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10 Helpful Tips for First Time Buyers

Every year over 40% percent of all homes purchased, are by first-time home buyers according to the National Association of Realtors. Many have done it, many are doing it, and you can buy a home too. 

But like most things, there are ways to make the process easier and you'll want to know everything you can before making one of the biggest purchases in your life.

Here in capsule form are 10 baseline strategies to make that first purchase a good experience.

1. Think credit. Poor credit will make you a much larger risk in lender eyes and a larger risk means higher interest rates and higher monthly mortgage costs. Make a point of paying your credit card payments, auto loans, rent, and other payments on time, all the time, and in full. In addition keep your credit card balances low below 30% of your available credit, otherwise banks may see high balances as a sign in weakness in managing your money.

2. Consider taxes. Keep in mind that in addition to your mortgage payment you will have to pay taxes and insurance. Sometimes this is not included in your mortgage payment, so when you get your loan make sure it includes a escrow account for taxes and insurance.

When you buy a home mortgage interest and property taxes are generally deductible from income taxes. This means while monthly housing costs may be larger when you own than when you rent, what you save in taxes can make up some or all of the difference. For details and to find out if you qualify, speak with a tax professional.

3. Know the real estate agents role. Real estate agents are at the center of most property transactions. It's important for you to know what an agent does, who is represented, and how the system works. Typically a buyer does not pay anything to the agent and the seller pays all the buyers agent fees.

4. Consider what location will work best for you. Look at your needs, the needs of household members, and your preferences in terms of commuting, shopping, recreation, and other factors that are important to you. 

5. Plan on getting a home inspection as part of any offer you make. A professional inspection can help you understand the condition of the property and the repair bills you are likely to face in the next few years. 

6. Look into the financing process as soon as possible. Get pre-approved by a lender so that you generally know how much you can borrow, what you can afford, and so owners will see you as a serious buyer. 

7. Save Money. You'll need money for a down payment, closing costs, moving, and other expenses. Put off trips, buying on credit, obtaining new debt and luxuries until after you're in your new home. 

8. Examine the different financial options which are open to you -- consider FHA, VA, and state-backed loan programs which require little down and have liberal qualification standards. 

9. Look for gifts and grants. According to NAR, 22% of all first time buyers receive gifts from relatives and friends. Some companies offer grants and other incentives to employees who are buying a first home. Community groups may also have programs and financing in place for first-time buyers, while the federal government has established special programs for teachers and police officers. 

10. Start now, don't wait! Start taking steps now to get into a home. In most markets the longer you wait the higher the home prices will be and harder it may be to get financed.

Take your time, and ask as many questions as you like. Being a first-time home buyer is challenging, but millions of people do it each year and you can too.

8 Important Tips for Protecting Yourself When Buying a Home

If you're getting ready to buy a house during what is typically the busiest buying and selling time of the year, then offers may be flying, loans may seem confusing, and everything may be moving way too fast. That's why it's important to do everything you can to protect yourself throughout the entire homebuying process. 

Low mortgage interest rates and a strong underlying demand for housing drove total state existing-home sales to a new record in the first quarter of 2003 with 34 states experiencing sales increases over the first quarter of 2002, according to the National Association of Realtors. 

And the NAR says that many states that saw sales decline actually had a shortage of homes for sale - and the biggest price increases. 

"Too many buyers, not enough sellers is making this an exceptional sellers' market ... Some bidding wars are here again especially in the first-time buyers market of single-family homes," said Ben Lambert, a Realtor in Herndon, VA. 

The same phenomenon is being felt in other parts of the country. 

"The lack of inventory continues to be a concern for the buyer," said Dave Petruncio, a broker in Western Springs, Ill. 

What this means if you're buying during the frenzied spring and summer months is that you'll need to do everything you can to protect yourself as you make offers, obtain your loan, buy insurance, and strike up contracts. 

Freddie Mac offers a number of tips: 

Get pre-approved for a loan. With competition fierce, you'll want to be ready to make an offer. With a pre-approved loan, you'll have more clout as the seller considers your offer. 

