As a homeowner, you remember clearly that moment you realized that you would be buying your first home. Losing the landlord is a beautiful dream for many and when it starts to become a reality, the feeling can be intoxicating.
It’s easy to get caught up in the dreams and let the cards fall where they may, but that is unwise. There’s a process to buying a home, and those that are successful follow the steps.
Before you jump online to look at homes for sale, start with the basics: the 3 basic things you need to buy a home.
You’ll need a mortgage
Most people are surprised to hear that 23 percent of home buyers who will pay cash for their homes. The majority of them are financing it through the sale of another property. Unless you are financing your home with the sale of another property (which would mean you are not buying your first home) or you have done an exceptional job at saving and investing, you will need a loan to finance the purchase of your home.
The type of loan used to buy a house is called a “mortgage”. The word appropriately traces its origins to the Old French term for “death pledge.” Ok, 30 years may not likely see you in the grave, but it may feel at times as if you’ve been repaying this loan forever.
Look at what you get in return. In addition to having the freedom to have a pet or two, the luxury of painting your walls any color you feel like and the satisfaction of knowing that a landlord will never be calling you to schedule an inspection of your house, you get the added benefit of equity growth and the financial security owning a home can provide.
Shopping for a mortgage is something that shouldn’t be entered into lightly. There is a lot more to consider, for instance, than the interest rate. Additional considerations are covered in detail at Investopedia.com, WashingtonPost.com and, if you prefer video, Money Talks News.
You’ll need cash
There are a few things you’ll need cash for. Likely you will need cash for a down payment on the home you choose to buy. There are some first time home buyer and other special types of mortgage financing that may provide zero down mortgage options. For instance, if you’re using a Veterans Administration or U.S. Department of Agriculture loan you may not have to pay anything in down payment funds.
Typical FHA lenders, on the other hand, base the down payment amount required, at least partially, on your credit score and it could range from 3.5 to 10 percent.
There are also the FNMA (Fannie Mae) and FHLMC (Freddie Mac) programs with down payments ranging from 3 to 20 percent of the purchase price. But, that’s not all the cash you’ll need.
You will need cash to pay your earnest money deposit. Your deposit needs to be paid when your offer to purchase is accepted by the seller (or shortly after). For offers to purchase Real Estate in Rhode Island, the deposit is customarily the lesser of 5% or the down payment amount required by the lender if less than 5%. The deposit is negotiable, though, so depending on the situation it may warrant offering more or trying to get the seller to consdier less. At closing, the earnest money is credited towards what you owe.
Another phrase first time buyers should become aware of sooner than later is “cash to close.” You may have heard of this chunk of money referred to as “closing costs.”
This amount includes all the fees and expenses that are related to actually making the loan and the closing process. They can include tax transfer fees and sales tax pro-rates, attorney and title fees, notary and escrow fees, and more.
Closing costs are variable, but you can reasonably expect to pay between 2 and 5 percent of the purchase price, unless you negotiated a credit towards closing costs from the seller when you agreed to terms of the sale.
Your cash to close, along with any remaining down payment, is due at closing. Most home buyers wire the funds to the closing attorney or bring a cashier’s check to closing.
The lender will let you know the total amount of cash you’ll need to close in advance of the actual closing.
Other out of pocket expenses can include your home inspection, appraisal fee, and first year’s home owner’s insurance policy.
You’ll need a real estate agent
This may sound like a no-brainer, but you’d be surprised how many first time home buyers don’t take this step seriously.
In fact, studies by the National Association of Realtors finds a significant percentage of real estate consumers enlist the help of the first real estate agent they speak with. Maybe that first person is the one, but you should at least consider why you’re working with them.
Real estate agents are not all alike. Read reviews to learn of the experiences other clients have had. Interview at least three. Learn about their experience, their negotiating successes, their availability to devote time to your property search, and exactly what they’ll do to help you find a home. Let them know you are buying your first home and you need to know everything about the process. The ones worth working with will take the time to answer your questions and make sure you understand the home buying process.
Now, the fun part begins – looking at homes for sale. We wish you luck in buying your first home.
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