specific time frame.
The inspection contingency is part of the contract and states that the buyer can negotiate repairs or cancel the sale as the result of the inspection.
Some inspections include:
In the state of Washington home buyers generally do a general home inspection but when writing up the contract the buyer must state if they are doing sewer scope on the home. The buyer if-then fines further issues they can request to do further detailed inspections.
- pest and termites
- sewer scope
- general inspection
You’ll want to pay attention to the inspection contingency’s expiration date. If it expires before your inspection findings, you may lose your earnest money deposit if you try to cancel the contract. If it is before your expiration date, you can negotiate any repairs needed.
The financing contingency gives the buyer a certain amount of time to obtain the financing for the house. It provides them with protection against losing their earnest money in case a deal doesn’t go through.
The appraisal contingency is to protect the buyer if the property doesn’t appraise for the price. If the property is not valued at the listed price, the contract can be ended, and the earnest money can be refunded.
The Deal Can Fall Apart the Week of Closing
Unfortunately, sometimes the deal doesn’t go as planned. It can even fall apart just a week before closing. There are several reasons as to why a closing can fall through, such as:
- Loss of a job
- Buyer’s or seller’s remorse – This is when the seller or buyer begins to get cold feet and decides they don’t want to sell or go through with the purchase.
- Liens and title issues – After an offer has been accepted, the title company involved with your house sale will perform a title search to detect any title issues. These could be outstanding property tax, bankruptcies, or contractor liens. So it is crucial to pay off any debts.
- Financing issues – This could be from the loss of a job, or if you have any outstanding debt that could cause the lender to question your ability to make mortgage payments.
You Have to Sell Your Place Some Day
An important thing to remember when buying a house is that someday, you may have to sell it. So, thinking about the end result is beneficial for going in. With thinking about the possibility of needing to sell, there are a few things you want to consider when you purchase your home.
Neighborhood features that boost resale value:
- Neighborhood amenities
- Historical features
Neighborhood features that will LOWER a home’s value:
- Distance to power lines
- Distance to a gun range
- Distance to train tracks
- Distance to highway
- Registered sex offenders
- Neighbors with messy lawns
- Noise pollution
- Numerous foreclosures
- Undesirable school district
Pros & Cons Condominium, Townhouse, and Single-Family Home
Every type of home will have its pros and cons. So, looking at the pros and cons of each one will help you get an understanding of what you prefer when buying.
- Maintenance is included
- More affordable
- Cheaper insurance
- Easier to maintain
- Typically close to downtown areas
- Good security
- Limited outdoor space
- HOA fees
- Lack of privacy
- Pet restrictions
- Limited parking
- Specific rules
- Lack of storage space
- Some maintenance is included
- More spacious
- HOA fees
- Small yards
- Pet restrictions
- Less privacy
3. Single-Family Home
- Share no walls with neighbors
- Have a yard
- More privacy
- More space
- Maintenance costs
- Financing the property
- Lawn care
- Can be a longer commute to work and downtown
Used Homes are Cheaper, but a New Construction Will Have Fewer Repairs
When purchasing a house, buying a used home is cheaper, but sometimes buying a new construction home can help you save money in the long run. A problem with an older home is that you run the risk of having to deal with multiple repairs that can become costly.
There are some benefits to buying an older home that appeals to many homebuyers:
- More character and history
- Large yards – older homes were built when lands were cheaper, allowing for homes to be built on a large yard.
- Matured trees and vegetation
- Closer to downtown
Drawbacks, on the other hand, include:
- More maintenance
- Replacing wiring and plumbing is expensive
- Less storage space
- Needs to be updated
- Smaller in size
If you don’t want to run into any issues with repairs or updates, new construction has its advantages:
- Open floor plans
- Modern finishes
- Energy-efficient appliances
- The option to upgrades such as A/C and heat pump
However, there are some disadvantages to new constructions, such as:
- Higher beginning cost
- Longer commute to downtown
- The lots may be smaller
- Stricter regulations
Buying your first home should be an exciting time! These tips can help to make sure that your house-hunting remains as stress-free as possible – and that you end up with a home you will love for years!