Make sure it's in writing. Don't settle for verbal agreements. If the seller says he'll replace the carpet or leave his washer and dryer, get it in writing. 

Get a good-faith estimate. Your mortgage lender is required to provide you with a good-faith estimate of closing costs within three days of receiving your application. They need to provide it in writing. If you don't have to pay loan application fees, you may want to compare lenders and compare closing costs. 

Don't settle for the first lender you come across. Contact at least three lenders and compare rates. 

Lock-in your rate. One of the most stressful parts of the loan process is watching rates inch up and down each day and trying to figure out when to lock in your rate. Once you do lock in, be sure to get a written statement that outlines your interest rate and length of the lock. 

Get a home inspection. A professional home inspector will examine the house's major systems and let you know if there are any problems or defects. You can then use the information in your negotiations. Look for an inspector who is a member of the American Society of Home Inspectors. Members are required to have completed at least 250 paid professional home inspections and passed two written exams that test the inspector's knowledge. Also, ask for references. 

Shop for homeowners' insurance as soon as your offer is accepted. The National Association of Realtors recently cautioned homebuyers to not take homeowners insurance for granted. You and your spouse may have a clean claims history and a stellar credit history - something insurance companies use to determine whether they will insure you - but it's not just you they're looking at. If the house you're eyeing has had claims, there's a chance they won't insure you, especially if it's a water-related claim. 

Read everything. When you have the closing meeting to sign the mountain of papers, make sure you read through everything carefully and don't hesitate to ask questions if there are something you don't understand. 

Finally, give yourself enough time between your closing and your move date, just in case there are delays in the closing process. 

Avoid the Top Six Down Payment Mistakes

About to make a down payment on a home? Here's how to avoid the six most common down payment errors. Deciding how much of a down payment to make on a home is one of the most crucial steps in the mortgage process. The amount you pay up-front is a major factor in determining how much your monthly payments will be, which makes it a decision that could affect you for years to come. Here are six of the most common down payment mistakes home buyers make and advice on how to avoid making them yourself. 

Mistake #1: Making too small a down payment 
While lenders do offer mortgages with down payments of less than 20 percent of a home's sale price, these loans require you to pay private mortgage insurance (PMI) -- an additional fee tacked on to your monthly payment to help protect the lender in case you should default on your loan. 

In addition, low- and no-down-payment loans frequently carry higher interest rates and so can end up costing you considerably more over the life of your loan. Conversely, a down payment greater than 20 percent may earn you a more favorable interest rate if you have a less-than-stellar credit rating. 

Mistake #2: Making too large a down payment 
While common sense dictates that the more you pay up front, the better off you'll be, that's not always the case. One mistake first-time homebuyers sometimes make is using such a large portion of their savings for their down payment that they end up not having enough left over to cover closing costs and other expenditures for their new home. 

Mistake #3: Not making a down payment at all 
Some lenders offer mortgages that require no down payment but these loans can be risky. Paying no money down puts you in the position of having no equity in the home (i.e. you don't own any part of it). Should the value of your home fall, there is the risk that you could end up owing more to the lender than your house is worth. This situation could also make it difficult to refinance your mortgage in the future. 

A no-down-payment mortgage may be an effective strategy in certain situations. However, you need to be economically responsible and financially sound to be able to handle the inherent risks involved. 

No-down-payment loans often come with a higher interest rate than loans with a conventional down payment. As a result, your monthly payments will be higher, leaving you with less money available for bills and emergencies. 

Since you'll be paying less than 20 percent of the home's purchase price, you will also have to pay PMI or be required to take out a second loan (known as a "piggyback loan"). Each of these options increases the monthly cost of owning the home. 

Mistake #4: Paying with unseasoned funds 
In most cases, a down payment is a pretty substantial chunk of money, and not everyone has the ready cash to cover it. A gift from a friend or family member can help, but don't think that just because you've come up with the full amount that you're necessarily in the clear. 

