You want to buy a home. You have spent time on the internet looking at houses. You may have driven around on a few Sundays visiting open houses. If you have given your name to anyone or shared your email address with anyone, there is a good chance you have been inundated with all sorts of information. There is a lot of information available for first time home buyers. We have offered several articles ourselves. Rather than give you a bunch of links to what has been shared in the past, let us try to put things in perspective for you.
Let us pull back the curtain and help you become a home owner. In order to reach your goal, you must first determine if now is the time and if you are actually in a position to pursue the goal. For starters, lets give you an idea of what you can expect to pay.
For general purposes, we will use an interest rate of 5%. Borrowing money at 5% over a 30 year period will cost you $5.37 for every thousand dollars you borrow. This figure is only for principal and interest. It does not include your monthly cost for taxes, insurance, home owners association or condo fees. If the interest rate is lower than 5%, the monthly cost will be lower. If the interest rate is higher than 5%, the monthly cost will be higher. Your lender will be able to narrow down your exact cost when you apply for a loan. Right now, you just want a general idea of what you can afford.
Take the amount that you will be comfortable paying each month. For example purposes, we will use $2,000. Subtract the approximate cost of your home owners insurance. In Maryland, the average cost is about $600 per year or $50 per month. You now have $1,950 to work with. Your cost for taxes and other fees will be property specific.
If you divide the $1,950 (the money you have available) by $5.37 (the monthly cost for a 5% 30 year loan), you will come up with about $363,000. If you qualify for a loan paying $1,950 per month, you can look for homes that are priced at about $375,000.
This example is for those that are going to use an FHA loan which will require about a 3.5% down payment. You will also need to factor in the cost of the FHA loan (your lender will have that information).
You will have to have money available for the down payment and other cash need for closing. It may be money saved or it may be a gift from a relative (gifts must be documented as gifts and not short or long term loans). Sure, there are lots of ads claiming you can buy a home with no money down and no money out of pocket. There is always a catch and those ads are used hoping to attract uninformed and desperate buyers. The collapse of the housing market has resulted in a buying environment in which you now have to have some of your own money invested in your purchase.
How much money? The amount of money you need will depend on the type of loan you use and the additional requirements of your individual lender and the specific requirements in your contract to purchase. A VA loan requires no money down but the borrower will have to have money available for closing costs and any reserves the lender requires. (Reserves are monies that are set aside to cover future expenses as designated by your lender).
If you are going to be using one of the FHA loan products, you will need to have 3.5% of the loan amount as a down payment (this amount is subject to change as the government restructures FHA loan requirements) and about 3% of the purchase price ( approximate closing costs for the buyer) available in cash at the time of your offer. Your agent may be able to negotiate some closing help, but that amount will be limited by your lender’s internal rules or by FHA standards.
Conventional loans require more money down and a purchase using a conventional loan is also subject to closing costs for the buyer. As with any purchase, some closing costs assistance can be negotiated in the contract. The amount is always subject to the lender’s approval.
YOU HAVE TO SPEAK WITH A LENDER. There are some lenders that have grant money available. We deal with several of them. Grant money should be considered a bonus. If you need grant money to make the purchase, it may not be the right time for you to buy. A lender will review your situation, determine what you can afford to purchase and give you information about the monthly costs associated with your loan. Note the earlier information about your monthly costs for borrowing money.
THERE MAY BE A DISPARITY BETWEEN WHAT YOU QUALIFY FOR AND WHAT YOU ARE COMFORTABLE REPAYING. We strongly recommend that you only borrow an amount that you are comfortable including in your monthly budget. Home ownership will include unexpected expenses. The news stories of homes lost over the last few years should be a warning signal to anyone considering buying a home. Do not borrow money based on future income. Do not borrow money based on the potential for future raises in salary. Do not borrow money based on possible increases in over time. Only borrow what you can comfortably repay from your current income. (Yes, there are exceptions to every rule. If you are a professional serving a residency, there are programs specifically designed with your needs in mind.)
Once you have spoken with a lender, it is time to begin your search. You may have already spent time on-line. Now you have an idea of what you like, it is time to call in an expert and get assistance in making your dream a reality.
LOCATION, LOCATION, LOCATION. Remember, location determines price but location also influences your quality of life in your new home. The distance to and from your your job, the distance to shopping, the proximity of schools and the neighborhood in general all have to be considered.
If you have reached the point where you have a firm idea about how much you can spend and a general idea of where you would like to live, you are ready to sit down with us and take the next step in your home buying process.