What First-Time Home Buyers Need To Know

My team and I regularly come in contact with first-time homebuyers looking for some guidance. The prospect of buying your first home can be an anxiety-inducing one, especially if you don’t know where to start. I’ve spent my career helping thousands of people find the perfect home, so I’m happy to shed some light on the subject for those new to the process.

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Patience is key.

Even after you spend hours searching through listings and going to showings, your journey is far from over. Getting a mortgage, having the home inspected and going through the closing process all take time. General wisdom suggests that the process could last from 30-90 days, but that depends on a lot of extenuating factors.

The neighborhood you choose is important.

We believe the neighborhood you live in is just as important as the home you live in. When you make a purchase based solely on the number of bedrooms and bathrooms or square footage, you’re missing out on the lifestyle component of your new home. Where you live will determine not only obvious factors like where your children go to school and how much you pay in taxes, but it also determines more nuanced factors, like how you spend your weekends. Spend time in an area before deciding to buy there, and see if you can really imagine yourself living there on a day-to-day basis.

Have your documentation ready.

Keeping everything digitally organized — rather than trying to keep track of a stack of papers — will help immensely. Have pay stub statements, proof of assets and any loan or credit card debt documentation readily available. Expect to present more paperwork than you might think they need to see. Like a Boy Scout, the key here is to always be prepared!

Be flexible.

One sentiment that almost all of the homeowners we asked expressed is just that: the importance of being flexible. You may have a list of features that make up your perfect home but ultimately discover that you are unable to find all of those features within your budget. Know which “must-haves” you’re willing to compromise on and which ones you really need. If a short commute is most important to you, you may be willing to sacrifice an extra bathroom or granite countertops to be closer to work.

Follow guidelines.

In other words, don’t buy beyond your means. Deferring principal payments in order to get into a bigger home is often a risky proposition that can lead to financial strain. Work out a budget that’s realistic, and then stick to it. Not sure how much house you can actually afford? NerdWallet provides a calculator to help you determine that based on location.

Shop around.

Like any other major purchase, it’s important when buying a home to weigh your mortgage options. Different banks may offer different rates, so getting a wide range of offers can save you money. Planning ahead is your friend in this scenario — as soon as you think you may be interested in buying a home, start the mortgage process. This will also help you determine how much you can feasibly afford.

Don’t let fear stop you.

There’s no doubt that the home-buying process can be daunting — and for first-time buyers, the uncertainty can lead to dread. You will experience a range of emotions in the pursuit of finding your perfect home, but it will be worthwhile when you finally settle in.

At the end of the day, buying your first home will be an intensive process, but it doesn’t need to be a scary one. If you go in with a strong plan and know your facts, you’ll avoid making the wrong choice or missing out on a great deal.

~Bill Ness, Forbes Community Voice

Buying a home in 2018? Here’s what you need to know.

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Homeownership can be a costly endeavor, especially since certain tax breaks are now less generous. Here are a few things to be aware of if you’re planning to go from renter to owner this year.

If you’re thinking of buying property this year, here are a few points you need to be aware of.

1. Your housing costs shouldn’t exceed 30% of your take-home pay

Regardless of how the recent tax changes end up impacting you, a homeowner’s housing costs should never exceed 30% of take-home pay. Different folks have their own interpretations of what peripheral expenses that 30% threshold should encompass, but at a minimum, it should cover known costs like property taxes and homeowner’s insurance. For better protection, however, I’d recommend that that 30% mark include maintenance, as well.

The typical U.S. homeowner spends anywhere from 1% to 4% of their home’s value on maintenance each year. If you’re buying for the first time, there’s no way to know where you’ll fall in that range, but if you aim for 2.5% — smack down the middle — and are looking at a $400,000 home, that’s roughly $833 per month in maintenance.

If you then take that $833 and add it to your monthly mortgage payment, property tax payment, and homeowner’s insurance payment, your total should not be greater than 30% of your monthly income. If it is, you’re leaving yourself with limited wiggle room for unplanned expenses that may arise in the future.

2. You can still deduct your mortgage interest — to a point

The mortgage-interest deduction has long been criticized for favoring the rich, and so some legislators have been arguing to eliminate it for years. Thankfully, this key deduction is still intact for the current tax year — albeit at a lower threshold.

It used to be that you could deduct interest on your mortgage for loans valued at up to $1 million. But as a result of the new tax changes, that limit has been lowered to $750,000. If you’re an average earner looking to buy a modest home, you should be able to deduct your mortgage interest in full. But if you’re looking at pricier homes, or live in an expensive area of the country where home prices are inflated, you may want to be more cognizant of that cap.

Of course, if you’re not planning to itemize on your tax return, there’s no need to worry about the mortgage interest deduction, or any deduction, for that matter. As it is, the majority of taxpayers don’t itemize, and since the new tax rules effectively double the standard deduction, it’s estimated that fewer filers will do so going forward. But if your intent is to itemize, then be aware of the aforementioned limit.

3. Your property tax deduction may be capped

Just as the new tax laws limit the mortgage interest deduction, so, too, do they limit the extent to which you can deduct property taxes. In fact, going forward, your total SALT (state and local tax) deduction maxes out at $10,000, whereas prior to 2018, it was unlimited. If you’re thinking of buying a home in a low- or no-income tax state, and you don’t expect your property tax bill to be particularly high, then the $10,000 cap won’t impact you. But if you’re buying a home in, say, New Jersey, which boasts the highest property taxes in the nation, you may come to find that a portion of your property tax bill is non-deductible.

