Remember the American Dream? Go to college, get married, work hard, buy a home, then have 2 kids, add a dog and cruise control. Times have changed and many people are well into their 30’s when they first consider purchasing a home for the first time. And although the dream has changed, most people I talk to wish to own a home at some point in their life. So what should you know about home buying?
Credit, Credit, Credit
Credit is the way lenders know whether you pose a risk based on your history of paying the loan back. The higher your score, the less risky you seem. Interest rates and risk go hand in hand. The less risk a lender sees, the lower the rate they will offer you to borrow the money. Once credit has been established, whether it’s with student loans, a credit card or a car, you must make every effort to pay on time. The length of your accounts will also be used to compute your score. The longer you’ve had credit, the better. Finally, the lower your credit to debt ratio (meaning how much you actually borrow compared to how much is available to borrow), the better. In short, the more responsible you are with your credit, the better lenders will treat you when it comes to borrowing.
One thing I ask clients to do when they begin to save for a down payment is tell me how much they think their home will be worth; then we can create a realistic plan to save the percent required for the lending program they qualify for. First time home buyers have the option of using an FHA-approved lender and pay as little as 3.5% for a down payment. However, lenders require (PMI) Private Mortgage Insurance for loans with a down payment less than 20%. PMI increases your mortgage payment monthly and it’s in place until your mortgage value falls below 80% of the original loan value. This insurance protects the bank from your default on the loan – it does not protect the borrower. Conventional loans require a minimum of 20% down and don’t require PMI. There are other types of loans and you should consult with a mortgage broker before making your choice. Some people prefer to put a lot more down because it provides peace of mind to have less debt. Whatever program you qualify for, planning ahead will ensure you have the right funds when you find the home of your dreams.
Rainy Day Fund
When clients are saving for their down payment, I ask them to create a separate account where they save 5-10% to cover closing costs which average 3-8% and leave a cushion in case their furnace or something else breaks down in the first year, this is especially true if the property will be rented out for income. There are some sellers who will offer to pay your closing costs like appraisals, surveys and title insurance, as an incentive to make a purchase. I have never heard of anyone saying they saved too much.
If you don’t ask, you never know. Once you go through the inspection process there could be repairs or new appliances you want to request as part of your purchase. Some sellers will ask you to pay list price if you want them to pay closing costs. Be prepared to comprise when it comes to negotiation and if it’s the house of your dreams, sometimes it’s best to let the small stuff go. But if you feel the value of the property and the list price don’t coincide, it doesn’t hurt to ask for an incentive.
If your goal to purchase your first home is long term, such as more than 5 years away, a great way to make your money work for you is to open an investment account. Once you get closer to your goal, as in a year out, then you can move the money into a more conservative account like a money market account or even a savings account, but investing will help you reach your goal faster. Each individual is different and knowing the risk you are willing to take is essential to make the right investment choice.
In closing, the more you plan the better prepared you will be so you can savor the moment you unlock the door to your own home sweet home.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified profe