5 Important Steps for First Time Homebuyers!

First time homebuyers, whether previously renting or living with family, need to take some very basic steps when planning to buy their first home.  Perhaps items like saving money for a down payment, budgeting for monthly expenses and listing future expenses to expect once becoming a homeowner.

What is the true outlay of buying a home?

When renting a home or apartment, a simple monthly rent offers you a month of shelter; but as a homeowner, there are many more monthly expenses to prepare for. Firstly, the mortgage payment usually includes Principal, Interest, Taxes & Insurance; if the home is in a housing community, you may also have a Homeowners Association Fee (Monthly HOA Dues).

Property Taxes are assessed annually and billed in 2 installments if they are not included in your mortgage payment.  Most mortgage programs require the setup of an Impound/Escrow account in order to pay the property taxes; this is a good idea because it is difficult for most families to budget the property tax installments twice a year. It is important to understand that impound accounts are set up as a savings vehicle in order to pay the future taxes as they come due, taxes are not actually paid out monthly as you pay your mortgage payment.

Homeowners Insurance, also known as Hazard Insurance or Fire Insurance, is a requirement of all mortgage loan contracts. Mortgage companies require the encumbered property to be insured at all times during the term of the mortgage; also, the mortgage company must be listed on the insurance policy with an endorsement, Form 438BFU.  This endorsement protects the lender in the event that the Insured fails responsibility, the insurance carrier will protect the interest of the mortgage company pursuant to the agreement on the Mortgage Clause (i.e. 438BFU). Homes are insured for the Reconstruction Cost of the Dwelling calculated by the insurance carrier; insurance must rebuild the home in the event of a covered total loss.

Homeowners must budget any sudden or additional maintenance expenses which will pop up unexpectedly; it may be a good idea to have an emergency fund to cover the replacement of a new water heater, plumbing repairs, a failed appliance or roofing repairs.

Benefits for homeowners . . .

Current tax regulations allow you to deduct Property Taxes and Mortgage Interest paid if you itemize your deductions.  You will most probably be able to reduce your taxable income on your tax returns therefore paying considerably less income tax.

Many professionals explain that home ownership is well worth it even if you only calculate the income tax savings and nothing else over the term of a mortgage.  In addition, a homeowner will see long term gain in property values providing a savings vehicle which may otherwise not be attainable.

Are you better off buying at this time?

Primarily, some savings or a hefty family gift will be necessary to make a purchase; from that point, you’ll have a Mortgage Payment usually comprised of a Principal Payment, Interest Payment, estimated Property Tax Installment & estimated Hazard Insurance Installment (Homeowners Insurance or Landlords Insurance).

In addition to the mortgage payment detailed above, a home will have upkeep expenses including regular maintenance, sometimes urgent repairs, monthly utilities expenses and an after-tax benefit which is very helpful to most homeowners.

Review mortgage options that meet your goals!

Although it is possible to purchase a home with a small down payment, mortgage companies provide the most favorable rates to those with a 20% deposit  If the down payment is less than 20 percent, you will need to purchase mortgage insurance to secure the bank’s risk and this additional expense is not tax deductible.

Mortgages come in many different forms; sometimes, you’ll find a lower interest rate with a shorter-term loan (i.e. 15 year loan instead of 30 year loan).  Also, if you plan on owning the home for a short period, perhaps 5 years, there are loans which may offer a lower Fixed Rate for that period and then turn into an adjustable rate mortgage for the remaining term; these types of loans may be known as a 5/30, a 30 year term which offers a fixed interest rate for the first 5!

If in this case, the interest rate is much lower and you’re planning on selling the home before the fixed period, it may make sense to apply for that mortgage program. Every institution is going to offer different mortgage programs each with very different fees and charges.  It is best to have a trusted professional review the options if you aren’t familiar with mortgage programs.

What does your Credit Report look like?

A homebuyer’s credit report is a historic map of responsibility used by mortgage underwriters; the credit score is critical for obtaining the most suitable mortgage with low rates and appropriate terms to the buyer.  It is important for a credit report to show a positive and long-term span of responsible credit handling with on-time payments and debt levels in proportion to available credit.

Although credit inquiries will temporarily negatively impact credit scores, it is always more favorable to have multiple accounts where balances are used and paid down responsibly. In the long term, credit accounts score well when they’ve been active for many years and have never had a late payment recorded.