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.
January 19th, 2007 at 3:09 pm
As a FTHB, do you have to have at least $3000+ in the bank, if you are prequalified for 100% finance? What is the difference of 100% and 80/20? I heard that after 5 yrs on 100% finance, mortgage payments go up, is that true? and why?
January 20th, 2007 at 3:43 pm
Hi Adelina!
First off, thank you for taking an interest in my blog! It makes me happy to know people are considering my advice.
As a first time home buyer, you do not necessarily need $3000 dollars in the bank. That number is based on the purchase price of $250,000. Generally speaking, lenders ask that you have two months of reserves, which is two months worth of mortgage payments. There are programs, not CalHFA, that will not require reserves, but the rates are higher. Higher rates= Higher payments.
100% financing means that there is no down payment and the bank is financing the entire purchase. There are different loan programs that are available to do this, and an 80/20 is one of these. An 80/20 is two loans, and generally done to avoid having mortgage insurance. There are loans available that allow you to have one loan for 100% without having mortgage insurance.
As far as mortgage payments going up, that doesn’t happen because of 100% financing. Payments go up when you have an adjustable rate mortgage. Most of the time with 80/20 combos, the “second” is adjustable and this can cause your payments to go up. It is possible to have 100% financing without adjustable rate mortgages.
I hope I have answered all your questions. Let me know if you need further clarification or have any more questions! Have a great Saturday!
January 25th, 2007 at 3:05 pm
Adelina,
If you do not have $3000.00 in the bank I’m not sure you should be in the market for a house. Look at the numbers they ran for $250,000 (a condo or a house in a bad hood). You are going to need $1,800 a month which would be one third of your monthly inclome of $5,400.00. if this is allready tight you should only consider if you have a concrete reason to think you are going to be making a lot more money in a few years to afford the higher payment. With prices going down you could end up in real trouble since you are currently unable to save Three thousand dollars.
You need to look at sources that are not trying to sell you something. Check out The Bee Real Estate News and Sacramento Landing blog.
-Mark
January 25th, 2007 at 3:14 pm
Oh, also..since $250,000 pretty much only buys you a condo in Sacramento, you have to factor in about $200 a month HOA’s as well.
January 25th, 2007 at 4:32 pm
Hi Mark!
I want to clarify a few of your statements. First off, there are 1126 listings in Sacramento, CA available for $250,000 and less as of today. I actually worked with a first time homebuying couple who purchased a very cute home for $207,000. It is not only condos that are available. While your first home may not be your dream home, it is your stepping stone to your dream home and historically speaking, real estate is the most sound investment one can make.
Adelina, consider this:
Say you put that $3,000, actually $3579.16 is what I calculated, down on a car. What happens to that $3,600? What can you do with that $3,600 in 5 years? Nothing. What value will your car have? Most likey your car is worth even less. So say you get your tax return, and use $3,600 of that and purchase a home. Nothing extravagant, but a little 3 bed, 2 bath on 44th street for $250,000 (it is available as of today). Then you put that $3,600 toward your mortgage payments, and remember what a good feeling it is not throwing it away in rent and getting the tax write off at the end of the year. Then in 5 years, with a very conservative 4% appreciation, your home is now worth $304,163.22. Even if you only paid the interest, as discussed in the initial scenario, you have earned $54,163.22 in equity. That’s a 10% downpayment on a $500,000 home. What kind of home could you purchase at that?
Now, I don’t know what you do Adelina, but I know that one person is not going to stay idle in a job forever. You get promotions, you change jobs, you get married, but you have to believe that your financial situation will get better. Even if it doesn’t, you can manage your money to make it feasible to own a home. With down paymen assistance programs and CalHFA programs, it is not an unrealistic goal for anyone to achieve the American Dream of owning a home. This isn’t about buying something, it is about owning the place you call home and not putting your money somewhere that you will never see it appreciate.
January 25th, 2007 at 4:49 pm
Jen,
Where was this 207k home? I certainly didn’t say there are no SFRs for $250k though all the ones I have seen so far are in or on the very edge of high crime areas. I’m a little worried that you are telling a potential buyer with little or no money in the bank that they may see 50k appreciation in 5 years considering the homes in that price range are the least likely to see appreciation in coming years. You do realize that you can’t count on 4% a year when prices are still falling in those areas right? While I see no reason why you shouldn’t encourage somebody who can actually afford the full amount of the mortgage, I think telling somebody who may barely afford the interest only payment is not very responsible.
January 25th, 2007 at 7:50 pm
Mark,
Thanks for your input. While many of your comments may be accurate, you should understand that Jen’s job is not to know the real estate inventory and prices — that’s my job. Jen’s job is to qualify buyers who are not yet qualified for loans, and the assumption that this borrower is or is not qualified is unwarranted at this point because a professional with a license hasn’t qualified her.
I appreciate your bubble-blog-esque hand-wringing, but this is a commercial blog, Jen’s a friend, and unlike the bubble blog which assumes everyone who owns a home is a hapless dupe of the Real Estate industry, our assumption is that the readers here are adults. If I find Jen being overly aggressive — which I doubt, since she’s a person of outstanding ethics and integrity — I’ll be the one to call her on it, not you.
Thanks again for your comments. Thread’s closed.