Shopping for a home can be a very exciting time, but it can also be extremely stressful. After all, you're about to spend hundreds of thousands of dollars and enter into a commitment that can last most of your life. Here's some information that we hope you'll find helpful when you're shopping for a home. While we can't give you the answers to all of your questions, we'll do our best to address some of the bigger issues.
What Do You Want in a Home?
Before you go and find a realtor, you'll need to consider what you want in a house and to do that you'll have to ask yourself some very important questions: How much can I afford? How big of a house do I need? How many bedrooms should it have? How much is going to cost to heat this house in the winter? If you have kids, will you have access to good school systems? Is the yard big enough? And the list goes on and on.
Check Your Credit Score
Before you consider applying for a mortgage, it's important that you take a look at your credit score. Your credit score is a major component in determining the interest rate for your loan. In general, the higher your credit score, the lower your interest rate. Keep in mind that a mortgage is typically a 30-year loan, so a 2% difference in your interest rate could result in tens of thousands of dollars in interest payments throughout the life of the loan. If your credit score is on the low end, you may want to consider cleaning up some items on your report and work on increasing your score prior to applying. Granted, if you are approved at a higher rate because of your credit score, you will always have the opportunity to refinance at a later date, but keep in mind that interest rates fluctuate greatly from year to year, and often from month to month. Locking in the lowest possible rate is crucial.
Note: Make sure all of the information is accurate. Anything inaccurate on your credit report could drastically affect your score and hurt your chances of getting approved for a mortgage. If something on one of your reports is inaccurate, it needs to be disputed immediately. The reports typically come with instructions on how to dispute incorrect information. Everyone is entitled to a free copy of their credit report once per year. Make sure you visit AnnualCreditReport.com to obtain your free copy and review it for accuracy.
Find out How Much You Can Afford
Sit down, be realistic. Don't find the number you're comfortable spending - find the number you can comfortably spend. As a general rule, your mortgage payment should never exceed 30% of your gross monthly income (before taxes). This can be a difficult rule to follow, so it's important that you're upfront with your agent. Although it may be difficult to find the exact home you're looking for in your price range, your patience will most certainly pay off when you have to start making payments. But, if you go into the buying process with a firm budget and you stick to it, you'll be much better off. For example, if a home your real estate agent shows you will cost $1500 a month and the maximum payment that you can afford is $1200, don't let your love for the house blind you. An extra $300 dollars is a huge undertaking when you haven't factored bills and home repairs in yet!
Shop Around for the Best Mortgage
You may think the mortgage is just one of those things you sign up for and then you own your home. You'd be wrong. Choosing the type of mortgage is as important as choosing your home. The most common mortgages that you'll be choosing from, as outlined by usa.gov, are:
- Fixed-rate mortgage - Interest rate stays the same no matter what the length of the loan is. On the downside, if the rates fall, yours will not.
- Adjustable-rate (ARM) - Lower initial rate, however, rate is subject to changes over the length of your loan (both positive and negative changes).
- Interest-only - You pay only the interest on the loan (monthly) for a fixed term. Unfortunately, after the initial period ends, the balance of the loan is due, meaning higher payments, having to pay a lump sum, or even refinancing.
- FHA Loan - If you do not qualify for a typical loan, this will allow you to purchase a home with a lower down payment. The amount you're able to take out for a loan, however, may be limited.
- VA loan - If you are a veteran, active duty personnel, or surviving spouse, you are guaranteed a loan through the VA. You will be offered competitive rates and low or no down payments. Much like the FHA loan, though, your loan may be limited.
- Balloon Mortgage - This type of loan is usually a fixed-rate with low payments. Unlike the other loans, at the end of the initial period, the entire balance is due immediately. This makes the Balloon Mortgage risky for most borrowers.
Searching for the Perfect Home
Ah, the fun part...shopping for a home! Since this process may be overwhelming to you first-timers, it's usually best to use a real estate agent. While they will get a commission from the sale of your home, they can be a huge help when it comes to figuring out how to get the best deal on your home. Not everyone understands the ins and outs of the paperwork involved with purchasing a home and you don't want to accidentally sign something you don't mean to without having the best guidance you can find.
