The American Dream of owning a home is very much alive. The turning real estate market is coaxing more first time home buyers out. Record low mortgage interest rates (In 1981 interest rates skyrocketed to 18.45%!), and property prices are empowering millennials to invest in a property rather than rent. This helpful guide will help you traverse the many confusing aspects of home buying:
1. Do the Math: Make sure you are in the position to be able to afford a home. Lenders typically allow a 28/36 rule which means your mortgage payment, property taxes, and insurance should not take up more then 28% of your monthly gross income. Then, you add to that your current total monthly debt payments (e.g. college loans, credit cards, which can't be more than 36% of your gross income). Lenders will also look at your credit score to ensure you're in stable financial condition to take on the responsibilities of promptly paying monthly payments. All of this will require job stability, commitment, and some sacrifice.
Tip: Exit out of that Grubhub app, put your phone down, and step away from your phone. Start cooking meals at home. Not only in this better for you in the long run health wise, but it will end up saving you so much money. Check out this infographic to let this set in:
2. Stay Organized: This process will run more smoothly if you have all the necessary documents such as your government issued ID, most up to date credit report, a verification for your employer, W-2 forms, Federal Tax Returns, and bank/asset statements.
Tip: Many of these forms are very easy to obtain with the click of a mouse. If you don't have a tax professional helping you with taxes you can request past tax returns from the IRS. You can find the steps here.
3. Don't forget about the Down Payment: It is important to remember that after the housing bubble there are less and less lenders willing to offer 100% finance options. Homebuyers typically put down anywhere from 3-20% of the total mortgage cost.
Tip: Increasing your down payment will also make you eligible for loans at lower interest rates. FHA and VA offer programs have 100% financing options, but this route will have the higher interest rates and PMI- Private Mortgage Insurance.
4. Taxes, Property Insurance, and Closing Costs: These necessary expenses can be overlooked when buying. Closing costs are include origination, underwriting, appraisal, title insurance, wire and courier, and other fees. Your lender can give you a better picture of what to expect.
Tip: Definitely shop around for homeowners insurance. Try going to the company you use to cover your car.
5. Shadow the Property Inspector: This professional will inspect and evaluate the quality and safety of your home. The inspector will look at mechanicals and structural aspects of the home. They will be able to educate you on the home you are purchasing, and how items such as your sump pump, water tank, ejector pump, furnace, dehumidifier, and ventilation (to name a few) work in conjunction with your home.