If you’ve been laid off, or have lost income because you’re unable to work during the Shelter at Home orders in response to the COVID-19 pandemic, you may be struggling to make your mortgage
How To Prepare For A Home Purchase Now Or In The Future
You’ve thought about it. You’ve talked about it. Is this the year you’ve resolved to finally do it? Buying a home is a big step, that requires some big planning. No matter how far in the future your home purchase goal is, there are some things you can do now to get all of your ducks in a row.
Start a savings plan. Start setting aside money anywhere your budget allows. Cut back on non-essential purchases and focus on savings. Zero down payment loans do still exist, but most come with income and area restrictions, usually more rural areas. The next lowest down payment loan available everywhere and to most first time home buyers is an FHA government-insured loan, with a minimum 3.5% down payment. That’s 3.5% of the purchase price. So, if you’re looking at a $250,000 home purchase, for example, you would need a down payment of $8,750 for a down payment. Many financial experts recommend saving up until you have 20% of the purchase price for a down payment. This is great advice, and will save you money each month on mortgage insurance, but consider your rate of savings vs. the rate of home price appreciation in your area. If house values are increasing by 5% per year, and you are only able to save 2%, your home will cost more in the long run. If you purchased now with that rate of price appreciation, the growth in equity will get you to the 80/20 loan-to-value ratio faster than saving for a 20% down payment.
You can use an online mortgage calculator to estimate what you might be able to afford to spend on your home, based on your income and monthly payment comfort level. A mortgage payment is usually made up of 4 total factors- principal, interest, taxes, and insurance, abbreviated with the acronym “PITI.” Some online mortgage calculators will estimate payments with just principal and interest, or the full payment. Be sure to look at the down payment amount and interest rate used in the calculations. Remember that the calculators are rough estimates, too, but they can help you get a ballpark idea. A loan officer can help give you a more precise target.
While there are some zero down or low down payment loans available, you will still need money for closing costs, moving, and buying some essentials that you might not have if you’re still enjoying apartment life. 2-3% is a quick and easy number to use to calculate closing costs, which include things like loan fees, taxes, title company fees, and HOA transfer fees. Most of the time, they’re less than that, but if you plan to have about 3% saved, you’ll be well prepared.
Plan to save money for the items you’ll need right away in your new home. To help with planning, most homes in Texas come with an oven/stove and a dishwasher. They do not usually come with refrigerators, washers, or dryers unless the seller has offered to leave them as an incentive. If they haven’t, you can still try and ask for them in a purchase offer, but they can say no. Microwaves vary- some homes have them built in, which means they’ll stay. Others have free-standing microwaves like you might remember from your college days, and those would be considered property of the seller that they’re free to take. Other important things to consider- window blinds or curtains, garage door openers, pool equipment, and any remotes for ceiling fans or built-in media equipment typically stay, if they’re in the home. The seller is not required to add any of the ladder if the home does not currently have them, however. They say “everything is negotiable” in real estate, though, so you can always ask.
Check your credit. There are plenty of free websites out there that allow you to check and monitor your credit reports. They aren’t known for being 100% accurate, but should give you a good idea of where you stand and if there are any concerning items to investigate, like a forgotten collection or fraudulent account.
Talk to a mortgage loan officer and a Realtor. You can start with either. Even if you’re a year away from actually buying a home, a loan officer can pull your credit and discuss your finances. They have the knowledge and experience to help you determine which type of loan would be best for your purchase goals, and can advise you on what that will mean as far as down payment, closing costs, and estimated monthly payments. With this information, you and your loan officer can narrow down a purchase price range that works for your budget.
Loan officers can also help by suggesting which debts to pay down for the most impact, and what actions might help boost your credit score the most. If you don’t know a quality loan officer, talk to a trusted Realtor for recommendations. Talk to them about first-time buyer down programs, down payment assistance programs, or other specialty loans and incentives that may be available at the time you’re thinking of buying. You may find out that you’re closer to ready than you thought. Remember that estimated payments from a loan officer will change somewhat depending interest rates at the time of your actual purchase. Interest rates fluctuate daily.
Be extra cautious with loan information and calculations if you’re going to buy a new construction home. Some builder finance companies will calculate loan payment estimates with a tax rate based on the empty land, without figuring in the value of the house. This is because taxes are due at the end of the year, for the value of the property as assessed in springtime of that year. So if the land was an empty lot in April and your new home was built afterwards, you’ll have a nice and low tax bill that first year, but it will jump up considerably the following year when the value of the house is added to the value of the land. Using the same $250,000 home price estimate, let’s assume the land value is $20,000 and the remaining $230,000 is the value of “improvements,” or your house. If the tax rate for the area is 2.6% of the assessed value every year, that means your land taxes would be just $520. Once the house is built, the taxes on the land plus the house would be $6,500. Ask your loan officer to calculate the annual property taxes using the tax rate and purchase price of the home for a more accurate monthly payment estimate, beyond the first year of ownership.
A Realtor can help by telling what average prices are in different areas and sharing other relevant information, like how quickly homes are selling, pricing trends over time, and what developments are planned in the area.
Begin narrowing down areas. Make a list of the most important things to you in a home and location. Is it a good school district, optimal commute, or hot new community with all of the good amenities that tops your list? How many bedrooms and bathrooms would your first home have? Do you want a first home with plans to move up later, or a forever home that you’ll stay in until retirement? Once you know what’s important to you, you can start researching which areas are a fit for your needs, wants, and budget.
Create a timeline. Based on your rate of savings, lease expiration, and any other factors that are important to you- like the school year, for example, decide when you’d like to move in to your new home. Once you have your target move-in date, work backwards from there. The average contract time is 30-45 days, but can be up to 60 days for government insured loans like USDA, VA, and FHA. Your lender can give you an idea of how long their bank is taking to close each type of loan. If you’re someone that can go shopping and find what you want quickly, give yourself 4-6 weeks to look for a home. If you need to try on every pair of shoes, or test drive every car on the lot, give yourself 90 days or so. Either way, it doesn’t hurt to build in another couple of weeks or a month of cushion time.
It may sound like a lot, but just take it one step at a time. The good news is that the GroupWatson Real Estate Team is here to be your home resource- providing you with information, lender & contractor referrals, and market data at any point in your planning process. Feel free to schedule a no-pressure consultation to discuss where you are now, where you want to be, and what steps you need to take to get there. And when you’re ready, we’ll be here to guide you through the entire purchase, and beyond.
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Christy grew up in West Texas and is a graduate of Texas Tech University with a bachelor’s degree in Family Studies. She and her family have been residents of The Colony, TX for 3 years and are very....