Buying a home for the first time is exciting. It's kind of scary too. The average age of a first-time home buyer in the U.S. is around 33, which is fairly young to be making such a massive financial decision. Those who have been around the block a few times should exercise caution, but that's even truer for first-time buyers. Here are 11 tips to keep in mind when preparing to buy your first home:
- Get a Handle on Your Credit Situation - The state of your personal credit will determine whether you'll be eligible for a mortgage as well as how much you will pay for one. Before doing anything else, then, get a clear understanding of your creditworthiness. Obtain your free annual credit reports for all three credit bureaus, or pay to access them again if you have within the last year. Get your credit score. Examine each report carefully. If you find mistakes, report them. If you find issues like delinquencies, do your best to correct them.
- Make a Budget - There's no point in looking for a home to buy without knowing how much you can afford to spend. Set a budget early on to avoid having your heart broken again and again by promising homes that are far too expensive. By knowing your ideal price range, you can limit your search to homes that fall within it. Online mortgage calculators can give you an idea for how much you can afford to pay each month. Better yet, visit a loan officer to get a pre-approval. Be aware that lenders will look at your debt-to-income ratio too. They want your front-end ratio, or the portion that goes toward housing costs, to be 28 percent or lower. They want your back-end ratio, or the portion of your incomes that covers your usual monthly debts, to be 36 percent or less; some will go as high as 45 percent. If you make around $4,000 per month, then, your monthly housing costs--your mortgage payment, homeowner's insurance, property taxes, maintenance costs and so on--should not exceed $1,120.
- Make a List - Your search will unfold more smoothly when you are clear about what you need and what you want. These are distinct things, of course. Make a list of your must-haves--non-negotiable attributes that you can't do without. For example, you might require a certain amount of space or a certain number of bedrooms. Make a second list of nice-to-haves, including amenities and things that you could technically live without but would love to have.
- Hire an Experienced Agent - The agent that you choose to help you buy your first home will make or break your overall experience. Take your time looking for one, and make sure that they have the right credentials and experience. Choose someone who knows your target area like the back of their hand. They should know the local market well, and they should be able to connect you with real estate lawyers, loan officers and others who can assist you further.
- Scout Out Comparables - No, comparables aren't just useful for people who are trying to come up with listing prices. They can clue buyers into what the market is doing, allowing them to be more strategic. Find homes in your target area that sold recently. How much were they listed for? How much did they sell for? This will give you an idea for what to expect.
- Amass a Decent Down Payment - Sure, you can always opt for an FHA loan that only requires a small down payment. For the best terms, however, it is always best to come up with a down payment of at least 20 percent. Look for ways to pull the funds together. For example, your parents can each gift you up to $13,000 without facing tax obligations. If you're married, that means that you could receive up to $52,000. If you have to repay it, though, it will affect the amount that you are ultimately approved to borrow.
- Think Long Term - That house may be perfect for you at this very moment, but how will it be down the line? Will it continue to suit your family, or are you likely to need to move fairly soon? How difficult will it be to sell the house if so?
- Scour HOA Contracts - If you look at a home that is in a neighborhood that is governed by a homeowner's association, or HOA, ask for and carefully read the HOA's guidelines before making your decision. Some HOAs are fairly laid back, but many are very stringent about things that some homeowners find aggravating. Also, if you want to rent out the place someday, the HOA may restrict your ability to do so. By reading up on the local HOA, you can make a much more informed decision.
- Look Past the Staging - Staging is great for sellers because it puts a home in the best possible light. It can be deceptive for buyers, however, so try to look past it as best as you can. For all that you know, that huge sofa was strategically placed there to cover up something. Also, some elements like paint and wallpaper can easily be corrected, so don't count them against a house if they aren't to your liking.
- Protect Yourself - Even if your budget is fairly modest, always pay for a thorough home inspection by a reputable company. Insist on contingency clauses in your contract in case something comes up. Otherwise, you could lose your earnest money or other deposit, or you could be left on the hook for buying the home even if you change your mind. If feasible, hire a real estate lawyer to look over everything for you too. After all, this is a legally binding situation, and it is definitely not the time for careless mistakes.
- Financing a Property - These days, there are more home loan products than ever. It's little wonder that home buyers are often so perplexed. Like many people who are buying a home, you may be automatically leaning toward a standard 30-year mortgage. However, what if there is something better--something that suits your financial or lifestyle needs more effectively? By educating yourself about the various ways to finance a property, you will have an easier time selecting the right loan. Boston City Properties is here to bring you up to speed.
