First Time Homebuyers
Buying a home is one of the most significant financial decisions most people ever make, so it is important to do your homework about all aspects of the process before you begin. We’ve indicated some of the things you should consider below:
Renting versus Buying
Your Timeframe: A home is an investment as well as a place to live. When you rent, you write your monthly check and your obligation only extends to the life of your lease. Owning a home typically involves much larger and longer obligations and reflects a greater commitment to remain in your home, since buying and selling can involve costs and risks.
Financial Considerations: The tax laws typically allow you to deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes. This may amount to a considerable savings each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner, and common charges in a co-op or condominium may be partly deductible. Your tax deductions may be limited based on your income as well as other factors, so you should research your situation or consult with a tax advisor.
Your maintenance responsibilities will be greater if you own your home rather than rent it. Because of this, you will need to insure the premises.
The value of your home may go up over the years or it may go down. Traditionally Americans have viewed homeownership as a good investment and a vehicle to build wealth.
Personal Considerations: Many people feel a sense of satisfaction and control by owning their property and having the freedom to enjoy it as they wish. Other people prefer the flexibility and freedom from obligation that comes with renting.
Am I financially better off renting or buying?
To prepare for buying a home, take stock of your financial situation – review savings, debt, income and expenses. You should obtain a copy of your credit report to make sure that the information it contains is accurate. Expect that your mortgage lender will review the report, so be familiar with its contents and make time to correct any inaccuracies. You will want to have a good idea how your new home will fit into your budget. The types of documentation you may have to provide when applying for a mortgage. Traditional loans usually require documents that verify your employment, income and assets. However, low-documentation options may also be available for some homebuyers. Some documents you may need when applying for a traditional mortgage loan include: 1) passport or other government identification, 2) copies of your checking and savings account statements for the past 6 months; 3) statements of any other assets like bonds or stocks; 4) a recent paycheck stub detailing your earnings; 5) a list of all credit card accounts and the approximate monthly amounts owed on each; 6) a list of account numbers and balances due on outstanding loans, such as car loans; 7) copies of your last 2 years' income tax statements; and 8) the name and address of someone at your office (usually in Human Resources) who can verify your employment.
Many buyers find it helpful to meet with a Mortgage Consultant and get pre-approved for a mortgage of a certain amount on a property still to be determined. Having a pre-approval in hand also makes you a more attractive prospect to someone selling their home, since it gives them confidence that you can complete the transaction. You can speak with an Apple Bank Mortgage Consultant to get pre-approved (link to Contact Us).
You should consider which home characteristics and neighborhoods best fit into your future lifestyle and financial plans (marriage, children, job location, retirement, recreation, etc.) You may want to research recent home sales in your targeted area to get a feel for current prices.
Most people also work through a real estate broker to guide them through the process of finding a home. A good real estate broker will be familiar with the neighborhood you are considering: schools, amenities, safety, traffic, commuting, and more. He or she will search the classified ads and multiple listing services for homes you may want to see. The broker provides you with access to homes for sale and can help you prepare your offer. Remember, however, that most brokers actually work for the seller who pays them at closing, not for you.
You will need to hire a lawyer to help you with the contractual matters. You should hire an attorney who specializes in, or is familiar with, residential real estate transactions.
Down Payments and Other Costs of Buying a Home
Making the Offer: When making an offer to buy a home, there are several things you should consider:
- Is the asking price in line with prices of similar homes in the area?
- Is the home in good condition or will you have to spend a substantial amount of money making it the way you want it? You may want to get a professional home inspection (or if there appear to be more significant issues, an engineers report) before you make your offer.
- How long has the home been on the market? If it's been for sale for some time, the seller may be motivated to accept a lower offer.
- How much mortgage will be required? Make sure you really can afford whatever offer you make.
- How much do you really want the home? The closer you are to the asking price, the more likely your offer will be accepted. In some cases, you may even want to offer more than the asking price, if you know you are competing with others for the house.
If your offer is rejected, you may have to offer more money. Often, negotiations on a price go back and forth several times before a deal is made. Just remember - don't get so caught up in negotiations that you lose sight of what you really want and can afford!
Earnest Money: Typically, at the time when your offer to buy a home is accepted by the seller, your sellers attorney will put your “earnest money” (perhaps 5-10% of the purchase price) into an escrow account. These funds prove to the seller that you are serious about wanting to buy the house. At closing, your earnest money will be applied to the down payment or closing costs. Involve your lawyer in the negotiation of the contract with the seller once the offer is accepted and the earnest money is paid. All the important aspects of the transaction should be in the contract. A buyer who needs to obtain a mortgage loan in order to complete the purchase should include a financing contingency in the contract.
Down Payment: The more money you can put into your full down payment, the lower your mortgage payments will be. Depending on the loan program, typically your lender will require 10-20% of the purchase price.
Closing costs: You will pay most closing costs at settlement, when the loan closes. These costs cover various fees your lender charges as well as other processing expenses. When you apply for your loan, your lender will give you an estimate of the closing costs, so you won't be caught by surprise.
Typical costs include:
- Appraisal Report Fee
- Credit Report Fee
- Processing Fee
- Underwriting Fee
- Document Preparation Fee
You may also have to pay the third-party fees listed below:
- Title Insurance
- Attorney Fee
- Recording Fees
- Mortgage Recording Tax (except for co-ops)
- You will also have to set up a real estate tax escrow account
- You will have to obtain homeowners insurance
- You may also have to settle up with the seller on such items as the remaining fuel in the oil tank, or property taxes that the seller has already paid for periods when you will own the house.
Ongoing Costs: Your mortgage payment will typically include principal and interest on the loan, plus a monthly share of real estate taxes and insurance on the property. You are responsible for maintaining your homeowners’ insurance policy although we may pay it through your escrow account. Outside the mortgage payment, you should consider items such as your monthly utilities and co-op/condo common charges or maintenance. If your utilities have been covered in your rent, this may be new for you. Water and sewer costs are also items that will have to be paid to your local municipality. Also remember that you need to provide for renovation and repairs that may be necessary.
At the Closing
Essentially, this is a meeting involving you (the buyer), your attorney, the attorney for the Bank, the real estate broker(s), a title agent, as well as the seller and their attorney most likely. The attorney for the Bank will have legal documents for you and the seller to sign. While he or she will give you a basic explanation of each paper, you may want to take the time to read each one and/or consult with your attorney to make sure you know exactly what you're signing. Keep in mind this is a large amount of money you're committing to pay for many years! Your lender is required to give you a booklet explaining the closing costs and a Good Faith Estimate of costs you will be required to pay shortly after you apply. You should review this and obtain a list of how much cash you'll have to supply at closing, and a list of documents you'll need at closing.