First Time Home Buyers
Before you Buy
First, we must find out if homeownership is right for you. A home is a lot of work. Mowing, snow removal, maintenance, decorating, furnishing, and the list goes on. It’s an even larger financial decision by taking on debt and also promising to pay obligations such as property taxes.
While homeownership can be financially rewarding and can create wealth, it could also become a money pit if we aren’t careful.
The key is understanding what homeownership means, how to approach it to maximize return on your investment, and if it is right for you. The cost of borrowing money right now is just one factor among many. Here are some questions to ask during the home-buying process:
Is It Better To Rent Or To Buy?
Homeownership is cheaper than renting in many cases. But not always. You should do your due diligence and compare the two options. When deciding which option is best for you, ask some basic questions:
- How long do you plan to live in your home?
- How fast do rent and home prices appreciate in your area?
- Can you invest in a down payment and still have an emergency fund to cover mortgage payments and expenses?
The option to buy could be best for you if:
- You can take advantage of homeowner tax credits and incentives.
- Planning to stay in your home long-term (over 5+ years)?
- Rent is appreciating fast.
The option to rent could be best for you if:
- The cost of maintenance and improvements exceeds your monthly budget
- Planning to relocate in less than 5 years.
- Facing job/career insecurity
- Have credit and financial issues.
The Home Purchase Assistance program of the District of Columbia can help first time homebuyers receive interest-free loans for closing cost. Typically the loan is based on income, family size, total assets and other factors to determine eligibility.
The state of Maryland has several programs to help first-time home buyers reach their dreams.
The programs can help with getting loans guaranteed by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), or the U.S. Department of Agriculture/Rural Housing Service (USDA/RHS).
There is even a Down Payment Assistance Program to help pay not only the down payment but also for closing costs, and/or prepaid/escrow expenses.
The SmartBuy program can also help reducing or pay off student debt while purchasing a home.
Check with MMP for eligibility and requirements.
Virginia Housing offers a wide range of loans and assistance to homebuyers in Virginia.
From government-backed loans, down payments assistance or no down payment, credit score assistance, and helping to reduce federal taxes.
Loans are maxed out by income, purchase price limits, and differ based on location.
Why Do You Want To Buy?
Now that you found out that buying makes more financial sense you have to decide if it makes emotional sense and fits your lifestyle. If you are working and playing hard all day and night, maybe a home that requires upkeep and maintenance doesn’t fit your lifestyle. It’s like going on vacation and paying $700 a night for 5 -Star hotels and never sleeping there. If you barely spent time in a place why are you spending so much (PS this applies to renting too)? Is it the commute, the neighborhood, where all your friends live, where everyone told you you should live?
Most people will try to convince you to buy a home. I rather try to convince you not to, so you can decide for yourself to buy one for all the right reasons. You will hear people ask you:
- Have you outgrown your home? Well, you are not Alice in wonderland, so unless you had children or friends move in you haven’t outgrown your home. You might want to take a trip to IKEA or the Container store and declutter (there saved you $500k). Size is about perception. Some decorative changes and rooms can be made to look larger. Don’t buy a home unless you need the room aka my Baby Grand piano doesn’t fit in my studio.
- Are you tired of paying rent? Sorry to break it to you but if you are tired of paying rent you are going to be even more tired of paying your mortgage, property taxes, special assessments (condos), HOA fees, mowing/gutter cleaning/repairs, and a long list of other things. The difference is that all that hard work and payments are now going into maintaining and growing your equity in your new home. Before you were subsidizing someone’s else payments to maintain and grow their equity in their home.
- Don’t you want a larger yard? Owning a large yard means it won’t cut, seed, fertilizer, kill weeds, pesticide, and drive itself to the HomeDepot which is going to become your second home. So really what they are asking you is do you want to be on a first-name basis with John in the garden section?
- Don’t you want a shorter commute? Yes, a shorter commute is always great but so is a longer one that doesn’t cost me several hundred thousand more. Is 10 to 15 minutes less worth paying more? By the same token is 10 to 15 minutes more worth paying less? You have 2 questions in one. The first is, is the commute (shorter or longer) more important to me than the investment potential opportunity? The question is after how much (less or more) of a commute do I start having diminishing returns or enjoyment for my investment? You might be financially rewarded by getting a similar home for less in a growing neighborhood that will appreciate faster but you have diminished enjoyment due to a longer commute. It’s all about trade-offs.
Having a clear sense of your reasons for buying will help you choose the right property.
Homebuying Guide
Have I prepared for homeownership?
Yes buying a home takes planning. Before you contemplate buying, you must first clean up your credit. Get a free report and see if there are mistakes or outstanding issues. Try to work with creditors to clean up any defaults, late fees, and judgments. Creditworthiness is key in obtaining a loan.
Collect tax filings, W2 forms, proof of income, and other financial documents. Mortgage companies will ask for 2 to 3 years’ worth of financial documents. The next step would be to go over your monthly budget and cut unneeded expenses. The key is to save as much as possible to have enough for your down payment, and expenses (inspections, mortgage fees, points, closing costs), and still have an emergency fund after closing.
Do I have the right partners?
Before you go shopping for houses you should shop for lenders. All that pre-prep work will pay off now. You have great credit, savings, and all your documents ready to submit to lenders and get your application in. There are also state-sponsored programs to assist first-time homebuyers to qualify for a loan and even help in paying some of the costs for closing and even the down payment (see above tabs for links to such programs).