If you have good credit and have amassed a down payment of at least 20 percent, you should consider getting a conventional mortgage. A conventional loan is one that has a fixed interest rate. It isn't insured or backed up by the federal government, which is why it tends to have pretty strict credit requirements. You see, with an FHA or VA loan, a government agency is guaranteeing the loan, so lenders are more willing to extend credit to people who make less or who otherwise aren't extremely qualified.
With a conventional loan, all of your financial ducks must be in a row. You will need a very good credit score, and you will have to meet some pretty demanding income requirements. Most importantly of all, however, you will need to pay a down payment of at least 20 percent. By paying an even larger down payment, you can reduce the cost of your loan even more. This is sometimes called "buying points." Chances are that you already know whether or not a conventional loan makes sense for you. In today's shaky economic times, many people don't even come close to qualifying for these types of loans. Fortunately, there are other options.
Conventional loans can be conforming or non-conforming. In the event that you want to get a conventional loan, you will probably have to decide between these two as well. A conforming loan is one that conforms to guidelines that have been established by Freddie Mac or Fannie Mae. For example, both have guidelines regarding loan limits. On single-family homes, conforming loans can't exceed $417,000. If you want to buy a single-family home that costs more than that, you will have to look into jumbo loans. These loans are only offered by certain lenders, and the process to be approved for one tends to be very arduous.
If you don't qualify for a conventional loan, you aren't out of luck--not by a long shot. Most people who don't qualify for conventional loans proceed directly to FHA loans, which are loans that are backed up or guaranteed by the Federal Housing Administration, or FHA, which is a division of the Department of Housing and Urban Development. Basically, FHA backs up these loans so that if they are defaulted on, lenders still receive some of the money that they are owed.
One of the best things about FHA loans is that they have minimal down payment requirements. Unlike a conventional loan, where you have to provide a down payment of at least 20 percent, you only need to come up with one of 3.5 percent or higher. This is why FHA loans are so popular with first-time buyers. They typically haven't had time to accumulate decent down payments. Without FHA loans, many first-time buyers would be out of luck. FHA loans also have laxer requirements, so if you are struggling to be approved for a conventional loan, you may have better luck with an FHA loan.
If you are a veteran or service person, you might consider taking out a VA loan. Like FHA loans, VA loans are guaranteed by a federal agency--in this case, the Department of Veterans' Affairs. In most cases, no down payment is required at all. Eligibility requirements are also very relaxed--some would argue that they are even laxer than those for FHA loans. Don't just walk into a bank and ask about these loans, though. First, contact the VA and get a certificate to show lenders that you are eligible for VA loans. That way, your loan will be processed more quickly, and you won't waste any time.
State and Local Mortgage Programs
You might also want to check locally for special mortgage loan programs. Oftentimes, state and local agencies and governments offer special programs for certain populations. For example, if you make less than a certain amount per year, you may be eligible under a local program. If you are willing to buy a home in a specific area, you may be able to take advantage of a special local loan program. The possibilities here are pretty endless, so visit a local bank or credit union and ask.
Fixed versus Floating
The other big variable to consider when financing a property involves the interest rate. You can choose between a fixed-rate mortgage and a floating-rate mortgage. As the term implies, a fixed-rate loan carries the same interest rate from start to finish. You will always know how much your mortgage payment will be, which is very convenient. However, if you know that your income will increase in a few years, this option may limit your ability to buy the home that you really want.
People usually choose adjustable-rate mortgages because they need a few years of low payments but know that they can handle larger ones later for whatever reason. With a floating rate, your interest rate will be fixed at first. After a certain period of time--usually one, five or seven years--the rate becomes variable and adjusts based on the market rate. In most cases, the rate adjusts monthly. Another type of floating rate mortgage is called an interest-only loan, where you only pay down the interest charges at first and start paying down the principal later. This is bad in that after several years, your balance won't have gone down at all.
Ideally, meet with a mortgage broker who can connect you with many types of loans. That way, you are more likely to get a loan that suits your exact needs.
Tips for First-Time Home Buyers
For most people, buying a home is one of the largest and most important purchases that they will ever make. The home-buying process is rarely simple. Even those who have gone through it before find it to be complicated and confusing on subsequent occasions. Matters are trickier still when dealing with a fast-paced, competitive real estate market—and if you’re looking in Boston or anywhere in Massachusetts, you can rest assured of that. It’s easy to feel overwhelmed as a first-time home buyer, but the team at Boston City Properties is here to help.
All too often, first-time home buyers assume that they can sort things out largely on their own. However, real estate markets are confusing, and zeroing in on something that really works is tougher than many people realize. The internet has empowered people to be able to do much of the initial research themselves, but it’s only effective when reliable sources of information are used. Boston City Properties offers an array of useful resources and services for anyone who is buying or renting property in greater Boston or elsewhere throughout the state. For now, though, read on to pick up some useful tips for getting through the home-buying process in one piece.
