5 Key Steps for First-Time Home Buyers

Charity Delich

9-27-2009

You’ve religiously dined on frozen meals for months. You’ve been stashing away your extra cash instead of spending it on baseball tickets, a pedicure, or a night out on the town. You’ve even been riding the bus to work. Now that you’ve saved enough money for a down payment, you’re finally ready to make the biggest purchase most individuals ever make – buying your first home.

If the sheer amount of information available to first time home owners makes you feel doomed to rent forever, don’t panic! There’s hope, even for a rookie. The following five tips for first time home buyers can help alleviate your pre-purchase jitters:

Evaluate your current budget and set your future mortgage budget
Find your ideal real estate agent
Make the real estate rounds
Take advantage of home buyer incentives
Read your purchase contract

1. Evaluate your current budget and set your future mortgage budget

You need to know how much money you can allocate towards your new home before you start looking at properties. A budget that thoroughly outlines your current expenses will help you accomplish this. Start by documenting all of your income in an Excel spreadsheet. Next, track how much and where you’re currently spending money. See WhatCollegeForgot.com’s guide to budgeting for detailed guidance.

Next, you’ll create a mortgage budget, which is a separate budget that helps you plan for reasonable mortgage payments. Your first step is to determine the average price of homes in your desired location and consideration set (e.g, ranch home, two-story, townhouse, condo, etc.). Here are some resources to help you determine your target home price:

Zillow.com – a Web site that lets you compare selling prices in your selected area.
Realtor.com – another home search tool provided by the National Association of Realtors.
Local newspapers – the classified section in your local newspaper provides a quick check of local home prices.
Your real estate agent –another excellent resource for pricing properties in your area.

Next, estimate what your home purchase loan amount will be. Start by establishing your target monthly home mortgage payment. Freddie Mac's home ownership calculator estimates what you can afford to spend on a home and what loan amount you’ll need to qualify for. Be sure to account for the costs of increased utility bills, property taxes, homeowners’ insurance, and any homeowner’s association fees. The Insurance Information Institute offers guidelines for what you should expect to pay for insurance. You may also be required to pay private mortgage insurance (PMI) if your down payment is less than 20 percent. Freddie Mac also offers an online calculator that helps you tabulate any possible PMI costs.

Track all of your estimated homeownership costs in a spreadsheet or notebook. Keep a miscellaneous expense category for things like purchasing appliances and maintenance costs. Don’t forget to account for your down payment and closing costs. Most importantly, don’t underestimate your expenses! First-time home buyers are often surprised at how much they shell out for basic upkeep on their properties. Even the little things – fertilizing a lawn, re-painting trim, or hiring a plumber – can add up quickly. This is particularly true if you plan to buy an older home, as it will require more maintenance.

2. Find your ideal real estate agent

Your real estate agent will be your key resource for first time home buyer information. Keep in mind that you’ll spend many Saturday and Sunday afternoons traipsing through homes with your real estate agent. The hours you spend home hunting are more bearable when you have a knowledgeable real estate agent that you get along with.

Referrals are a great place to start when finding a real estate agent. Ask your family and friends who they’ve successfully worked with in the past. Consider any referrals as a starting point, but don’t select an agent just because that’s who your aunt and uncle used. Your needs may be different from those of friends or relatives, so always make sure that the agent you select is also an expert in the types of properties and locations that you’re looking for.

Think “location” when searching for possible real estate agents Drive through your desired neighborhoods and check out “for sale” signs to find agents who are already handling comparable transactions. Agents that know a neighborhood well are better equipped to help you navigate your options.

Interview three or four agents before making your final selection. Inquire about each agent’s commission and fee structure so you can factor these costs into your budget if necessary. Find out what days and times they’re available to show you houses. Always ask about their past experience, specifically related to the types of properties that fit your buying needs. For example, if you want to purchase a condo in a downtown area, don’t choose an agent who primarily sells houses in the suburbs. Top-notch agents will listen to your wants and needs and will only take you to homes that meet your specifications.

3. Make the real estate rounds

Now that you’ve found the perfect real estate agent, you need to make the rounds. This means physically checking out properties. Online research is helpful, but it’s no substitute for taking the time to explore properties for sale in your preferred location and price range. Bring a home buying checklist to each property that you view. This will help focus your search, and you can use the list later to compare features among the different homes you’ve seen. Mortgageguide101.com and the U.S. Department of Housing and Urban Development both offer printable home buying checklists.

Conduct a thorough examination of each property you visit. Take a friend or relative, preferably one who has already purchased a home, with you when house shopping. Someone else often spots things you may not have initially noticed – a barking dog living next door, a leaky faucet, or rotting wood.