All funds -- whether they're gifts from relatives, loans against an investment portfolio or your own savings -- that have been in your account for longer than two months are referred to as "seasoned," meaning that they're considered your money. If your bank statements indicate a large cash deposit that's less than two months old, your lender will need to know where those funds came from and whether they're gifts or loans. Gift-givers may be required to provide a letter to the lender indicating that they are in a financial position to offer the gift. Also, generally speaking, the larger your overall down payment amount, the less concerned the lender will be about where the money is coming from. 

The lender wants assurances that the money you're putting towards your down payment is actually "yours," since it's assumed that if you're investing a significant portion of your own money into the down payment, you're less likely to default on your loan. 

Mistake #5: Neglecting to bring a cashier's check to closing 
Along with figuring out how much of a down payment you should make, you also need to ask your closing agent exactly how much you will be required to pay at closing. It's not enough to simply bring your personal checkbook to closing. You will a cashier's check to pay the amount of your down payment and your closing costs. Find out ahead of time exactly what the final total will be and obtain a cashier's check for that amount. 

Mistake #6: Incorrectly assessing your debt comfort level 
No one knows better than you how much debt you can handle. Trust your instincts; if you'd rather pay as much as you can at the start and have the benefit of lower monthly payments, don't let anyone dissuade you from that. The worst thing you can do is lock yourself into a mortgage that ends up costing you more per month than you can comfortably afford to spend.

Don't Overlook a Homes Potential When Choosing a Home

Home shopping? For first-time homebuyers it's an exciting, albeit nerve-wracking, experience. If you're like others in the market for their first home, you probably have in mind exactly how your soon-to-be home will look. 

But it's important not to fall into the bad decorating, dingy walls, and dirt-bare back yard equals bad-home trap. If you don't see past the hideous wallpaper, funky light fixtures, and avocado green carpeting, you may miss out on a home with great potential. 

And, if you're looking for a home in a seller's market where homes are being snatched up as soon as they go on the market, you'll come to realize you can't be choosy if you want to make a competitive offer. 

One of the first things to do is to get pre-qualified for a loan and determine the maximum you can afford to offer for a house. Don't look at homes that are asking for more than 5 percent above your maximum, otherwise you'll be setting yourself up for disappointment if you find the perfect - but outside your budget - home. 

So what to do? 

The floor plan of the home is extremely important. If a floor plan isn't quite to your liking, consider rearranging it or adding on. If you're looking at an existing home and will need to remodel or expand to suit your needs, the estimated cost of renovation should play a role in how much you offer. 

Also, consider the features of a home: 

  • Walls. While walls are one of the easiest things to remedy, they also make a huge first impression. If the walls need to be painted, are covered in wallpaper, or are painted a color you find distasteful, picture them crisp and clean in the color of your choice - that's how they could look after you paint them. 
  • Floors. Like walls, carpet or floor surfaces that are old or outdated can be easily replaced. You could even ask for a carpet allowance in your bid, especially if you're in a buyer's market. 
  • View. Things like old, ugly -even dirty - windows and window treatments can make a view appear less desirable. Those things can be improved, so unless the only view you have is of your neighbor's clunker on the side of the house, don't get hung up on what is surely a fixable view. 
  • Landscaping. Your best bet is a moderately landscaped yard because you can always improve landscaping without spending too much. Worst case, even if you're looking at dirt, landscaping is one of the more feasible projects to tackle. Plus you get to design it however you'd like if you're starting from scratch. 
  • Closets and garages. You can never have too much storage space, which is why so many newer homes have three-car garages. But if you encounter a converted garage that is now a bedroom or storage room, don't give up. Converted garages can almost always go back to their original purpose without much cost or labor. 
  • Kitchen. The most popular room in the house, many homeowners want their kitchen to be large and have modern appliances. Don't let color schemes from the '70s detract you, because there's nothing like a fresh coat (or two) of paint to make a kitchen your own. Plus, if you like the rest of the house enough to make an offer, you can give the kitchen a minor spruce-up with some new appliances, or a major overhaul complete with new countertops, cabinets, and flooring. 
  • The exterior. If the home you're looking at doesn't have good curb appeal, try to picture it with a fresh coat of paint and spruced-up landscaping. 
  • Pools. If you want a pool, buy a home with a pool already built in. The cost of adding a pool starts around $25,000, and paying to add one later will never yield a dollar-for-dollar return on investment. The cost of repairing a pool is less than putting one in, so if you're looking at a home with an old pool that looks like it's in bad shape, it's still a better bet than putting one in later. When making an offer, bear in mind the things that you can't live without, as well as your budget. Also, be sure you hire a professional home inspector to inspect the house. If the home's systems are in good working order and the house has everything you want except a minor item or two, make an offer accordingly. 

