Tips When Buying a Home
FOR THE FIRST TIME HOMEBUYER:
START PLANNING AHEAD!
I have found that most first time homebuyers decide that they want to buy a home on a whim. However, this makes it harder to qualify to purchase a home. Here are some steps to prepare to buy a home:
- Build your credit. The CalHFA (California First Time Homebuyers program) requirement is a 620 FICO score. Many first time homebuyers don’t understand how to build up their credit. Here are some tips:
- Have at least three revolving accounts. For example, a car payment and two credit cards.
- Keep the balances of your credit cards at about 30% of the maximum limit. (I.e. if your credit card has a $500.00 limit, then keep your balance around $150.00 and continue using it and making payments.) This shows consistency in repaying your credit.
- Keep your accounts open. Many people close their accounts after they pay them off, but it is much more beneficial to leave them open. The credit bureaus consider the length of credit history. If you continue to close all of your credit cards after you pay them off, you will have no lengthy credit history. So hold on to those store credit cards and maybe just use them every Christmas and pay them off before the next holiday season. Also, the more available credit you have, the better your score will be!
- Make your payments on time. Collection accounts will stay on your report even after you pay off the balances! Avoid these derogatory accounts at all costs. Should you get them, pay them off as soon as possible. If you are thinking about purchasing a home, either wait to pay these collections off until after you purchase or a year before you are planning on buying a home. The reason for this is that it will make them active when you pay them off and will actually lower your score. So if you wait a year after paying off your collections and let them be closed and seasoned, they will no longer hurt your score. Make sure you rebuild your credit after having collections by making new active accounts.
- Save some money! CalHFA, and most banks, require that borrowers have two months of reserves. Reserves include the mortgage payment, taxes and insurance. Let’s put this in perspective. Let’s you were going to buy a home for $250,000.00, which is a realistic price for a condo or older home in the current market in Sacramento. The most popular program for CalHFA is the interest only plus program that has a fixed rate of 6.250% for thirty five years, of which the first five are interest only. This allows for first time home buyers to get used to having a mortgage payment and to have time to increase their income before the payments increase. They interest only payment on a $250,000.00 house will be $1302.08. The taxes will be $260.42, the mortgage insurance will be $177 .08, and an estimated $50.00 for hazard insurance. An estimated monthly payment for this home will be $1789.58, so you will need to have roughly $3579.16 in your bank account for at least one month before you get into contract to purchase a home. Let me clarify some of the terms that I mentioned above.
- Interest Only payment: This means that when you make a payment you will only be paying off the interest owed on the loan. Many buyers are misinformed about whether or not this is good for them. With the recent change in the market, people are concerned that they will not gain equity in their home if they are just paying interest. My response to this is that if you are buying a home to live in and will be there for a couple of years, you will gain equity. Real estate is the most solid personal investment one can make. In cases of investors I do not suggest that people get into interest only loans, because they usually want to just sell them for a profit in less than two years. However, for those who are really wanting to live in their home and stay there until they are ready to buy a bigger home, interest only loans are a wise choice for those who are beginning their careers and their lives. Consider that real estate values typically go up over longer periods of time, and that you as a borrower will probably be making more money in the next five years. This CalHFA loan program would be perfect for you. Also, keep in mind that interest paid on a mortgage is a tax deduction!
- Property Taxes: This is a county imposed tax that is required for all property owners. This pays for fire protection, roads, school, and other county maintained services. This is calculated as 1.500% of the purchase price, so for the estimated purchase price of $250,000 you would owe $3,125.00 per year. As a first time homebuyer you are required to put them in your monthly payment as impounds. This means that we will make it a monthly payment of $260.42.
- Mortgage Insurance: This is an insurance required by most investors when the LTV (loan amount versus the value of the home) is greater than 80%. With CalHFA this is required, but this will cover you as the borrower in case there is an instance when you can’t make your mortgage payment. For those first time homebuyers that have no down payment and have to borrow 100% of the purchase price, they can refinance when they gain equity in their home to a value of 80% and get rid of their mortgage insurance. On a positive note, as of 2007, this mortgage insurance payment is now tax deductible (within certain income limits). This is calculated, depending on which company you use, as 0.850% of the loan amount. This is $2,125 per year, and the monthly payment will be $177.08, for the loan amount of $250,000.00.
- Hazard Insurance: This is required by all lenders. According to my preferred company, Liberty Mutual, this covers your property against damages to the structure and the property except those exclusions that are disclosed (i.e. floods and earthquakes but these can be added to your policy). This basic coverage runs about $70.00 per month. You can contact Liberty Mutual to find a more precise estimate at 1.800.660.0351 ext 264.
- Meet with your Realtor®! After you meet with your mortgage consultant and get qualified, then meet with a Realtor®. It is to your benefit to work with just one! Then they can get a sense of who you are and the best fit for you! Your Realtor® can help make the search a lot more streamlined! Moreover, the cost of your Realtors® services is paid for by the seller, whether you use a “dual agent” by going through the listing agent or whether you use a more independent buyer’s agent who’s working directly for you. In a way, you’re paying for the service either way when you buy the home, so you might as well get the representation.
I hope that you have found this helpful! If you have any further question, don’t hesitate to ask me! Jyee AT metrocitiesmtg DOT com or call me at 916-929-1271.
