Keith W. Michon, P.C. First Time Home Buyers
Buying a home for the first time can be overwhelming, stressful, anxious and even downright uncomfortable. But it does not necessarily have to be the case. If you do your homework, establish a realistic budget and stick to it, the process can be much more straightforward. Buying a home is probably the biggest purchase you ever make, and without the right information, it can also be the most confusing. This step-by-step guide is meant to help you navigate the winding path toward homeownership.
- Determine What You Can Afford
- Get Pre-Qualified or Pre-Approved by a Lender
- Figure Out Where You Want to Live
- Find Out What Loan Assistance Programs May be Available in Your Desired Areas
- Find a Good Realtor and Attorney
- Go Ahead and Submit An Offer
- Conduct a Home Inspection
- Formally Apply for a Mortgage
Get started by evaluating your financial situation and setting a budget. The table below provides some basic guidance as to the maximum home price you can afford. These estimates take into account household income and the percentage down payment you have.
|How Much House Can You Afford With a 7% 30-Year Mortgage?|
|To Spend This Amount on a House||You Need At Least This Monthly Income||To Cover This Monthly Housing Expense||Other Monthly Debt Payments Should Not Exceed||And You Need at Least This Much Cash||To Meet a Down Payment Requirement||And Closing Costs|
For the purposes of the table above, minimum monthly income is based on a ratio of monthly housing expense to income of 28%. Closing costs include points and are assumed to total 4% of the loan. Monthly housing expense includes principal and interest, mortgage insurance, taxes and hazard insurance. Taxes and hazard insurance are assumed to be 1.825% of sale price. The down payment requirement is assumed to be 10% on prices of $250,000-400,000, 5% on $150,000-200,000, and 3% on $100,000. Mortgage insurance premium rates are .79% with 3% and 5% down payments, and .53% with a 10% down payment.
It is important to point out that as rates fall, buying power increases. To say it another way, as rates fall, the amount of money you can borrow for the same monthly payment increases. As a result, you can afford to buy a more expensive home for the same monthly payment.
The chart below shows how purchasing power varies based on different interest rates for the following example: annual income is $44,000 with car payments and other debts total $400 a month. The monthly housing expense would be approximately $1,100 (property taxes and hazard insurance of about $275 and a principal an interest payment of $825).
|If your interest rate is:||You can afford:|
In addition, points can sometimes be avoided depending on market conditions and individual credit scores.
Qualification (or "pre-qualification" as it is often called) is simply an opinion by a lender (or mortgage broker) that based on information you have provided covering your income, assets, and debts, and given current market interest rates, you qualify for a loan of some specified amount. If any of the information you provide turns out to be different, or if interest rates increase, the opinion is subject to revision. The opinion also assumes that your credit is satisfactory. If that turns out not to be the case, the qualification will be withdrawn. With a "pre-approval", the lender actually verifies the information you provide and has checked your credit. In either case, the information helps to establish a current amount that you will be able to spend on your home.
The lender's commitment under a pre-approval, however, will most often be expressed in terms of a monthly mortgage payment rather than a loan amount. Since the interest rate is not known at the time the pre-approval is granted, lenders are reluctant to commit to a specific loan amount for fear that a rate increase would increase the monthly mortgage payment to an unacceptable level relative to the applicant's income. If this were to happen, the loan amount corresponding to the approved monthly payment would drop, and the applicant would either have to increase the down payment or buy a less costly house. This is why a pre-approval has limited value. In addition, lenders do not commit themselves to anything when they qualify a potential borrower. Hence, there is nothing to hold them to.
To convert the monthly mortgage payment in a pre-approval into an approved loan amount, the interest rate must be fixed. For this you need a rate lock commitment from the lender, which will specify the rate, points, loan-to-value ratio and other features of the transaction. A rate lock is not usually given until you submit a complete application, and it may require paying a fee.
It is certainly better to find out that you do not want to live in a particular community before you buy a home than after purchasing it. It is important to look at and compare such things as the quality of the school systems, property tax rates, municipal services and overall financial health of the city or town. The status of these issues will affect real estate property values in a positive or negative way for years to come. What may look like a "good deal" now may, in reality, represent a stagnant investment. In addition, your children may not get the level of quality education needed to remain competitive with similar students in other Massachusetts communities.