You should shop for lenders and make sure that you get pre-approved and not just pre-qualified. Being pre-qualification will only tell you how much you can afford for a home. Getting pre-approved will tell you how much the bank will guarantee to lend you. The latter will let you calculate with expenses, closing, and down payment how much house you can get. Now you have a budget for your dream home.
Next up is finding the right agent to work with. Buying a home requires an understanding of complex real estate issues and more paperwork than one should ever fill out. Having the right agent at your side advising you, negotiating, and advocating on your behalf and solely on your behalf is important to help you navigate the real estate market successfully. An agent like Suhayl can guide you through this complicated process. Choosing the right agent that fits your style and personality is important as well.
Getting Financing
Start a file and gather all of your important financial documents. Lenders will need information about finances so might as well do that first. Make copies of bank accounts, investments, recent credit cards statement, car and student loans, recent pay stubs, and 2 to 3 years’ worth of tax returns.
Check Your Credit Rating
Your credit score is of one the most important pieces of information that lenders will be looking at. Do pull your credit score and review the information for mistakes or issues you can clear up.
Below is the contact information for the 3 major credit reporting agencies:
| Equifax | (800) 685-1111 |
| Experian | (800) 392-1122 |
| Trans Union | (800) 888-4213 |
Scores of “800” are considered “Very good to Excellent”.
680 + is considered “Premium”.
620-800 is considered “good”.
Is your credit not great? Well with a little help you can fix that. Check our Financing section.
The good news is that today you can do this from home online. Long and Foster works with a select few lenders that come highly recommended. If you need help with poor credit or down payment assistance your state housing department can help you with those.
How to choose the right lender?
Evaluate lender based on the following:
- How transparent are they about fees and rates?
- Are they offering competitive rates, costs, and fees?
- Do they have different programs or one size fits all
- Have experience in the type of home and location you are looking to buy?
- Do they have good reviews online?
First of all, you must understand which loan you are getting and what the rate is. Some lenders are going to say one rate but mean another. The one to pay attention to is APR, or annual percentage rate. The APR is the sum of the interest rate plus other loan costs. The APR is going to tell you the total annual cost that you’ll end up paying for borrowing money. The most common loans are:
Fixed Loan: The monthly payments will stay the same over the life of the loan, which is typically between 15 and 30 years.
ARMS (Adjustable Rate Mortgage): ARM’s vary in rate over the lifetime of the loan. They start lower than a fixed-rate loan at first, saving you money initially, then vary based on an index based on market rates. Some lenders will tell you what that index and how it is legally fixed. If not they can do so at their discretion and at your cost. Some ARMS (Intermediate/Hybrid) can fix the interest rate for 3,5,7 or 10 years. ARM’s are better if you plan on not living in a home long-term or plan to refinancing in the future and want to take advantage of lower payments now.
Based on the type of loan and terms, the monthly payments can vary widely and how much your total payment (over the lifetime of the loan) is going to be. Best to compare them all and find out which trade-off you are willing to make. Payless per month but pay more long-term or pay more per month and pay less over time.
Other things to consider are:
Points: Your lender might offer you points (fee) to lower interest rates. They will charge you a one-time pre-paid interest payment calculated as a percentage of the loan ranging from 0.25% to 2% of the loan balance. Points are tax-deductible but best to consult with your tax advisor on how they will affect your taxes.
Origination fee: An origination fee is a payment associated with the creation of an account with a lender handling the processing associated with taking out a loan. An origination fee can vary from 1.0% to 5.0% of the loan amount so shop around and negotiate.
Miscellaneous Fees: Lenders will charge borrowers various fees including notary, courier, recording fees. Always best to ask for an explanation and if they are optional or can be waived. Why overpay.
Do I have Plan to select which home is right for me?
You are now all set for home shopping after pre-prepping, getting pre-approval, having a budget, and having an agent like Suhayl at your side. While housing shopping is exciting and fun it is also a serious affair and a long process not like a 30-minute show on HGTV. So best to start with a plan. Make a list of needs vs wants and have a budget.
If you are looking with your partner, discuss your different tastes, needs, and deal breakers together so you’ll be on the same page. Take our homebuyer quiz and compare notes. You are also not just buying a home together but your neighbors and the neighborhood. Research the neighborhood, and check out if they have a website and or a Facebook group page. Do look at local government sites to find out about schools, traffic, new developments, and other information that could impact the neighborhood. A new highway or a new state-of-the-art entertainment and art center can transform a neighborhood overnight and impact home values. Drive around and check out the local shops and restaurants and see if the neighborhood fits your lifestyle. Also, make the drive to work to find out your commuting time from that neighborhood or check google maps and see the traffic flows. If you live on a cul-de-sac in a secluded neighborhood, you might find yourself in the back of a traffic jam at 8 am. Anticipation is a gift when it comes to home buying.
Evaluating Homes Guide
With a plan and information about your preferred neighborhoods, you are now ready to shop. After a few days of fun visiting homes, you might start getting a little overwhelmed. All the homes start looking the same and getting confused. To avoid this, try not to visit too many homes at the same time and take notes and pictures. It’s also good to know what you should look at and why. I put together some tips on what you should pay attention to in the downloadable guide below:
Remember to stay within your budget and consider added expenses such as taxes, homeowner’s association fees, potential repairs, maintenance, etc. before making an offer on your dream home.