Again, if you’re not planning to itemize on your tax return in the first place, then there’s no need to worry about this change. But one thing you should be aware of is that some experts say that home values may soon start to drop as a result of the new laws, since, by taking away a portion of the tax breaks buyers once enjoyed, they make ownership less affordable in some parts of the country.

If you’re buying a home because you plan to live there for quite some time, this may not be too concerning. But if your plan is to buy a home, flip it, and unload it in a year or so, prices could start to fall when more buyers see their tax breaks go down and their tax bills go up.

Buying a home can be a wise financial decision that serves you well, not only at present, but for many years to come. Just be sure to know what you’re getting into before signing that mortgage.

~Maurie Backman, The Motley Fool

Five Steps to Take Before Buying a Home

When you’re considering buying your first home, you’re probably full of excitement about achieving the American dream. Unfortunately, this dream could turn into a nightmare if you haven’t made sure that you’re financially ready for the costs of becoming a homeowner. Before you call a realtor, take these five steps to get all your ducks in a row.

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1. Calculate what you can comfortably spend

The last thing you want to do is make yourself “house poor” by spending more of your income on a home purchase than you should. The “affordability standard” for housing is that you should spend no more than 30% of your income on housing costs (including insurance and property taxes), while many mortgage lenders prefer that your housing cost is no greater than 28% of your income.

Your outstanding debts can also impact the amount you can spend on a home. Most lenders want a total debt-to-income ratio — including your mortgage payments and other debts — to be around 36% or less, although you can still get a standard mortgage with a ratio as high as 43%.

This means if your income is $50,000, you could reasonably afford about $1,170 per month for your total housing costs if you stuck to the 28% rule — assuming you didn’t have a substantial amount of other debt that would push your total monthly payments above the recommended 36% of income. If we also assume you can pay 20% down and qualify for an interest rate of 4%, then you could potentially afford a home price of up to $250,000. That may or may not be a realistic price in your area, and you may want to aim lower if you have other sizable debts.

2. Save a down payment of 20%

In our example above, we factored in having a 20% down payment when calculating the price of the home you could afford. Paying at least 20% of the value of the home up front is vital, because it allows you to avoid private mortgage insurance (PMI). PMI insures your lender in the event that you’re unable to make payments and the lender must foreclose on you. On a $200,000 loan, PMI could cost you $100 a month or more, depending on how much you paid up front — and you could be paying it for several years.

You’re stuck with PMI until you pay your loan down to 78% or less of the home’s original value. Once you prove to your lender that you’ve reached that milestone, your lender is required to drop the PMI requirement. .

If you don’t have a down payment, not only will you waste thousands of dollars on PMI and additional interest payments, but you’ll also put yourself at substantial risk. When you make a 20% down payment on a home, the value of the house would have to fall more than 20% for the home to be worth less than you owe on it. If you only make a tiny down payment, however, even a slight downturn in the market could mean you’re underwater — i.e., your home is worth less than you still owe the bank. This makes it difficult or impossible to sell unless you can bring cash to the real estate closing for the difference between what your house sells for and what you still owe.

3. Save an emergency fund of three to six months’ worth of living expenses

When you’re a homeowner, you are responsible for everything that goes wrong in your house. Instead of calling a landlord when the furnace breaks or the pipes freeze, you have to call — and pay for — a repair man. If the problems are costly to fix, or can’t be fixed, you’re the one on the hook. If you don’t have money set aside to cover maintenance, repairs, and replacements, then you’ll have to use credit. You don’t want to be paying interest on your new fridge for the next 10 years, so make sure you have an emergency fund to cover the many costs of being a homeowner.

Not only can an emergency fund help you pay for surprise repairs, but it can also ensure that you don’t lose your home in the event that an illness, job loss, or other crisis puts a major strain on your household finances. If you cannot pay your mortgage because your income has taken a hit, you could be foreclosed on, lose your house, and end up with ruined credit. You don’t want this to happen, so save up enough money to pay the mortgage for several months in case something goes wrong.

4. Get pre-approved for a mortgage loan

When you have your financial house in order, it’s time to prove to the bank that you’re ready for the responsibility of taking on a mortgage. You want to get pre-approved by your chosen financial institution before you start shopping for a home. Getting pre-approved means you’ll have a clear idea of what the bank will lend you so you don’t shop outside of your price range. You’ll also be taken much more seriously by real estate agents and any potential sellers to whom you make an offer. Some sellers won’t even consider offers from someone who isn’t pre-approved, because there’s no way to know whether the financing will be available to complete the sale.

If you want your bids to be competitive and you want to know you’re shopping for houses that are priced right, provide your financial information to the bank before you start house shopping and get a pre-approval letter to take with you.

5. Find a buyer’s agent

Although you can technically buy a house without an agent, it’s usually a bad idea to try it — especially if it’s your first home. An agent can help you spot red flags that should send you running away from a prospective home. Agents know the market and can help you make a reasonable offer so you don’t overpay, and they can also guide you through the steps of the buying process, like getting a home inspection.

You’ll want to be sure you find a buyer’s agent, rather than letting the seller’s agent represent both you and the seller. A buyer’s agent is focused only on your interests and has lots of experience helping homebuyers find the house of their dreams. If you’ve already made sure you’re financially ready before calling a realtor, your agent can help you make the buying process low-stress and successful.