It is a good idea to narrow your search to a few communities and then begin the house hunt in order to determine what type of home you can get for your hard earned money. After visiting a viewing the available housing stock, you will be in a much better position to identify a good deal when you see it and help narrow your search to a specific community.
First time home buyers may qualify for affordable housing or down payment assistance depending on the community and program. These types of programs enable first time home buyers to purchase property that they otherwise could not afford. There are also restrictions attached to the ownership and subsequent resale of the property. The first time home buyers must usually attend a month long seminar (typically 4 evening sessions) to qualify for the affordable housing program. The seminar provides valuable information regading all aspects of the purchase process. In addition, many affordable housing properties are made available via lottery. Listed below are some resource links to the affordable housing process:
- Massachusetts Housing Finance Agency (MassHousing)
- City of Cambridge Affordable Homeownership Programs
- Malden Redevelopment Authority
- Massachusetts Housing Partnership (MHP)
A good real estate buyer agent or broker can be a very valuable resource when you begin the house hunting process. Many brokers also live in the same city or town and therefore can provide important feedback as to the school systems, etc. The broker also has access to the Multiple Listing Service ("MLS") that provides detailed information about properties listed for sale all across Massachusetts. The MLS lists how long the property has been on the market, number of rooms, annual taxes and much more.
An attorney is also an important part of the purchase "team" who helps guide you through the purchase process. Since an offer to purchase in Massachusetts is a binding contract, it is important to submit an offer that protects your interests. Also, the terms and conditions listed in the offer to purchase will be incorporated into the more detailed purchase and sale agreement. The attorney should incorporate any concessions that arise from the home inspection, track your mortgage financing (mortgage contingency date) and attend the closing to make sure your interests are protected.
Most real estate attorneys charge a fixed fee. As a result, never hesitate to ask questions. Since you are making a long term commitment and spending a large sum of money, you will feel much better about the transaction if you stay informed and understand what is happening each step along the way.
Once you find a home that you feel meets all of your criteria, it is time to submit an offer. The amount of the down payment can vary, but generally you should make a down payment that equals at least 10% percent of the purchase price. First-time homebuyers may go as low as 3% to 5%. It is important to have a mortgage contingency and inspection contingency (and appraisal contingency). If condominium parking is supposed to be included, it should be listed in the offer. The same applies to special items such as lighting, shades, moveable kitchen islands, etc. Remember that once an offer is accepted by the seller, additional concessions may be much more difficult to obtain.
After the offer has been accepted and before the purchase and sale is negotiated and signed, the buyer must conduct their home inspection (usually within 10 days). The inspector will view the property and provide a detailed frank written report identifying the physical deficiencies. Any agreed upon repairs or concessions must be included into the purchase and sale agreement to be enforceable. To the extent the seller is willing to fix items will depend on the cost and their current motivation level to sell the property.
All lenders are required to provide you with a loan packet that contains state disclosures as well as a Good Faith Estimate of Settlement Charges. This will provide you with a accurate approximation of your closing costs for the following items:
- credit report
- loan application fee
- appraisal fee
- bank attorney fee
- real estate taxes
- mortgage insurance
- title insurance
- registry recording costs
- prepaid interest
- title search costs
When you are formally approved you will be asked to "lock" your rate at the then going rate. It is important to lock the rate for a period not shorter than the closing date. To do otherwise may result in an interest rate increase prior to closing.
The mortgage contingency date in your purchase and sale agreement represents the date by which you are required to obtain formal written verification that your loan request has been approved. This is typically called the "loan commitment letter" or "written loan approval letter." If you have not obtained a written commitment by the expiration of the mortgage contingency date, your entire deposit may be at risk.
During the closing process, many other issues may arise. Examples include: seller title problems, final walkthrough inspection issues, failure to complete repairs and mortgage approval delays.
A good, responsive and experienced attorney will provide you with the protection and peace of mind to get you to across the first time home purchase finish line.