A real estate agent will consider your budget and your wants/needs and come up with a selection of homes that fit your criteria. If you were to shop for a home on your own, you could be prone to stepping into houses that were far beyond your budget. Falling in love with a home you cannot afford will make the entire shopping process even more difficult as you try to find an affordable home that lives up to higher expectations.
There are a lot of things to consider when you're searching for your perfect home. For example, if you're a parent, or thinking about becoming a parent, you'll want to be sure you're in a good school district. Be sure to make a list of your wants and needs before going house shopping.
Put in an Offer
Don't offer the sellers the full asking price right out of the gate. There's always a chance they're willing to take less than what they asked for. Also, your real estate agent should know, almost immediately upon seeing the home, whether or not it is overpriced. Talk everything out with your real estate agent, decide your absolute highest price, and figure out the best approach for your first offer. A home may be priced at $200,000 but the reason for that price may just be that the seller doesn't know how much their home is really worth. You real estate agent will work to ensure that you're getting the best possible price for the house. After all, that's what you're paying them a commission for!
Choosing Homeowner's Insurance Coverage
Homeowner's insurance is something that is absolutely necessary when owning a home and it's certainly not something to be cheap about. Homeowner's insurance usually covers any damage to your home from natural disasters, theft, vandalism, and any upgrades* to your home in case building codes change in your area. Your attorney's fees (should you need one for the cause), and any damages in lawsuits involved in bodily injury or property damage (either from you, a family member, or a pet) are covered by the liability portion of the insurance.
* "Upgrades to code: Most policies cover about $10,000 to cover added costs of rebuilding to new codes. If you have an older home or if codes have recently changed, buy a law-and-ordinance rider for an extra 25 percent of the premium."(consumerreports.org)
According to bankrate.com, there are four terms that homeowner's policies use to describe the coverage they offer you.
- Actual cash value - the actual cash value equals the replacement cost minus the depreciation.
- Replacement coverage - the cost of the rebuilding is covered up until you reach the amount of the policy. For example, a $100,000 policy will cover only that amount of your rebuild, even if your home costs $150,000 to rebuild entirely. Also, if you suffer less damage that is not a total loss, you will be covered for the cost of the damage, minus your deductible.
- Extended replacement coverage - The cost of rebuilding your home, up to a certain percentage over the insured amount - typically 20% or 30%. This means that, if your home is insured for $200,000 but the cost of repairing the damages will exceed that value, you would be able to receive benefits of between $220,000 to $230,000.
- Guaranteed replacement coverage - This type of coverage is not commonly used as much lately. It was popular in the 1980's but has since been removed from most insurers' policies. This coverage means that your damages would be covered in full, regardless of the cost. It is a quite expensive policy but is probably worth it, if you were able to find it still available near you.
Signing the Closing Documents
Read, read, read. The closing consists of two sets of documents - mortgage documents to officially borrow the money, and real estate documents to sign the house over to you. This is another reason having a real estate agent and attorney is a good idea. While reading through the stack of closing documents, they can easily explain to you the documents you are signing instead of you trying to understand the legal language on your own. Don't leave the reading of the documents up to someone else, though. This is a huge purchase that you're making in your life, it's important to pay close attention to everything that's put in front of you to sign.
First-Time Home Buyers
It's important that you know your rights and responsibilities as a homeowner. If you're a first-time homebuyer, we recommend speaking to a housing counselor who specializes in the home buying process. They'll walk you through the process and be sure you understand exactly what you'll be responsible and they'll help you prepare for all of the intricacies of homeownership. Additionally, you may be eligible for certain benefits as a first-time homebuyer, such as down-payment assistance. If you live in Massachusetts and Connecticut, you can click here for our First-Time Home Buyer Course. You can also click here to see a list of housing counseling agencies in your area.