Starting Out
In recent years, the housing market has become very difficult for first-time buyers. In fact, first-time home buyers only make up 21% of current home sales, per NerdWallet.
And since home prices have risen so much, the average age of first-time home buyers has risen from 28 in 1991 to around 35 to 40, depending on the data source.
Aside from the price, there are other factors contributing to this trend. One is the downpayment. The housing debacle of 2008 caused many banks to require more down payment or show more in savings. Although lower percentage downpayment plans exist, you will pay PMI (Private Mortgage Insurance) premiums until 20% of the purchase price has been paid. The banks are more comfortable when the loan value is 80% or less of the market value.
The core problem of the housing crisis in 2008 was that loans were given for more than market value. Thus, appraisals are much stricter now. Even with rising home prices, due mostly to low inventory, banks are very cautious about their exposure to losses.
Rules for Purchasing
I know some reading this post may already own a home. But I want to pass on some items to be aware of when trying to save for a home purchase in the future. Perhaps you can assist a friend in their planning and preparations.
First, there are real estate laws to protect both the buyer and the seller. That is why there are contracts to be signed either as a seller or a potential buyer.
I was a licensed real estate agent just prior to the 2008 housing fiasco. So, I am familiar with the contract law surrounding buying a home.
As a buyer, you should be acutely aware of the HUD-1 document, which discloses the condition and age of key components of the property you are attempting to buy. That will include the plumbing, the HVAC system, the roof, appliances, etc. This is critical to your price negotiation and understanding of any potential repair expense. Some repairs can be requested to be done before closing on the property as part of your negotiations. The hope is to minimize your exposure to repair costs soon after your purchase.
Asking your seller to include a Home Warranty policy in the sale can give you some peace of mind for any of the unknown potential repairs over the year following the sale.
Though the fee may seem high to some, an independent home inspection will be worth the cost, both to your level of confidence and your ability to negotiate a reasonable price for the condition of the property. Unless you have experience in home construction, you may overlook potential repairs. Aged utilities and code changes will be noted by an inspector, usually an engineer or a builder, the cost will vary but expect to pay $300-$600.
Second, as you consider a purchase, remember that a contract to buy is an agreement based on your terms. In fact, a contract can include anything. It is only limited by your imagination. So, ask for anything that appeals to you and be ready to negotiate with what the seller will agree to.
In other words, you may see something that is not attached to a building, such as a mower, that would be useful to you as the owner. You can put anything on the table until the seller takes it off!
Third, allow time for negotiation, which will include any changes to the price due to the appraisal or inspection. In fact, the appraisal can be a deal breaker for either the buyer or the seller.
The level of desperation by the seller or the limited options for the buyer will affect how much negotiation can be done. The seller is more willing to negotiate if the buyer can fund the purchase by showing the bank approval equal to or over the purchase price.
Negotiation may or may not be friendly. Usually, the agents relay offers and points of negotiation. Agents will discuss the points of negotiation and add agreed terms in an addendum document as part of the purchase agreement. However, in recent years, when sellers had been getting multiple offers, negotiations were limited and buyers often had to send a note as to why they wanted to buy that property. That is a situation where the offer should include a benefit to the seller, like no inspection required. Then, the seller will know the present condition is satisfactory and the buyer is willing to deal with potential repairs. That is where “as is condition” is acceptable to the buyer. Make sure you have plenty of reserves for potential repairs!
Regardless of what you, as the buyer, can do in negotiations, you must allow for the possible breakdown of talks and loss of the purchase opportunity. A better deal will come along later. Otherwise, you could spend thousands of dollars more to buy a house than you need to.
Consult with your Realtor and your banker about what is reasonable in your market.
Rules for Funding a Real Estate Purchase
Real estate is anything connected to land. You will pay real estate taxes if you own a home on land. Your vehicles and other items not attached to the land are considered personal property, on which you pay personal property taxes to the county in which you live.
I have offered that explanation since your closing costs when buying a home will include any unpaid real estate tax on that date. And an escrow account will be established by the mortgage holder to make sure that the real estate taxes are paid every year that you carry the mortgage.
You will also be required to have homeowner’s insurance which will require you to pay a deposit to show coverage and the annual premium will become part of the escrow payment each month. The mortgage company wants assurance of being covered in any storm or fire damage that will affect the value of the property.
Your plan to buy a home should include a trip to the bank to get pre-approved for a mortgage loan. That will include letting them know about your cash reserves. How much will you have available for a down payment and for closing costs? The verified reserves will determine what amount they are willing to loan you on a home. They will give you a letter showing what price range of home you will qualify to buy. That letter will make your agent happy to show you properties.
This step is where many first-time buyers can stumble and lose out on buying opportunities. They fail to build a good cash reserve to give the bank confidence that you can afford to be responsible for a large debt.
In the qualification process, the bank or mortgage company will require a budget recap to determine your monthly cash flow, your employment history, and your level of debt. There are limitations to whom a bank is willing to consider.
This is why you need to build a good mindset for money to make these situations a good experience. Your good saving habit and limited debt to income ratio will work in your favor!
Will you fit into a common measure by banks for what is affordable? NerdWallet notes that a bank will use the 28/36 Rule. That is, a 36% debt to income payment demand limit, with total housing costs (utilities included) up to 28% of gross income.
Other Home Purchase Considerations
There are several other considerations before you finish contract negotiations and go to the closing table to finalize your home purchase.
First, you need to be aware of the details for your monthly house payment. Will you borrow the whole amount or an amount with a downpayment, which is due at closing? Will you finance for 15 years or 30 years? At what rate of interest? Will you lock in that rate or risk that the market will go down at the day of closing?
Remember, your payment will include the mortgage principal payment, any PMI policy payment, interest for that month, and any escrow amount for the homeowner’s insurance and real estate taxes. And note that the escrow portion can change up or down each year.
Second, certain housing developments may include a homeowner’s association, an HOA, which includes a fee for services which will vary. Those fees may or may not become part of the escrow account.
Third, your spending behavior may affect your ability to close the deal on your new home. That is why you must be very conscious of not making any major purchases while under contract buying a house. Your credit report will be reviewed by the bank and the title company prior to closing. All parties related to financing the property require assurance that you can afford to do so!
Fourth, a title company usually controls the contract signing and assures a clean title transfer to the new owners. The title search must ensure there are no legal liens on the property, such as any unpaid real estate taxes or unpaid contractors. The seller pays the title company from their proceeds, unless the buyer agrees to pay them.
Make Your Home a Planned Purchase
Plan your major purchases, that includes your home. Planning can keep those purchases from weighing on your financial future.
Small downpayments are possible to get a mortgage loan. But you will end up paying more in added interest over the life of your loan. Look up the total interest you will pay on a 30-year mortgage loan. The interest paid could be close to the original loan amount. It will benefit you greatly to pay down your mortgage loan as soon as possible!
Your interest is calculated on the remaining balance. Interest is the price you pay for being lazy with saving!
Make saving a priority to allow you to be able to pay at least 20% downpayment on a home purchase. You will not only save on interest but be able to avoid the PMI premium addition to your monthly payment!
If you make yourself aware of all the potential factors, you can make your home purchase one of your most valued financial experiences.
My hope is that you can make use of this information and assist others, especially, first-time home buyers, to keep this experience manageable for their current budget with the hope for a better financial prospect in their future home negotiations.