Buying your first home can be very overwhelming and stressful. It doesn't have to be though. Do your homework, seek advice of professionals in the field, follow directions and take your time. I have worked with many first time buyers and several of them have now bought second, third and even forth homes from me. I consider it the best compliment I can receive when someone comes back to me because they were happy with the way I treated them the first time. Your home may very well be the most expensive thing you will buy in your entire life. Shop wisely and buy smart. Ask lots of questions and listen to the answers. My 4th Grade Teacher told us "The only Dumb Question is the one you don't know the answer to because you were too dumb to ask". Below are some suggestions and tips to make buying your first home a more pleasant process.
- Check the selling prices of comparable homes in your area. Do a quick search of actual multiple listing service, or MLS, listings in your area on a number of websites. Your Realtor, hopefully me, can give you data of every home that has sold in the area going back five or more years. I usually tell people the most accurate comps are those in the same area, same approximate size, age, amount of land and have sold in the past 6 months. With The Florid Keys being a very unique area we sometimes have to go back 12 months but I prefer no more than 6 months. The Property Appraiser's Office at the Court will also have data not on the MLS. Not every home is sold through a Realtor. If you notice a house sold for more than most similar ask your Realtor, again preferably me, if there was any unique feature or additional items. There could be two identical houses built at the same time by the same builder from the same Blue Print but one may have a $100,000 kitchen renovation. Same if one sells for quite a bit less than you would expect ask was it run down? Distress sale. When negotiating the most valuable commodity you can have is Information.
- Use a good Mortgage Calculator to get an idea of what your monthly mortgage payments would be if you bought today. Most people don't buy a home based on the actual "Purchase Price". They buy based on how much money they are going to have to come up with every month. You don't want to be House Rich and Cash Poor. Be sure to include your taxes and insurance (Covered below in item number 3) when considering how much it will cost yu each month to own the home. There is a great Mortgage Calculator in the right hand margin of this Blog.
Find out what your total monthly housing cost would be, including taxes and home insurance. In some areas, what you'll pay for your taxes and insurance escrow can almost double your mortgage payment.
In most cases the Seller will provide a copy of their Homeowner's Insurance Policy for your review. I have several reputable Insurance Agents I can suggest who will give you a fee quote and usually beat the competition in price fr the same policy. To estimate what you'll pay in taxes, check your property appraiser's website. Just remember that exemptions and the intricacies of local tax law can create differences between what a homeowner is currently paying and what you can expect to pay as a new homeowner. A pretty good cheat rule for Monroe County, which is the Florida Keys, is your taxes will be roughly 1% of your purchase price. A house costing $300,000 will have Property Taxes of roughly $3,000 per year, a house costing $500,000 will have Property Taxes of roughly $5,000 per year.
- Find out how much you'll likely pay in closing costs. The upfront cost of settling on your home shouldn't be overlooked. Closing costs include origination fees charged by the lender, title and settlement fees, taxes and prepaid items like homeowners insurance or homeowners' association fees. Your Lender should provide you with a Good Faith Estimate of all closing costs and how much money you will need to bring to the Closing Table total including Down Payment and all Closing Costs. The Lender will give you a pretty close estimate within a few days of entering a contract and an exact figure a few days before Closing.
- Look at your budget and determine how a house fits into it. Fannie Mae recommends that buyers spend no more than 28 percent of their income on housing. Push past 30 percent and you risk becoming house-poor. Keep in mind buying a house is a very long term commitment. The average Mortgage is 30 years. I usually suggest to Buyers that they want to have at least six months of payments in Savings in the case of financial emergency
Talk to reputable Realtors in your area (again, hopefully me) about the real estate climate. Do they believe prices will continue falling or do they think your area has hit bottom or will rise soon? I have had several clients come back to me because I told them it wasn't a good time to be buying. They bought a similar, or even the same, house for less money several months later. One of my most difficult conversations I had to have with clients was a couple having Marital Problems. I had to address their personal problems and suggest the financial obligation would only add stress to an already troubled Marriage. The conversation went well even though they Divorced. Both of them remarried and both couples bought a home from me because of the way I was sensitive to their personal situations and suggested they did not buy which meant I lost a commission.
