7 Things First Time Home Buyers Must Do

(March 7th, 2008)

Are you a young first time home buyer looking to purchase your first home? Here are 7 things you must do for homework before you even think of buying a home.

i) Research Home Prices & Areas

Look at the type of home you want to purchase in your State or wherever you are going to relocate. Look at the inventory that is available out there and their going prices, that is what you should expect to pay. There are a few websites such as www.zillow.com and www.homegain.com that show homes available for sale in America. Also visit www.mls.com or www.realtor.com for more listings.

ii) Use Our Mortgage Calculators

Home Affordability Calculator -> This home affordability calculator will help you determine how much of a mortgage loan you can afford to take out in the 3 repayment periods (15 years, 20 years or 30 years). It asks you for the monthly payment you can afford and its applicable interest rate.

Prequalify for Mortgage Loan Calculator -> Want to know how much of a mortgage loan amount you can afford to take out? This calculator takes into account your current monthly income, the loan amortization term (15, 20, 30 years), interest rate you get and the down payment that you put down. It also asks you for your monthly housing and other expenses.

Mortgage Refinancing Calculator 2 -> This mortgage refinancing calculator will tell you whether you should refinance your current mortgage loan on a lower interest rate. It will compare your currently monthly mortgage payments with your payments on the new refinanced interest rate, outputting the net savings you will have (Monthly Payment Reduction). The mortgage refinancing calculator is so sophisticated that it will also output the break even point on your closing costs.

iii) Find Out Your Total Monthly Housing Costs

On top of your mortgage payment, be sure to allocate costs for home insurance, property taxes, home improvements, repairs & maintenance, etc.

Annual property taxes are set as a percentage by the government every year and can be paid as one lump sum payment, or as part of your monthly payments. If you make payments to your lender, your lender will hold your tax obligations in an escrow account, and remit to the government at year end.

Insurance - Just like property taxes, property insurance is payable monthly and is accumulated in an escrow, and remitted to the insurance agency at year end. Property insurance protects the house from theft, fires, and other disasters. The other type of insurance is Private Mortgage Insurance (PMI). Borrowers have to pay PMI if their down payment is less than 20% of the purchase price of the home. This PMI protects the lender from your defaults and if you go in to foreclosure. The average annual premium for Private Mortgage Insurance (PMI) is $477 in Utah and $1372 in Texas.

To get an idea of the insurance you have to pay in the state where you choose to live, call a local insurance agent in that state. Ask them how much insurance you would expect to pay on an annual basis for the type of home you are wanting to purchase.

iv) Find Out your Closing Costs

Typical closing costs include

- Loan origination fees charged by the lender
- Title search fees
- Attorney fees (for drafting and filing the credit agreement)
- Credit application fee (non refundable fee, even if you get turned down)
- Property appraisal fee (to appraise the current value of your home)
- Homeowners' association fees + homeowners insurance

v) Housing Costs

Your mortgage loan costs including the pricipal owing balance, interest, taxes, closing costs + home improvement fees should not exceed 28% of your annual gross income. By gross income, we mean the income you earn before income taxes are deducted.

Debt Obligations

Your other debts including any student loan payments, credit card debt, auto loans, child support payments etc should not exceed 36% of your annual gross income.

For example, consider you and your spouse make $75,000 a year gross income (before taxes). This enables you to have housing costs of up to $1750 per month. This is how we derived this number:

This amount also includes property taxes, condo/townhouse fees, etc.

You must also hold all your debt payments to less than $2250 per month. This amount is derived by:

vi) Build Good Realtor Contacts

Find reputable realtors in your area and ask them about the conditions of the market. Ask for their opinions on whether home prices will fall, or go up in the state where you live.

vii) Expect the Unexpected

While purchasing a house is the best way to build wealth, you should be ready for unexpected expenses that might crop up. For example when your fridge or dishwasher stops working, you will not be able to call the landlord anymore to get it fixed, you'll have to do it yourself or get a technician and pay him. Be prepared to do home improvements atleast once very few years on your home.

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