First-Time Homebuyer FAQs
How do I know that buying a home is a better decision for me than renting one?
Owning a home is an investment. While renting has its benefits, the monthly check you make out to your landlord is handed in and that money is gone forever. When you own your home, on the other hand, your mortgage payment will often be lower than the price of rent, and the money you do invest benefits you in the long-run.
- In most cases, you can deduct the cost of your mortgage loan interest from your federal income taxes, and typically from your state taxes as well. This saves you a lot of money year after year, as the interest you pay will make up most of your monthly payment for most of the years of your mortgage.
- You can also deduct the property taxes you pay as a homeowner.
- On top of this, ideally, the value of your home will increase over the years, so that, should you decide to sell, you may make a profit from your investment.
- Finally, owning a home allows you the opportunity to truly make it your own by decorating, remodeling, and breathing new life into your space – no permission needed.
However, there are certain elements that come with homeownership that are not appealing to many. For example, any repairs that need made – no matter how minor or major – as well as regular maintenance, including yard work, must be taken care of by the homeowner. In addition, some renters enjoy the cost of utilities and amenities (fitness center, pool, clubhouse, on-site laundry) being included in their monthly rent. These lifestyle factors, and a lack of interest in giving them up, often play into one’s decision to continue renting.
The choice between buying and renting is entirely up to you and your current situation. It’s important to sit down and construct a list of pros and cons for both, and considering the financial benefits (or struggles) that will come into play, too.
What are the first few steps in the home buying process?
Decided that you’re ready to become a homeowner? There are a few important first steps you’ll want to take.
- Take some time to figure out what kind of home you’re in the market for. We discuss some of the factors you’ll want to take into consideration here.
- Determine your budget. You can utilize our free online calculator to get a ballpark idea of how much home you can afford. Once you get really serious, though, you’ll move onto step number three.
- Get pre-qualified or pre-approved. This requires visiting with a lender, like 3Rivers, who will take all of your financial information into consideration to give you a more solid idea of the amount you’ll qualify for when you take out a mortgage. We discuss the difference between pre-qualification and pre-approval here.
- Start shopping! There are plenty of ways you can start looking into potential homes. If you’ve got a specific neighborhood in mind, do some scouting by driving or walking around and taking note of homes for sale. Online sites like Realtor.com are constantly updating homes on the market and you can refine your searches to include specific details (price range, number of bedrooms, year built, and so on), request alerts, and bookmark your favorites.
- Consider getting a real-estate agent if searching on your own becomes too overwhelming. You can present a real-estate agent with all of your wants and needs, and they’ll do the searching for you. They are also your go-to experts for information about the neighborhood, school ratings, crime rates, and more, and can often help you make sense of the home-buying process and structure the final deal to save you money.
Should I use a real-estate agent? How do I find one?
As mentioned above, there are many benefits to enlisting in the help of a real-estate agent. They not only help you narrow down home listings based on your list of wants and your budget, but they can also be a great resource to help you make sense of some of the confusing terms and processes that come with buying your first home. And the best part is that, typically, you won’t have to pay the agent a dime. Their pay will come from the seller of the home you decide to buy.
You can find a real estate agent in the area you’re looking for by checking the local yellow pages or classified section of the newspaper, doing an online search, or utilizing sites like Realtor.com.
How much money will I have to come up with in order to buy a home?
The answer to this question depends on many factors – including the cost of house, the type of mortgage you get, and how much of a down payment you’re required to make. In general though, you’ll need to have enough money saved to cover three costs:
- Earnest Money: This is the deposit you make on the home when you submit your offer, in order to prove to the seller that you’re serious about buying the home. When you make an offer on the home, your real estate broker will put the earnest money into an escrow account. If the offer is accepted, this money will be used towards the down payment or closing costs.
- Down Payment: A percentage of the cost of the home that you must pay when you go to settlement. Some loans require the buyer to put 10-20% of the total cost of the home down, while other loan programs offer to let buyers put as little as 3-5% down.
- Closing Costs: The costs associated with processing the paperwork to buy the home. Closing costs are also typically set as a percentage of the overall price of the home.
Will I qualify for a home loan (mortgage) even if I have bad credit, or don’t have much of a down payment saved?
Many first-time home buyers don’t have much of a credit history, or perhaps don’t have one in the greatest standing. In addition, many don’t have the standard 10-20% down payment on hand when they’re ready to purchase a home. Home buyers in this situation may be good candidates for one of the federal mortgage programs, like an FHA loan or HUD options.
Mortgage loan officers and real estate agents can help make sense of these options and determine which is best for the home buyer’s financial situation.
What costs does a mortgage cover?
Home loans, like most loans, have several parts:
- Principal: Repayment of the amount you actually borrowed
- Interest: Payment to the lender for the money you’ve borrowed
- Homeowners Insurance: Monthly cost to insure the home against disaster (fire, flood, theft)
- Property Taxes: The annual city or county taxes assessed on your property
Most mortgages are made out for 30 years, but there are other terms – including 15 years.
There are so many different types of mortgages available. How do I know which kind is right for me?
As previously mentioned, a lender or real estate agent will be able to help you determine the best home loan for your situation. But it’s a good idea to do your research beforehand, too.
Most home buyers decide to go with a fixed-rate mortgage. In a fixed rate mortgage, your interest rate stays the same for the term of the mortgage, which is normally 30 years. A fixed-rate mortgage allows you the convenience of knowing how much your mortgage payment will be month to month so you can be prepared for it.
An Adjustable Rate Mortgage (ARM) is an option that comes with a lower interest rate and monthly payment at first, but those rates and payment amounts can change as often as once or twice per year. The advantage with an ARM is that you may be able to afford a more costly home as the initial interest rate will be lower.
Other options include FHA loans and VA loans. Take some time to talk to your lender or real estate agent about all of your options.
How do I know the home I want is a fair price? And can I negotiate?
There are several things you should consider:
- Is the asking price similar to that of other houses in the area?
- Is the home in move-in ready shape or will you have to spend a large amount of time and money on renovations? It’s important to get a professional home inspection before you make your offer on a house to ensure there are no major issues.
- How long has the home been up for sale? If it's been on the market for awhile, the seller may be more willing to negotiate the price.
- How much mortgage will be required? Ensure that you can afford and feel comfortable with whatever offer you make.
- How much do you really want the home? The closer your offer is to the actual asking price, the more likely your offer will be accepted. In some cases, buyers will offer even more than the seller’s asking price, if there’s competition for the house.
Aside from the mortgage, what other costs will I have to prepare for?
First and foremost – utility bills. Often, these costs are covered in rent or are much less as a renter in a smaller space. A real estate agent can investigate the price of utilities for you. In some cases, buyers will need to prepare for homeowner association or condo association dues. Property and city or county taxes will also need to be prepared for, and they are often included in your mortgage payment. Again, a real estate agent will be able to help you estimate these costs.
Are there any special homeownership grants or programs for first-time homebuyers?
Special grants and programs offered for first-time homebuyers vary state by state and county by county. The loan officer you’re working with or your real estate agent will be great resources for learning more about these options, too.
You can also get in touch with your local office of housing and community development, or your mayor or county executive’s office for the most up-to-date information about first-time homebuyer incentives in your area.