    Most importantly, keep in mind that unless you're building your dream home from scratch, you'll probably never find the perfect home. But seeing past a previous owner's bad decorating choices to the core of the home and its potential for livability will yield you the home you've always wanted. It may take some work, but hey - it's yours!

How Much Should You Put as Your Down Payment?

Question: I have been renting the same townhouse for the last six years. My landlord now wants to sell the property and he has asked if I want to buy it. He is offering to sell it to me for $220,000, which I think is a great deal. I have a good salary, good credit and a good savings account. My question is this: How much cash should I use as a down payment and how much of a loan should I apply for? Some people tell me I should put at least 20 percent down to eliminate Private Mortgage Insurance (MI). Others have said I should keep my cash and take the largest loan possible to get the tax deduction. Is there a rule of thumb that I should follow when it comes to a down payment?

Answer: First, congratulations on purchasing your townhouse. Over the long run, your investment of ownership in your dwelling is likely to be very profitable. Remember at the end of the journey, a homeowner pays off his mortgage and owns a house. A renter has zip.

Now, let's get to your question. Although many experts will say it's wise for income earning folks to have a large mortgage because of the low rates and tax deduction, it's not right for everyone. Here are some things to think about:

  • Private Mortgage Insurance (PMI). PMI is a monthly fee that the borrower pays if the first trust loan exceeds 80 percent of the purchase price. Since a lower down payment results in a statistically higher risk to the lender, PMI insures a portion of the loan to reduce the risk to the lender. Thanks to creative lenders, however, a borrower can still put as little as no money down and avoid PMI by taking out two loans. Ask your loan officer about loan packages with no PMI, sometimes called "piggy-back" financing. 
  • Monthly payment "comfort level". This is a very important issue. If you have good credit and income, most lenders will qualify you for a larger loan amount than your would want. The first thing you should do is assess your personal spending and saving habits and try to come up with the maximum mortgage payment that would fit into your budget. 
  • Taxes. Understand the benefits of mortgage interest and real estate tax deduction. Since you will own the home, you will be able to deduct all the interest and taxes you pay on the home. Consult a tax expert on these issues, but it's important to get an idea of how much of a tax break you will receive if you own the home. This will help you decide your mortgage amount. 
  • Opportunity costs. Analyze the "opportunity cost" of a large down payment. In other words, if you put down 20 percent, or $44,000, what are you giving up? Is the $44,000 earning a good rate of return? Do you have to sell securities and pay capital gains taxes to liquidate the money? Get an idea of how much it will cost you to put down $44,000. 
  • Other debts. Take into consideration other debt you may have. For example, if you are carrying substantial credit card debt, it would probably be better to pay the cards off instead of putting down a large down payment. 
Hopefully this is a start in the right direction when determining what mortgage balance you should carry. But as I said, congratulations on purchasing a home.

Buying Houses in High-End Real Estate Markets

In 2002, James and Michelle Rigdon purchased a new $427,000 Gilroy, CA home with a conventional $282,500 first mortgage, a $25,000 deferred payment California Housing Finance Agency second, an $85,000 third from South (Santa Clara) County Housing, a $6,500 fourth from the Housing Trust of Santa Clara County and a $6,000 grant from a non-profit agency. 

That's what it's come to in Silicon Valley, CA an area where single family home prices have fallen nearly $40,000 in recent months but the median price of homes remain higher than a half million dollars. 

Instead of the traditional first and second mortgage to finance a home and cover the down payment, buyers are piling on more mortgages to acquire the American Dream. 

"We can't just get a first loan anymore. You have to go and find other loans. We spend a lot of time trying to guide people to the right place so they can get first, seconds, thirds and fourths," said Tracy Cunningham, the Single-Family Program Manager for the Housing Trust of Santa Clara County. 

