Traditionally, people didn’t buy a house until they were ready to share it with another person, but the recent real estate boom has seen even single people plunking down chunks of cash in hopes it increases in astronomical proportions. However, this article is not going anywhere near the debate of real estate bubble vs. economic upswing but solely addresses the nuts and bolts of buying your first home.
Before you even start planning your dream home, find out what banks think you can afford. This is called pre-qualification and consists of using a mortgage broker to shop your particular financial situation to banks who will, in turn, give "letters of prequalification" stating how much they will loan you. This will be key later on when you are looking at houses as you will know your affordable range.
Traditionally, you need to make a down payment that is 20% of the purchase price, but there are ways around this with second mortgages, PMI insurance, bridge loans and 100% loans. Please be aware that while these "alternative" options may be the only way a renter can become a homeowner, they can also be very expensive.
When you go to a bank or meet with a mortgage broker either to apply for a mortgage or get pre-qualified, look like a serious buyer. Make sure you are dressed neatly (first impressions are key) and are prepared to offer copies of your last two years tax returns, last two months of paychecks, last two months of financial statements and copies of your drivers license as proof of your income and asset accumulation.
Later in the loan process, you will need verifiable housing history. If you are renting, you will need to prove your reliability over the last two years by providing rent receipts. If you are living with your parents, some lenders accept a letter from your parents explaining the details of your situation (for example, you are going through school and reducing expenses by living at home) and vouching for your character.
The basics of a mortgage are interest, the "fee" for borrowing money, and term, the length of time you have to pay off the loan. A traditional loan involves paying the loan in twenty or thirty years with a set interest rate. Very popular the last few years have been Adjustable Rate Mortgages (ARM). Basically, there is a set interest rate (usually very low) for three or five years but once the set term is up, the interest rate is varied and usually very high. These can be helpful if you take advantage of the lower rate for the set period of time and then refinance before the higher rate kicks in so you end up paying less toward the interest and more toward the principal.
Also popular are "interest-only" loans. These loans are for buyers who don’t expect to own the house long and are usually used by real estate investors. There are both pros and cons to this method but if you have to resort to an interest-only loan to afford a home, the home is almost certainly above your means.
Know What You Want
Make your preferred list for your house. Consider bedroom/bathroom ratios, lot size, school districts, neighborhood and prioritize regarding importance. While a single person may not care about the quality of the school district and want a small lot for less lawn care, a young family may sacrifice an extra bathroom for a large, fenced-in yard.
Once you have viewed some houses and have an idea of what is available, consider contacting a buying agent to help you find the house you desire. He or she will be able to give you perspective on your "wish list" and make workable suggestions as well as guide you through the whole purchase process. In every real estate transaction, there is a buying agent and a listing agent. Sometimes, one agent does both jobs, but it is in your best interest as a buyer to have someone represent you alone.
The Headache Is In the Details
Watch real estate listings to discern how "hot" the market is in your area. This will help you know if negotiation is reasonable or if you need to snap up whatever you can get. If houses are sold less than a month after listing, suck-up to your realtor. If houses are generally on the market for a few months or longer, you may be able to counter-offer.
Once you have found your home and want to sign the contract, you will need to pay a deposit to the seller. Usually around $1000 or $2000, this locks in your contract and prevents the seller from negotiating with other buyers.
Most contracts detail your down payment amount (if you have one), list who pays what closing costs (buyer or seller), give you so many days to find financing and require that you apply for financing within so many days of the contract being signed. Make sure your contract is contingent on financing. Should you neglect this clause, even if your financing falls through at the last minute, you will still be obligated to pay the contract price.
Regardless of the house you choose and the kind of mortgage you secure, make sure you live within your means. If you buy a house you can afford, you will be far less affected should the real estate market in your area weaken. And if you are living in a "hot spot" and your house is worth twice as much in three years, consider yourself blessed, but don’t expect it.