Pay attention to the little stuff. Sellers who neglected basic things, such as maintaining the lawn or shampooing carpets, are likely to also let the big items slide. You don’t want to be stuck buying a new boiler a month after moving in.

You should get to know the entire neighborhood as well as your property. Check out the restaurants, grocery stores, and your prospective neighbors. Test drive times to work if you commute by car. Be sure that your prospective place is close to a train, bus, or subway if you take public transportation.

How will you know when you’ve found your dream home? That’s the million dollar question! Your perfect home should be situated in the right location and should meet all of your checklist needs as well as some of your checklist wants. It should also be comfortably within your price range.

Once you’ve found your perfect home, you should have a professional home inspection conducted. Although home inspection standards vary from city to city, The National Association of Certified Home Inspectors offers some general guidelines for residential inspections – covering basic standards for everything from roofs, exteriors, and basements to heating, cooling, plumbing, and electrical systems. Your real estate agent can refer you to a reputable home inspector.

4. Take advantage of home buyer incentives

Kevin Dembinsky, a real estate broker with Conlon Real Estate in Chicago, says now is the time to buy. According to Dembinsky, “The majority consensus is that the housing market has bottomed out. Prices will stop declining, and the market will begin to stabilize in the first or second quarters of 2010. Now, first time home buyers have the chance to buy a house for what people paid in 2003! That, coupled with tax benefits and other incentives, makes it a buyer’s market."

Indeed, a range of incentives are offered by sellers, particularly during a buyer’s market. Be aware of the following incentives prior to signing a contract:

Price reductions – Lowering a property’s price is one of the most widely used incentives sellers offer home buyers. Keep in mind, however, that a reduced price may not always be the best incentive for you. First-time home buyers who have limited upfront cash may benefit more in the long-run from non-cash incentives, such as seller-paid mortgage points or down payment assistance.
Seller-paid mortgage points – You can ask a seller to put funds toward mortgage points, typically for a period of one to three years. One mortgage point generally equals one percent of the loan amount and is considered a form of prepaid interest. For example, your mortgage may have a seven percent interest rate. If the seller agrees to pay two interest points for the first year, your interest rate will drop to five percent for that year. Remember that the seller’s contribution won’t last forever, and you’ll be accountable for the higher interest rate when this time period ends.
First time home buyer tax credit – the federal government is offering a first time home buyer tax credit of up to $8,000 to qualified buyers who purchase a primary home between January 1, 2009 and April 30, 2010. This credit is subject to income limitations – a solo buyer’s adjusted gross income must be $75,000 or less to be eligible while a married couple can’t make more than $150,000 in adjusted gross income.
Down payment assistance – Down payments generally range from three to 20 percent of a home’s total cost, according to Freddie Mac. Your required down payment contribution will depend on a number of factors, including your credit ratings, income, mortgage type, and loan amount. You may find it tough to scrape together this amount, but don’t despair. Sellers can pay part of your down payment and often will agree to do so in lieu of a price reduction or other incentive.
Service warranties – Sellers may offer limited warranties on a property through a residential service contract. These contracts usually insure a home’s major systems, such as the heating, cooling, or plumbing. Warranties may sound great at first, but you must read the fine print. For example, some warranties may not cover pre-existing conditions, even if that condition was unknown at the time of purchase.
Closing costs – Closing costs aren’t cheap. In fact, Freddie Mac estimates that they cost between two and seven percent of a property’s overall value . You can ask the seller to pay all or a portion of closing costs as part of your purchase negotiations. These costs include taxes, title insurance, financing costs, mortgage points, prepaid or escrowed items – such as homeowner’s insurance, private mortgage insurance, and real estate taxes – and related fees.

5. Read your purchase contract

This may seem like an unnecessary piece of advice, but you’d be surprised by how many people sign contracts they haven’t actually read. Neglecting to read your purchase contract can cause headaches later on, particularly if you decide to resell the property down the road. A qualified real estate attorney should also review the contract. Your real estate agent should be able to recommend a trusted attorney for this job.

You should also double check any condo or title documents to make sure they are consistent with your purchase contract. For example, if you’re purchasing a top-floor condo and deck, be sure that the contract and the condo documents both specify that your unit owns the roof rights. This will help you avoid disputes later on.

Don’t be afraid to negotiate the contract terms before signing on the dotted line. For instance, make a roof repair a condition of the purchase if your inspection shows a leaky roof. You can also ask your attorney or real estate agent to negotiate for some of the buyer’s incentives mentioned above. Finding your dream home can be a time-consuming and intense process. Using the above tips, you can improve your chances of having a hassle-free home buying experience.