But it's not just California. New England, some Northeast metros, Denver and other areas have been socked with high home prices that often make creative financing with multiple loans the only way to buy. 

"I'm not sure I'd advise someone in Boston that it is time to leave town, but I am certainly advising buyers to sit this market out. Boston has been through this real estate cycle before, and a lot of people will regret buying in the current real estate bubble," said Bill Wendel, of the Real Estate Cafe in Lincoln, MA. 

Others say, while real estate isn't without its risks, that risk diminishes over time and buying, even in an expensive market, more often than not, makes sound financial sense. 

The Office of Federal Housing Enterprise Oversight's Second Quarter House Price Index says the nation's housing market has enjoyed a nearly 39 percent rate of home price appreciation since 1997, with more the half the states and the District of Columbia enjoying a 5 percent growth in price appreciation during past year. 

The federal overseer of Fannie Mae and Freddie Mac says any housing market downturn isn't likely to fall as far as prices have risen and over time, banking on real estate is not a risky investment. 

It's just tough getting through the door in some areas and consumers need to give it a good hard shove to get it open. 

"Call the housing department in your city. Many cities offer great deals for first-time home buyers. Zero-interest loans or loans with no payments or even loans that do not have to be repaid at all if you stay in the house for a time. Different programs are offered at different times depending on the funds available," said Joette Joseph, branch manager of VP Alliance Title Co. in San Jose, CA. 

Grants, for example, have been so overlooked, the national non-profit housing grant industry recently formed a trade group, the Homeownership Alliance of Nonprofit Downpayment Providers (HAND) to boost the visibility of grants that average $6,000 to $15,000 nationwide per home buyer. 

"I've been talking to professors of urban affairs and almost no one has heard of this industry. It's a five-year old industry and there are about 22 agencies. We are doing it with private capital. It is a gift to a buyer. The buyer doesn't repay the money. That's the main appeal," said Jon Cottin, the new association's executive director. 

The same lack of knowledge often exists about special mortgages and loan programs available from city, county and state housing offices, as well as private agencies that don't always have the budgets to advertise like private lenders. 

"Find a loan broker who frequently works with first time buyers. They often have the inside scoop on whatever is currently available. There are many programs available if you do a little research. Be sure to get preapproved before you start shopping for a home," said Joseph. 

Many lenders participate in the federal Mortgage Credit Certificate (MCC) program typically administered on the county level in most states. 

With an MCC, up to 20 percent of the annual mortgage interest paid to the lender is refunded to the home owner as a federal tax credit. Homeowners who paid $10,000 in interest, for example, would receive a tax credit of $2,000. The remaining 80 percent of the interest -- $8,000 -- is taken as a typical mortgage interest deduction. 

Because the program offers a tax credit that is subtracted from taxes due (rather than a deduction the reduces your taxable income) home owners can see the benefit immediately by adjusting their W-4's exemption status. Or home owners can add the $125 a month to cash available for a mortgage payment. In many cases, lenders will qualify borrowers based on the extra monthly cash flow, enabling them to qualify for a home that might have been out of their reach without the MCC. 

Along with grants, government assistance, MCCs and private lender programs, builders also offer special financial keys to home ownership. 

Some jurisdictions mandate a below market rate housing program that requires builders, in some cases, to set aside a small portion of newly developed homes for low and moderate-income households. Builders can meet the requirements with lowered sale prices, special loan assistance and by other means. 

Savvy brokers and lenders can help steer borrowers to all these special programs, but it's often up to the borrower to seek out the programs. Finding one program often leads borrowers to others. 

"Don't be afraid to have your buyer agent call a builder directly and ask for a deal. Sometimes builders have remnant lots which they will sell at a bargain. Sometimes they will build a house on a 'cheap' lot and sell it for a discount from the normal price in that neighborhood. Maybe the lot has a drainage easement or some other weakness that has made it be the last house in a built out subdivision, but you get the deal because you asked," said Dane Hahn, broker-owner of Exit 11 Real Estate in Stratham, NH.

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