Buying your first home can be an intimidating process. A home purchase is the largest financial transaction that most people will experience in their lives, so it is understandable that it may be overwhelming. Colin Reilly, the President of Townsend Kane, offers his top 8 things that new homeowners must know to be successful in the process.
1. Pay Down Debt
One of the most important aspects of home buying is making sure that your outstanding debts are paid. Having a high percentage of credit limits exercised by use of credit cards and personal loans will affect your chances of getting the best mortgage terms for the house you want. Underwriters generally favor borrowers who keep their credit utilization below 30%.
2. Save for a Significant Down Payment
While there are special government programs available for first-time homeowners who do not have a large down payment, such as the FHA loan program, you should save at least 10 percent of your home price as a down payment. A 20 percent down payment may result in a lower interest rate. The more you pay as a down payment, the less money you will have to finance, saving costs over the term of the mortgage.
3. Understand Mortgage Terms
It is important to make sure that you understand the terms of your mortgage. Understand whether you have a fixed rate or variable rate mortgage. Get a fixed rate mortgage if at all possible. You will be able to refinance your mortgage to save money after six months if rates drop significantly. One way of shaving 9-years off of a 30-year loan is by simply making one extra mortgage payment each year.
4. Understand What You Can Afford
There are calculators available online that will help you determine how much you can actually afford given your credit rating and your budget. Inputting the price of the home and the amount of the down payment will give you a basic number, but you will need to add in regular expenses like utilities, insurance, and taxes. Just because a lender may allow a 45% debt to income ratio doesn’t mean that you should do it. Unexpected future home or auto expenses, job loss, or illness can happen without notice and so is critically important to living below your means.
5. Figure in Costs of Improvements
When you are deciding what you can afford, it is necessary to figure in the cost of any home improvements you will need to make. A “fixer-upper” may be cheaper on paper, but the cost of the necessary improvements may be prohibitive.
6. Understand Home Expenses
When you are transitioning from renting to owning a home, you may be surprised by the number of large, unexpected expenses that can occur. It is best to build an emergency fund that can help you in these trying times.
Renters don’t have to worry about fixing the furnace or the plumbing. Be aware that your monthly expenses in owning a home go far beyond the mortgage payment, insurance, and taxes. Build this extra amount into your budget so that you will not have any unpleasant surprises.
7. Don’t Buy Hastily
Market trends vary between buyers’ and sellers’ markets. In a sellers’ market, you will want to be aware of the tendency to leap too quickly on a home for sale. There will be a lot of competition from other buyers, and you may engage in a bidding war without knowing what you are getting yourself into.
Approach home buying with a cautious, unemotional perspective. If you let your feelings get in the way, you may find that you have gotten a bad deal on a home.
8. Always Have it Inspected
Always have your prospective home inspected by an independent home inspector. Don’t use the person recommended by the real estate agent. It is best to do your own research and find someone who will truly be in your corner and is not beholden to your agent in any way.
Even when you are buying a brand-new home, it is still crucial to have it inspected. Construction problems like water leaks or mold may slip past you.
These eight tips present important considerations for the home buying process. Colin Reilly of Townsend Kane has broken down the process of home buying and made it more understandable for first-time home buyers. With these eight tips in mind, you can move forward more confidently with your home purchase.