You’re ready to take the plunge and buy your first house. It’s exciting, but you’ve got lots of questions. Here are answers to some of the big ones.
Q: Is it really better to buy instead of rent?
Home ownership gives you more than just a place to live. When you own your home, you get a greater sense of stability and permanence compared to renting. Financially, homeowners benefit by building equity and by being able to deduct some or all of their mortgage interest and property taxes.
Renting, on the other hand, offers greater flexibility if your life circumstances change. Selling under such circumstances is stressful. You don’t get the financial benefits associated with homeownership, but you won’t be responsible for the cost of household repairs.
Q: Should I use a real estate agent when I’m buying my first home?
An agent specializes in handling all aspects of buying a home, which is a complex process.
When you begin your search, a real estate agent will talk to you about your needs and desires for a home, then narrow down your search by showing you only homes that fit your profile. An agent will have valuable insights about neighborhoods, schools, recreational amenities, shopping areas and planned new development.
When you find the house you want, an agent will help you determine an offer that fits your budget and will win the seller’s approval. Once you are under contract, she will steer you through the process of getting the home inspected and appraised and will help you deal with contractors needed for repairs before closing. Finally, an agent will shepherd you through the complex closing process, which can be intimidating.
Q: Do I need to be preapproved for a mortgage?
The short answer is yes. Pre Approval tells sellers you are a serious buyer, not a timewasting tire-kicker. It also lets you know how much house you can afford. What’s more, pre approval means that when your offer is accepted, the process of getting a mortgage has already started.
Mortgage pre approval, by the way, is different than prequalification. The latter is a more cursory process.
Q: How big should my down payment be?
The type of mortgage you apply for affects this answer.
Mortgages fall into two categories: conventional and government backed, such as Federal Housing Authority (FHA) and the Veterans Administration (VA) loans. FHA loans allow you to put as little as 3.5 percent down; the VA allows zero down. Some conventional loans allow as little as 3 percent down.
It’s important to remember, however, that there are reasons to pay a higher down payment if possible. If you put down less than 20 percent on a conventional or FHA loan, the lender will require you to purchase a mortgage insurance policy to protect the lender should you default. This will increase your monthly payment. Additionally, putting down 20 percent or more buys you additional equity up front and saves you money in interest over the life of the loan.
Q: Do I need to have the home inspected?
Yes, and it’s important to do so quickly. In most states the real estate contract gives you a window of time called the option or due diligence period to exit the contract without losing your earnest money. Completing the inspection in that time allows you to find any significant problems, to ask for repairs and/or price concessions, or to terminate the contract.
Many states require sellers to complete a Seller’s Disclosure of Property Condition report for prospective buyers. This gives you and your inspector a first look at past and currently needed repairs, water damage, and whether wood-destroying insects are present. The inspector then examines the entire house and all its systems and looks for building code compliance and the presence of potentially harmful substances like asbestos or lead paint. If there are areas of concern, the inspector will recommend bringing in a specialist for an expert look.
Paying a few hundred dollars for an inspection is money well spent. An inspector can find problems that could cost you thousands to repair after the home is yours. Even newer houses can have issues you’d rather know about up front than after closing.
Q: What costs will I pay at closing?
Closing costs vary by the state in which you live and by the type of mortgage you take. Here are some typical ones.
- A fee for the title search the title company conducts to determine whether there are liens and easements affecting the property.
- In certain states, a closing or escrow fee to the title company for managing the transaction.
- Attorney fees for review of escrow documents and mortgage loan paperwork.
- An appraisal fee for the lender.
- Prepayment of two months of property taxes, homeowners insurance and mortgage insurance.
- Homeowners association transfer fees and first month’s dues.
- Mortgage application, underwriting and origination fees.
- Per diem mortgage interest covering the time between closing and the date of the first monthly payment.
- Loan discount points paid to buy down the loan’s interest rate.
- A lender’s title policy.
- In some states, an owner’s title policy.
- Various fees for couriers, county clerk document recording, surveys and miscellaneous other costs.