House Rules
What to know before you buy.
Purchasing a home can be a dream come true that crumbles worse than a termite-infested foundation if you don't think about a few important factors before you start your search. Here, our list of hot topics can drastically affect where you end up, and even spare you an aspirin or two in the process.
HOW MUCH CAN YOU SPEND?
Be realistic about what you can afford. Sit down with your spouse to figure out how much you can shell out each month for a mortgage and other expenses. In addition to the cost of the house, don't forget to think about taxes, maintenance fees, repairs, PMI (private mortgage insurance), and closing fees. The closing fee can add up to 10 percent of the price of the house and is typically paid by the buyer, not the seller. That's a nice chunk of change for what seems like nothing at all, and many first-time homebuyers forget to consider this necessary evil when budgeting for a home. Ease the burden by calculating this additional cost into the sum of money for which you get preapproved (see below). If it's structured into your monthly mortgage payment, you won't have to pay it immediately out of pocket. You might also want to set up an emergency fund for unforeseen repairs, because you'll be getting the bill when the boiler breaks. The bottom line: Don't max yourselves out on your mortgage payments and forget about budgeting for all the extras.
[Nest Note] Many bank and financial websites offer mortgage calculators to help you figure out how much you can afford. But pay attention to the tool's default interest rate if you can't select your own rate when calculating.
WHAT DO YOU NEED TO ACTUALLY DO THIS?
First, get preapproval for a mortgage. This means you apply for a mortgage and the application is preapproved. The lender commits in writing to fund your loan, provided the home you choose appraises out in value. (Translation: The lender hires an appraiser to examine the dollar value of the house to confirm you're paying what it's worth. It's their way of making sure you're not getting ripped off with their dough.) Getting preapproved enables you and your spouse to know what you can spend and use that as a negotiating tool. You'll be able to make an offer to purchase the property knowing that the financing is in place. Because most lenders are hooked up to bank databases, applications for preapproval can be processed in 24 hours.
Also, think about your credit history. Remember that old cell phone bill you never paid? It may come back to haunt you because your credit report is an objective way for lenders to quickly analyze how risky it is to lend you money, in this case for a mortgage. Before applying for a loan, most people don't think about checking their credit history, which is a big mistake. If you and your sweetheart take the time now to understand all the nuances of your credit histories, you'll both feel more confident about planning your financial future together. And starting in September 2005, anyone can get a free (really, it's free) credit history report at AnnualCreditReport.com.
A credit score or FICO score of 650 to 700 is considered average, according to MyFico.com. The best score range (720 to 850) will allow you to get the best interest rates because you'll be less of a credit risk to lenders. In dollars, that extra 20 points can change your payment difference by about $200 a month. (Think of your credit history as a financial SAT score -- a higher one can help you qualify for a better mortgage rate.) But a bad credit score won't necessarily ruin your chances of getting approved for a loan. Scoring can gradually change for the better as you improve your credit, so pay close attention to any red flags. Upgrading your credit score by establishing a good line of credit (paying your loans on time, carrying a balance of 30 percent less than your maximum balance on credit cards) will show you to be less of a risk for lenders.
[Nest Note] FICO scores are your credit rating. Most lenders base approval on them. You have three FICO scores, one for each credit bureau: Experian, TransUnion, and Equifax.
WHERE DO YOU SEE YOURSELVES IN FIVE YEARS?
How you and your spouse answer this question will affect where you start to look and for what. Homeowners generally fall into two categories: those who buy a home to live in and possibly resell down the road, and those who buy a home to flip it. If you fall into the latter, turning a quick profit usually involves major repairs and renovations (don't forget to factor these costs into your budget). Without any major renovations, most properties take an average of five years to appreciate from the time of purchase. If you are planning to live in the same place for only the next year or so, the cost of moving, buying, and selling may make renting a smarter move.
Also, discuss where each of you foresees your marriage heading financially. If you're planning to have children relatively soon, or if one of you has children that will be living with you, money and space will become an issue. Elderly parents, job security, previous debts, and the illness of a spouse or loved one can also impact your ability to pay your mortgage.
HOW DO YOU FIND YOUR DREAM HOME...OR AT LEAST HOW DO YOU GET STARTED?
Now comes the exciting part! Once you've thought about potential neighborhoods, price ranges, and amenities, it's time to start your search. Chat with friends, coworkers, and family to get references for real estate agents and Realtors, and information on open houses. Don't forget to communicate your timeline (when your lease is up, when you'll have to vacate your current home) with your Realtor or broker.
[Nest Note] If you're trying to buy a house in the "off-season," you're pretty much out of luck. Unless you're looking in a resort town or a touristy area, homes sell steadily throughout the year. There's also no right time for interest rates because they are regulated by the Federal Reserve and can fluctuate according to the economy.
WHAT SEALS THE DEAL?
At this stage of the game, it's wise to bring in the professionals -- specifically home inspectors and lawyers. Home inspectors are trained to look at the overall condition of the home prior to purchase. If they see a problem, they'll recommend having a professional (plumber, electrician, carpenter) estimate the cost of repair, which, for a potential buyer, can be negotiated so that the seller pays for some of the repairs. Find one in your area using The American Society of Home Inspectors (ASHI.org).
[Nest Note] Home inspectors are not repairmen, and they do not inspect septic systems. It's best to get a septic inspector to check how the system operates before making an offer.
Since you'll be spending so much time and money buying a home, it's a good idea to have a professional oversee the tiny details. Lawyers review the paperwork involved and deal with the title company to ensure that your contracts legally show you are the owners of all the negotiated property. They also know the ins and outs of town regulations when filing a deed or making exterior or interior changes to a house, and can translate your new homeowner documents.
When you're ready to put in a bid, that offer must be presented in a contract, written by your Realtor or real estate agent, laying out the details to the seller. (This letter will include closing dates, appliances wanted by the purchaser, mortgage contingencies, and inspection documents or citations for any repairs necessary on the property.) From the date you and the seller agree on a purchase price, it can take six to eight weeks to "close" on the house, so keep that in mind when you're working out a timeline.
Congratulations!
[Nestpert] Leslie Williams, Williams Marketing; Allyson J. Bernard, National Association of Realtors; Ilyce Glink, author 100 Questions Every First-Time Home Buyer Should Ask