Remember to look at the big picture. While buying a house is a great way to build wealth, maintaining your investment can be labor-intensive and expensive. When unexpected costs for new appliances, roof repairs and plumbing problems crop up, there's no landlord to turn to, and these costs can quickly drain your bank account.
So consider whether you're ready for the expense and effort of homeownership before pulling the trigger and prepare for the hunt. Performing regular "Preventive Maintenance" can save you money in the long run. I can't count how many of my rental homes have had very expensive AC Repair Bills simply because the Tenant didn't change the $3 AC Filter. The unfortunate part for the Tenant is it is written right into the lease that if an AC Tech is called and determines the problem was caused by not changing the AC Filter every 30 days, the Tenant pays the bill. I'm not telling you this to show you I am a tough Landlord. I am telling you this to point out that changing a $3 filter can avoid a $500 AC Service Call or even relpacing your $5,000 to $10,000 AC Unit.
- Examine your credit. Right now, blemished credit or the inability to make a substantial down payment can put the kibosh on your homeownership plans. That's why it pays to look at your creditworthiness early in the homebuying process. Get your free annual credit report and comb through it for errors and unresolved issues. If you find mistakes, contact the credit reporting bureau to make sure they are corrected. It's also a good idea to get your FICO credit score, which will cost you a small fee. Removing or correcting errors on your Credit Report is not difficult but it is time consuming. Checking it regularly for inaccuracies will save you a lot of headaches trying to do it while under pressure to get your Mortgage approved. I have a Credit Monitoring Account with Equifax that I highly recommend. It costs me $15 a month and they email me any time someone checks my credit, if any of my balances change by more than $500, if anything negative has been reported on my credit report, if an account is opened or closed, if my FICO Score changes by more than 5 points and gives me a full Equifax Credit Report including FICO Score once a month. In addition to that I recommend checking the other two Credit Reporting Agencies, Experian and Trans Union, at least twice a year. They are all supposed to have a Data Share Program making them all the same but that usually is NOT the case. For a more detailed description of Credit Monitoring see my page titled "Credit Do's and Don'ts" on this Blog. Your Credit Report could be the most important part of the Home Buying Process.
- Get your Financial Documents Ready. Collect pay stubs, bank account statements, W-2s, tax returns for the past two years, statements from current loans and credit lines, and names and addresses of your landlords for the past two years. If you have any additional sources of income like child support, annuities, Disability, trust funds etc. have documentation showing this. Have all of that paperwork ready for the lender. It may seem like a lot, but in this age of tight credit, don't be surprised if your lender wants a lot of documentation.
- Find a Credible Lender and get preapproved. Getting preapproved for a mortgage helps you bargain from a position of strength when you are house hunting. The institution where you bank and a local credit union are good places to start your search although, with the uniqueness of the Florida Keys Real Estate Market, I recommend going with a Local Lender who knows our Market. I have several I work closely with and can get you together with them. I have one in particular who is best with First Time Buyers and people with Credit Problems.
If at first you don't succeed, try, try ... the government? If you can't find a bank willing to lend to you -- and in the current tight credit market, it's possible you won't -- consider getting an FHA loan. The Federal Housing Administration has a program that insures the mortgages of many first-time homebuyers. As a result of this guarantee, lenders who might otherwise feel queasy about your qualifications will be more inclined to lend to you. As a bonus, the FHA requires a down payment of only 3.5 percent from first-time homebuyers. FHA Credit Score requirements are usually lower than Conventional Lenders. Also, if you are a Veteran a VA Loan not only offers 100% Financing but also gives credit for Closing Costs. It's about time our Government does something for those who are Serving or have Served our Country keeping us safe.
As you can see, buying any home can be a very detailed process. Especially when buying your first home. If you prepare yourself and work with a good team of Professionals it can be a very smooth transaction. Do your homework, ask lots of questions, listen to advice, prepare all the necessary documents and it can be easier than you think.
Gary McAdams, P.A.
The Key West Life
Barbara Anderson Realty