Buying your first home is an exciting experience that also has its fair share of anxiety that comes along with the process, especially in the D.C. area. Unlike buying a new outfit that only requires a trip to the store, buying a home requires a great deal of preparation. If you are in the process of finding your first home now, then you probably already have a solid understanding of what we are talking about. However, this post has been created to give you a better understanding of what you will need to do before you decide on your first home and first mortgage.
Buy, or not to Buy
While homeownership is a goal for millions of people across the U.S., that does not mean that it is for everyone. Before making a commitment to buy a house, you need to ask yourself some very important questions.
How Much Can You Afford?
To find the answer to this question, you need to take a close look at your spending habits and your budget. Look at your statements from your bank, at least three months worth. Identify where you are spending your money and how. Do you have more monthly expense than you have in income? How much do you spend on “wants” instead of “needs”?
Also, consider the emotional strain of trying to save money so you can buy that first home. If money is already tight, saving can become stressful as you try to balance what you need to pay every week or month and what you want to save.
After identifying where your money is going, you have to determine how much you can afford for monthly housing expenses. Only with the mortgage payment, you have to consider the cost of insurance and the taxes for the specific area you are buying your home in. According to the Federal Housing Administration, your goal is to allocate no more than 31 percent of your monthly income for your housing expenses, the same percentage used by the majority of Washington DC mortgage lender.
Keep in mind that there are other expenses that come along with buying a home. One-time fees such as legal fees and closing costs can quickly add up to a significant sum of money.
Buying and Renting
Some people are better suited for renting a home rather than buying one. While buying a home helps to build equity and helps to prevent having to pay a monthly rent that seems to continually increase, there are other factors to homeownership that can put a significant strain on your bank account if you are not prepared, such as repairs and required maintenance.
Along with the questions mentioned above in “How Much Can You Afford?”, you also need to ask yourself the following questions. Your answers to these questions will help to identify which is better for you:
- What is the housing market like in the area you want to live in?
- How long do you plan on living in the area?
- Are there other expenses to consider for the area you are looking to live in, such as a long daily commute to work or school?
After answering these questions and you find that you want to buy, move on to this next step.
Get Your Finances in Order
Now that you have decided that owning a home is for you, it’s time to get your finances on track.
Your FICO score, better known as your credit score, has become one of the most important numbers you will ever have in your adult life and you will want to know what kind of shape it is in before you start looking for a Washington DC mortgage lender. Without a good score, financing for anything will be a real challenge and expensive. Go to annualcreditreport.com and you can pull a free report from the three major credit bureaus, TransUnion, Equifax, and Experian.
Test the Waters
Once you know your score, you can check with lenders for a preapproval letter. A preapproval letter is a written statement of how much a specific lender will let you borrow from them. This is a great way to discover how much you can afford.
Do not confuse a preapproval letter with a preapproved offer like you may see in your daily mail. These are simply marketing tools used to attract customers for lenders and are not the same as a pre-approval letter.
Saving as much as you can for a down payment on your first home will help to reduce how much you have to borrow. This, in turn, reduces how much you have to pay in interest for the life of the mortgage. Besides, if you can make a downpayment of at least 20 percent of the loan amount, you will save by not having to pay mortgage insurance.
Keep in mind that you also want to have money in the bank in addition to a down payment. Lenders want to make sure that you can cover additional costs, such as closing costs before they give you a loan.
Searching for Your First Home
Now that you are armed with the knowledge of how much you can afford for a home, you can now start a meaningful search.
The first step is to pick a neighborhood. Here are the factor to consider while looking:
- Distance from work.
- Quality of local schools.
- Local cost, such a property taxes.
Visit the neighborhood during different hours to see how the traffic is. Check and see what types of amenities are in the area, such as medical services and grocery stores.
After you have found a neighborhood that you want to reside in, compare the homes on the market to find the best price while having the features you want. You can easily do this online with one of the many real estate sites currently available.
Comparing will also give you an idea if the home you have an eye on is overpriced or not.
Once you have a few locations you like, schedule a time to do an actual walkthrough or visit open houses. An open house is great because it lets you get insight from others that are also looking for homes.
Call In the Experts
You can look for your first home on your own, but using a good broker has many benefits. With plenty of experience, brokers know what to look for, where to look, and what it is their clients want. Having a broker helping you can take a lot of the stress out of house hunting.
Submit an Offer
Once you have found the house that you think is perfect, it is time to submit an offer.
Compare Market Value
By looking at similar homes in the same area, you will have a good idea on what is a fair offer amount. If you are using a broker, they will take care of this for you and save you some work.
If you are making an offer for a home that is lower than the seller’s asking price, which should be about five percent lower than the asking price, the probability that they will refuse is fairly high. This is where your negotiation skills are going to have to come into play.
When a seller and buyer agree on a price, the agent will have to create a formal offer that you and the seller’s agent will review. Once the offer is accepted, be prepared to pay what is called “earnest money”, another expense that usually comes with buying a home. Earnest money is a good faith payment that lets the seller know that you are serious about the purchase. This money goes into an escrow account and is applied to the down payment.
Just because your offer was accepted does not mean you will be moving into your new home right away. After acceptance of your offer, the following actions have to occur:
- You have to apply for the mortgage. Apply with a company that can help with all of your mortgage solutions, such as a correspondent lender.
- You will need a home inspection.
- You will need an appraisal.
- You will have to purchase title and homeowner’s insurance.
- Conduct a final walk-through.
- Finally, close on the deal.
While daunting, all of these tasks are important to ensure your home is in good condition, covered for the unexpected, and, of course, to actually buy the home.
Once this is all completed it is time to celebrate the fact that you are now a homeowner. It is a long and stressful process will require a great deal of time from you. To make the process easier, you need to find a broker that can also help with all of your mortgage solutions.
If you are looking for a home in the D.C. area, contact Gregg Busch, a correspondent lender that can help make your dream of homeownership a reality.