Living Well The housing market is hot right now.
About 70% of the homes sold in October were on the market for less than a month. I (Laura) have even seen my neighbors sell their homes in just a few days.
There are several factors driving the current boom... Thanks to COVID-19 and restrictions on businesses, folks are saving more because they're unable to spend on things like travel and other forms of entertainment, so they have more cash to put toward a down payment.
And mortgage rates are the lowest we've ever seen them. Right now, the rate for a 30-year mortgage sits at 2.625%. Lots of folks are taking advantage of the extremely low rates, including first-time buyers. The number of first-time home buyers hit a 20-year high in 2020.
Today, we're sharing the top five things first-time home buyers should do. You might have already heard of some of these tips, but they can also help prevent unexpected – and unpleasant – surprises during your house hunt.
1. Know how much you can afford.
The common rule for knowing how much you can afford is the "28/36 rule." That means spending no more than 28% of your gross monthly income on housing expenses. That includes your mortgage, property tax, and insurance. And your total debt payments should be no more than 36% of your income. This includes things like car loans, credit-card payments, and student loans.
These are the numbers that lenders often use to determine how much you can afford for a mortgage.
Let's say you and your spouse make $10,000 per month (before taxes). According to the 28/36 rule, your housing expenses should be no more than $2,800 per month, and your total debt load should be no more than $3,600 per month.
It's important to remember that this rule is general. If you have other obligations like kids or dependents, look at your budget carefully. It might be better to spend less on a house, even if your loan and housing expenses are only 28% of your income.
2. Be prepared for the maintenance and other expenses.
One thing I hear from a lot of people is how much cheaper a mortgage payment is compared to rent. They see a lower payment and assume they're saving money.
But once you add increased utility costs (if your new home is bigger than your rental) and repair costs, you realize how expensive it is to own a house. When the plumbing breaks or the heating goes, you can't call a landlord to take care of it.
And there are other potential costs... homeowners' association fees, future property taxes, even lawn care. I could go on, but I think you get my point.
All of that easily adds up to hundreds of extra dollars that you might not have included in your monthly budget.
3. Get pre-qualified and pre-approved before you start looking.
If you're not familiar with the mortgage process, this step might confuse you, but let me explain.
A pre-qualification is fast and easy... and a great time to do some mortgage-rate shopping.
You provide the lender with basic financial information like your income, debt, and assets. Then the lender gives you a general idea of what type of loan you'd qualify for and how much it might loan you.
Pre-approval involves an in-depth review of your credit history and you'll often have to pay an application fee. A pre-approval gives you a more exact idea of the loan amount you can expect and the interest rate you'd pay.
Neither guarantees you'll get a home loan, but they improve your chances of getting the home you want and the loan you need.
4. Shell out for a professional home inspector.
Home inspections aren't usually required for a loan, but hiring an inspector is one of the most important steps in the home-buying process. If the inspector finds major issues, like any structural damage, you can use this to negotiate a better price or continue your search elsewhere.
One of the best things I did was to hire a great home inspector. During my house hunt, he looked at several houses and offered invaluable help. He gave me an idea of how much repairs would cost and how much time those repairs would take. Over the years, he has also recommended people for any home repairs I've needed.
Your realtor can recommend a home inspector. You can also try websites like Angie's List and professional home-inspector groups like the American Society of Home Inspectors.
A good inspector will cost you a few hundred dollars, but he'll save you any unpleasant surprises... like those termites you might not have noticed.
5. Know the risks of not putting 20% down.
Traditionally, a mortgage requires a 20% down payment. So if you're looking at buying a $200,000 home, you'll need a $40,000 down payment. But more than half of Americans have less than $1,000 in savings, and around 70% of first-time home buyers put down less than 20%.
If you can't afford that 20%, the lender will likely require some form of insurance. The most common is private mortgage insurance, or PMI.
PMI is the lender's protection against the borrower going into foreclosure. The PMI fee ranges from 0.3% to 1.5% of the original loan amount. And you can either pay it monthly or as an upfront lump-sum payment.
If you decide to pay it monthly, you won't have to pay it forever. Lenders are required to stop the fee when your balance is 78% of the original loan amount. But you can ask the lender to cancel the PMI when you reach 80%.
Now, if you have a Federal Housing Administration ("FHA") loan, you're stuck with the PMI unless you want to refinance to a conventional loan.
Buying your first home is stressful. And not many things are scarier than sitting in a room with realtors, bank representatives, and sellers signing mountains of paperwork. You might also feel a little sick writing that down-payment check.
Hopefully these steps will make the process of getting to that table – and your new home – easier.
Do you have home-buying tips? Share them with us at [email protected].
What We're Reading...
- The pandemic is diving people from the coasts.
- Something different: When will you get your second stimulus check?
Here's to our health, wealth, and a great retirement,
Laura Bente, CFP® with Dr. David Eifrig
January 7, 2021