20 Tips for First-Time Home Buyers
The internet is awash with websites offering guidance for first-time home buyers. At the end of the day, however, the thing that will affect your experience more profoundly than anything is where you turn for help and information. By signing up with Boston City Properties, you’ll gain access to a wealth of useful resources that are specifically geared toward real estate in Boston and Massachusetts, including up-to-the-second property listings and a powerful search tool.
Without further ado, here are 20 tips that were hand-picked by our team specifically for first-time home buyers:
- Decide if you’re really ready – As a first-time home buyer, it’s important to understand your motivations for wanting to buy a house in the first place. All too often, people talk themselves into doing so for the wrong reasons. For instance, don’t feel pressured into doing so because everyone else is or just because rates are low. Understand that this is a major financial commitment, and give it the thought and consideration that it deserves.
- Know the basics of how the process works – People often enter into their first home-buying experiences with many preconceived notions. This can put you at a distinct disadvantage, so take some time to learn how the process works as a whole. Don’t wait until each step arrives, or you will feel that much more overwhelmed. Understanding the basics of how it all works also reduces the risk of making rash or uninformed decisions.
- Determine how much you can afford – Like many people, you may be eager to get straight to looking at homes in your desired search area. Before doing anything else, however, come up with a conservative estimate of how much you can afford. Online home affordability calculators can give you a general idea, so consider starting there. When looking at monthly payment estimates, remember that they often only include the principal and interest. Additional costs apply, including property insurance, property taxes and, in some instances, private mortgage insurance and other fees.
- Check your credit score – Underwriters will consider many factors when assessing your eligibility for a mortgage, but your credit situation is by far the most significant. After all, lenders want reassurance that you will be able to repay your debt as agreed. Oftentimes, first-time home buyers go into the process assuming that their credit is okay only to learn that it’s a major liability. By checking your credit report early on, you can determine whether your credit situation could use some improvement. The better your credit is, of course, the better financing terms you are likely to qualify for, including lower interest rates.
- Manage your credit with care – Once you’ve decided that you will be buying a home, be especially careful with your finances. For example, avoid taking on any new debt. In fact, you should avoid applying for credit for now because hard inquiries can negatively impact your credit. If you can, pay down any existing debt that you have. Avoid closing older accounts regardless of their status as having a longer credit history is better than having a shorter one.
- Save early for a down payment – As early on in the process as you can, you should start squirreling away money for a down payment. Generally speaking, the more that you can put toward a down payment, the better. Doing so reduces the principal of the loan that you take, which means that you pay less in interest through the years. It often makes you eligible for lower interest rates and better terms too. A 20-percent down payment has always been the standard, but it isn’t feasible for all buyers. Even if you can finagle your way into a 5-percent down payment, for instance, you’re still looking at a down payment of around $10,000 on a $200,000 house. Look into special low-down-payment programs, and investigate things like FHA loans, which can be taken out with down payments as low as 3.5 percent.
- Be prepared to cover closing costs too – You also need to be ready to cough up a decent amount of cash when closing rolls around, and it pays to have those costs figured out and managed ahead of time. Expect to pay anywhere from 2 to 5 percent of the cost of the loan to cover these expenses, which include things like home inspections, title searches and various fees. Note that in a buyer’s market, it may be possible to get the seller to agree to cover closing costs.
- Assess your financial situation – Don’t wait until you sit down with a lender to take a good, hard look at your current finances. Lenders will consider your debt-to-income ratio, for example, and they will want it to be below a certain level. Figure out your current assets and liabilities to see where you stand. Lenders typically want buyers to spend 28 percent or less of their gross monthly income on housing costs; this is called the front-end ratio. They also want buyers to spend 36 percent or less of their gross monthly income on all monthly debts; this is called the back-end ratio.
- Research financing options – All too often, first-time home buyers only apply with one lender for their home loan. Many times, that lender pigeon-holes them into a particular loan product for unsound reasons. Educated buyers are less likely to end up with loans that they can’t afford, so do your homework here. It may be that a traditional 30-year, fixed-interest loan will work best for you; then again, it may be that you’d be better off with an adjustable-rate, 15-year loan. Different lenders offer different products, and interest rates vary widely too. A good rule of thumb is to gather quotes from at least three different lenders; this can save you thousands over the first few years of your loan.
- Get your paperwork in order – Before speaking to a single lender, gather as many of the documents that you’re likely to need as you can. These will include things like pay stubs, tax returns, W-2s and bank statements. Lenders will want to see every last page—even blank ones—so be meticulous.
