First Time Home Purchase Loans
First Time Home Ownership
Buying your first home can be exciting and rewarding, but first you have to make sure that you’re ready. Your home should fit your finances and your lifestyle, and you should be prepared for fluctuations, not only in your life, but in the real estate market as well. If you’re not ready to be tied down to one location for at least a few years, home mortgage loan may not be for you. But if you are ready, then buying a home can be an excellent financial and personal investment. The first step is determining where you want to live, how much you can afford, and how you want to finance your new home.
Choosing A Location For a Home Purchase
When buying a home, it’s important to examine the neighborhood as carefully as you do the property. Check out the schools and other local services – not just for yourself, but for potential future buyers as well. Consider public transportation accessibility, crime levels, tax rates, convenience of location, zoning laws, etc. Also, investigate real estate prices in the neighborhood, not just at present, but for the past few years. You want to buy a home in a neighborhood where prices are increasing. Less expensive homes in a good neighborhood often rise in value with the more expensive neighboring properties. Of course, if you do buy a lower-end home in a higher-end neighborhood, be sure to factor in the cost of repairs and renovations that may be necessary. In short, you want to invest in a home and a neighborhood that someone will want to live in – whether that someone is you or a future buyer.
This is especially true in diverse and expsensive states; for instance a California mortgage loan will vary greatly depending on the county and neighborhood of the property.
Hidden Costs of Home Purchase Mortgages
Too many times, first-time home buyers think that the price of the down payment represents all the money needed when purchasing real estate. However, a new home purchase loan includes many other costs, and the fees can definitely add up. Home inspection fees, transfer taxes, and closing costs all come with the territory, and closing costs can include application and appraisal fees, pre-paid interest, loan origination fees, title search and title insurance fees, recording fees, attorney’s fees, first-month’s homeowners insurance, and more. See our article on home loan closing costs for more information. All of these costs can add up to 3-8% of the purchase price; in other words, buying a $200,000 home could carry with it anywhere from $6,000 to $16,000 in fees.
Choosing a Home You Can Afford
Before going on the market, it’s important to figure out exactly what monthly mortgage payment (and thus what home) your budget can sustain. For example, let’s say Frank and Sarah's combined income is $50,000 a year, or $4,166 a month. Their housing expense ratio of 28% yields a monthly maximum of $1,166 for mortgage, insurance, and taxes ($4,166 x 0.28 = $1,166). Their total debt ceiling of 36% is $1,583 (4,166 x 0.36 = $1,500). Their monthly debt payments include a $150 car payment, credit card payments of $100, and student loan payments of $250. Subtracting this total of $500 from the $1,500 permitted leaves $1,000 in monthly housing payments. Performing similar calculations for your budget will enable you to establish a very specific price range for your home search, and help keep you from being tempted by more home than you can afford. Use of simple mortgage calculator to find out what you can afford.
Ongoing Home Ownership Costs
Of course, that monthly home mortgage payment is not the only cost associated with home ownership. Be sure to leave enough room in your budget for landscaping, property taxes, utilities and other services, homeowners insurance, repairs and renovations, replacement of appliances, etc. The type of property you buy can help determine the ongoing expenses. For example, while buying a condominium or apartment will usually remove landscaping fees, certain utilities, and other common homeownership costs from the equation, there are often association fees to deal with. Similarly, older homes can be cheaper upfront, but may require more repairs and maintenance than a newer home. Ask the previous owners and the neighbors for an estimate of monthly expenses, and factor that into your budget as well.
Choosing a Mortgage Lender or Broker
As a first-time home buyer, you’ll probably want to use a mortgage broker to help you find the very best mortgage loan rate available. A mortgage broker or banker can be a valuable asset if you ask plenty of questions; keep in mind, though, that the broker may be selling specific loan programs that benefit them more than you. This is a cynical view but, in light of recent events in the mortgage industry, this bears noting. It is often best to speak with several mortgage brokers to compare programs, rates and terms. Don't be afraid to ask how much commission they are making -- they work hard and deserve to make money off the loan. However, it needs to be reasonable and is often 2% to 3% of the total loan amount, although this can vary. The bottom line is that the more transparency exists in the loan process the better. After all, your real estate broker makes 2% to 3% on the purchase amount, we accept and understand this -- your mortgage broker should let you know what commission they expect to make as well.
Choosing a Home Purchase Mortgage You Can Afford
The mortgage terms you qualify for are often determined, in part, by the size of the down payment you make. Down payment requirements can be as high as 20% or more, or as low as 0% for certain VA (Veterans Administration) loans. Down payments greater than 20% usually buy a better rate. Lower down payments can increase your leverage (the possibility of making a profit using borrowed money), but they also entail higher monthly payments and (sometimes) higher interest rates. Home purchase mortgage loans in California can be obtained in much the same way. Home buyers can arrange financing even before shopping for a particular home; in a process known as “pre-qualifying,” lenders indicate the maximum amount they are willing to lend you, thereby helping you determine a price range before venturing out onto the market. Pre-qualifying also makes you more attractive to sellers, who don’t want to risk accepting an offer only to have it fall through due to lack of financing. Thus, being pre-qualified can help you negotiate a lower purchase price or more concessions from the seller.
Fannie Mae (the Federal National Mortgage Association) is a government-sponsored program that buys mortgages on the secondary market (from lenders) and sells them to investors. Mortgages that meet Fanny Mae requirements can carry lower interest rates or smaller down payments, so Fanny Mae mortgages are definitely worth looking into, especially for first-time home buyers. To qualify, mortgage buyers must meet two industry-standard ratio requirements: the housing expense ratio, and the total obligations-to-income ratio.
The housing expense ratio refers to the percentage of gross monthly income that goes toward paying housing expenses. In other words, it compares basic monthly housing costs to the buyer’s gross monthly income. These basic monthly housing expenses include property taxes, insurance, and the monthly mortgage. Income can include anything from salary, to child support, to pensions, etc. – anything that entails regular cash flow. For a conventional loan, the monthly housing expenses should not exceed 28% of the gross monthly income.
The total obligations-to-income ratio is the PITI (principal, interest, taxes, insurance – the components of a monthly mortgage payment) plus all other recurring monthly payments, divided by total gross income. It is, in short, the percentage of all income needed to accommodate your total monthly payments. These payments include monthly payments on student loans, installment loans, credit card balances older than 10 months, and the like. These payments are added to your basic expected housing costs and divided by your gross income. Your total monthly payments, including housing costs, should not exceed 36% for either a first of second home loan purchase.
Home Purchasing Costs – An Overview
Keep these general figures in mind when determining what kind of house is right for you:
Down Payment: 0% – 20% of purchase price
Home Inspection: $200 - $500
Points: $1,000 and up for 1% - 3%
Adjustments: 3% - 8% of purchase price
Using these figures and anticipating other immediate and future costs, in conjunction with your current and expected future budget, will help you decide price range and location before even looking at individual houses on the market. And remember: when buying or refinancing your home, consider not just your needs, but also the needs of future buyers. The average time spent in a house is seven years, so chances are you’ll be selling this house someday. Carefully planning your budget, doing extensive research, and considering the future will help make your new house an asset and a smart financial investment, as well as a home.
