With the spring buying season in full swing, first time-homebuyers are taking the market by storm.
The latest government data shows that, thanks to the now-expired home-buyer tax credit, new home sales increased 27% in February, the quickest rise since April 1963. And nearly two-thirds of Americans think the time is right to buy a house, with a majority believing prices will be the same or higher over the next year, according to a poll from Fannie Mae in early April.
But the home-buying process can be difficult to navigate, particularly in the wake of the subprime mortgage meltdown that left the market licking its wounds.
Here are five tips to keep in mind when you start house hunting.
Buying vs Renting
Pride is a major force driving people to become homeowners, say the experts, but the benefits extend far beyond that. Real estate tends to appreciate and the current tax system favors homeowners. Mortgage interest is fully deductible on your tax return as long as your mortgage balance is smaller than the price of your home.
Owning a home is also a good hedge against inflation, according to Bryan Hopkins, president of Hopkins Wealth Management.
“One of the biggest concerns for renters right now is the threat of inflation, and, if it comes, tenants will be seeing a lot more of their landlords asking for more rent. At least with a mortgage, you have a fixed rate and know how much you are going to pay each month. “
Determine What you Can Afford
Before you start house hunting, determine how much house you can afford. “For most Americans, your housing budget should never exceed a third of your income,” advised Hopkins .
“From peak to trough home prices are down 33%,” said Cameron Findlay, chief economist at Lending Tree. “As home prices decreased faster than the loan amounts were being paid down, the ‘loan to value’ for homeowners has been increasing, with a 33% drop in two years it has changed the eligibility of borrowers to qualify for the best rates.”
Hopkins, who is located in Southern California, said his financial planning firm has seen an increase in people looking to buy a new home. “The best thing you can do it take the emotion out of the process, “ he said. “You have to be able to look beyond bad carpeting and other easy repairs—look at the things you can change like school districts, neighborhood and general structure of the home.”
Prepare for a Mortgage
The amount required for a down payment is based on the loan type, most private mortgage providers require a 20% down payment , which typically means you will get a better rate and terms. Government programs will require much less and can be as low as 3% down.
“Loan qualification can include consideration of the expected mortgage cost verse your income, “ said Findlay. Findlay pointed to the following formula to that is for debt to income ratio:
Front end-mortgage only payment vs gross month income of 31% would be the target.
Closing Costs: What to Expect
New laws and regulations require disclosure of the fees upfront on the Good Faith Estimate [GFE], according to Findlay.
But expect closing fees to come in around 10% of the home sale, the experts cautioned.
Where You Going to Eat? On the Floor?
Furniture and other fix-up costs can also end up costing a pretty penny and are often overlooked, particularly with first-time home buyers.
“Those trips to Home Depot also add up quicker than people realize and push them over budget,” said Hopkins.
Take into account all furnishing and utility costs. “Outline all of your known monthly and yearly costs including bills, potential utility costs and other extraneous charges,” said Sheila Crowley, president of the National Low Income Housing Coalition. “You need to have an absolute knowledge of what it will cost so you don’t get into trouble down the road.”
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