- Get pre-approved – You will be taken more seriously and will have the peace of mind of knowing what you qualify for by obtaining an official pre-approval from the lender of your choice. Don’t confuse this with a pre-qualification, which simply means that the lender believes that you should qualify for financing. A pre-approval means that the lender has dug more deeply and that you have produced evidence that you can get financing.
- Choose a search area – As you get closer to actually looking for homes that are currently for sale, narrow things down to a more manageable search area. This may mean a specific Boston neighborhood or a city or town elsewhere in the state. Note that you can search Boston City Properties’ listings by neighborhood, city, town and even zip code. When assessing areas for your search, keep things like property values, crime and local services and amenities in mind.
- Know what you can and can’t live without – Write a detailed list of what you’re looking for in a home. Organize your list by the following classifications: must-have features, nice-to-have features and dream features. While you’re at it, jot down your absolute deal-breakers—just don’t be too nitpicky because it’s crucial to keep an open mind when looking for a suitable home. Don’t just think about what you need now; think about what you’ll need five years from now too.
- Be proactive – You’re going to want to work with a real estate agent, but don’t go into the process expecting them to handle everything. Agents aren’t infallible, so it pays to do your own research too. This includes researching the current state of the local real estate market and knowing how the process works. You’ll find many useful resources on the Boston City Properties website that are sure to help.
- Look at comps – When you bring a real estate agent on board, they will look at comparable homes to what you’re looking for to negotiate more effectively, among other things. You can easily check and see how much homes that meet your criteria are currently listing for on the local market, and you can also check and see recent sales to get more familiar with local prices. This work will make a difference with everything from determining your budget to negotiating more effectively.
- Know what to look for in a buyer’s agent – When you’re ready to proceed, contact Boston City Properties for a referral to a local real estate agent in your desired search area. You should know what to look for in one to ensure that you get the right help. Ask about their credentials, including the status of their license and any professional awards that they may have received. Ask to see their current listings, and get referrals to recent clients to see what they have to say. Make sure that they have strong knowledge of the neighborhood and its market, and stick with someone who has proven ethics and morals.
- Protect yourself – With a buyer’s agent by your side, you will be much more shielded from potentially disastrous mistakes and problems. Still, you should take care to protect yourself and your interests in other ways too. Never skip out on inspections, for example. Don’t be afraid to request contingency clauses when signing purchase agreements too. That way, if the appraisal comes in too high or another issue crops up, you can still get your deposit back.
- Come up with a strong offer – Nothing can ruin your odds of getting the home of your dreams like making an initial offer that’s way off base. Coming in with an offer that’s too low will automatically rule you out in most cases; coming in with one that’s way too high can shortchange you. It’s also important to leave your emotions out of it; if you end up in a bidding war, being too emotional can be a major liability. Your agent will help you to determine the most effective and strategic offer when you find a property that you’d like to purchase.
- Be flexible during negotiations – Buyers often think only in terms of money when it comes to negotiating the price of a house with sellers. However, there are many other ways to improve the circumstances of a deal, and it’s important to keep an open mind about that. For example, the seller may not be willing to go any lower on the price, but they may be willing to cover closing costs for you. If the house requires major repairs, the seller may be willing to slash the price in exchange for letting you handle them after taking ownership. This is where it pays to have a good real estate agent by your side because the ones with relevant experience and true talent go to bat for their clients in such situations.
- Be prepared to act quickly – Finally, as you will learn while researching whatever submarket applies to your search, local real estate markets across Massachusetts have been on fire for many years now. In greater Boston in particular, competition is fierce. Home inventory levels are low in many areas, and bidding wars are pretty common in many markets. It’s not unusual for listings to pop up one day and to disappear by the very next because properties are being snapped up that quickly. It is crucial, therefore, to be available at all times and to be able to act quickly if need be. Your agent should be similarly prepared to act, and they should always be on high alert on your behalf.
The Best Advice for First-Time Home Buyers? Connect with Boston City Properties
The tips that are listed above cover the basics for you, but they are only meant to serve as an initial guide. At the end of the day, the thing that will affect your ability to find the right home the most will be the quality of the information that you rely on. The fastest way to gain access to a wealth of resources that are geared specifically toward Massachusetts and Boston real estate markets is by connecting with Boston City Properties. With access to these resources, you will lay the groundwork for a much more efficient, effective and stress-free home-buying experience.
If you’re ready to take the plunge into first-time homeownership, Boston City Properties is here to help. As excited as you surely are to take this step, take care not to rush things. The right home is out there and waiting for you, but it’s up to you to do much of the work. Kick-start the process now by signing up for access to our constantly updated listings. When you’re ready, give us a call for a referral to a real estate agent in your desired search area. For more information, give us a call.