A Comprehensive Home-Buying Guide

Buying real estate entails a number of decisions and actions. Even the more experienced buyers must navigate issues regarding the location, condition, title, and cost of the house — and how to pay for it. For those of you new to home buying, we present this guide to aid your decisions.

Know the Market

Prices generally differ among houses because each one is unique in some way. However, the laws of supply and demand still factor into pricing trends and your ability to get an affordable deal.

In a buyer’s market, the number of homes available for sale exceeds the number of purchasers. You will find more sellers competing for buyers. This affords opportunities for you to extract favorable terms such as a lower price, the seller’s willingness to pay at least part of the closing costs or having items fixed on the home before you buy.

In a seller’s market, the demand for homes is greater than the supply. This normally means higher prices and a more difficult time getting concessions such as help on closing costs.

Look at Comparables

To aid you in pricing a home, look for comparables. These are homes with similar square footage, floors, number of rooms, conditions and other features. In terms of location, the most reliable comparables exist within a neighborhood or less than half a mile from the subject home and are based on sales within three to six months.

You can find the prices of comparable homes from:

*Multiple Listing Service (MLS): Participating brokers use information on offers and sales to create a comparative market analysis (CMA).

*Deeds: In most states, deeds recite an “excise tax.” This figure is a certain percentage of the home. You divide the tax by the tax rate to arrive at the price. The price upon which the excise tax is based is a final price rather than listing price and may not reflect adjustments demanded by the buyer.

*Property Tax Records: Tax departments report sales prices based on the recorded deeds. Generally, you can more readily search by addresses than through a register of deeds office that does not have an address index.

The Location

Location shapes the value of your home — and more. If you’re a first-time home buyer, chances are that you have young children (if any at all). At some point, you may find yourself with school-aged children. The National Center for Education Statistics maintains a database of public schools with information such as student-to-teacher ratios, class size and name of school district.

Your state or local board of education may post “report cards” for schools. Newspapers and local residents also provide helpful insights on school quality.

In choosing a location, also consider:

*The availability and affordability of cable, water, sewer, electricity and other *utilities. Ask your realtor or current residents the names of the utility providers

*The proximity of shopping, recreation, libraries and professional services

*Property tax rates and other assessments by the local government

Buying in a Flood Zone

If you choose a home next to a stream, river, lake, or another waterfront, find out if it is located in a Federal Emergency Management Agency (FEMA) flood zone. If you have a government-backed loan, the answer to this question affects whether you are legally required to purchase flood insurance.

Even if you don’t live in a flood zone, consider purchasing flood insurance if you live in an area where flooding is a possibility. Homeowners policies typically exclude losses from flooding, unless you have extra coverage for it.

Properties in flood zones may cost less than other homes, all other things considered. These homes can afford decent opportunities for first-time home buying.

Build Credit

Buying real estate often involves having a mortgage. Your ability to qualify for a loan turns significantly upon your credit score. Lenders rely upon this number to gauge your risk that you will fall behind on loan payments and otherwise default on your mortgage.

The required credit score normally varies by lender. At a minimum, you will need a score of at least 620. For some lenders, the minimum bar is set much higher.

FICO, which stands for Fair Isaac Corporation, uses a scoring model that takes them to account your payment history, your credit balances, age of accounts and inquiries. Naturally, your payment history counts the most.

Traditionally, credit bureaus reported almost exclusively payment history from credit accounts, car payments and other loans. However, Experian Boost allows you to report your utility payment history as well. For banks that use Experian-based credit scores, your history of paying the light bill, water bill and other utilities on time can help with your scores.

In having an attractive credit score, avoid the temptation of indiscriminately closing credit cards. Nearly 30 percent of your credit score depends upon the credit utilization rate. This ratio compares the amount of your outstanding balances with your credit limits.

For example, if you carry balances of $300, but have credit limits totaling $10,000, then you are only using three cents out of every dollar of your available credit. However, that same $300 of debt with limits of $1,000 means your rate is 30 percent.

Additionally, don’t close older credit cards. When you keep aged accounts, your credit record shows that you have a longer credit history. A large number of “hard inquiries” can hurt your credit score because these indicate to the bureaus and lenders that you are relying increasingly upon credit. An application for a credit card generates a hard inquiry.

Down Payment: 20 Percent or PMI?

The benchmark of a 20-percent down payment determines if you must have private mortgage insurance (PMI). With this insurance, lenders obtain coverage for losses occasioned by mortgage defaults. If you do not front 20 percent of the purchase price, you must pay the PMI premiums.

As a rule of thumb, PMI costs between $30 and $70 for every $100,000 you borrow. For instance, a $300,000 loan covered by PMI will cost you between $90 and $210 per month — on top of your regular mortgage payment. With a strong credit score, your PMI costs will gravitate to the low-end. Other sources put PMI at an annual cost of 0.55 percent to 2.25 percent of the original loan.

Other Options for Down Payments

Putting down 20 percent is not necessarily a daunting task.

When you’re buying real estate for the first time, your goal is not necessarily a spacious home. Unless you already have a number of children, you probably do not need many bedrooms or bathrooms. With a smaller home likely come a lower price and a correspondingly lower down payment.

It might behoove you to not worry about a 20 percent down payment anyways. As a first-time homebuyer, you might qualify for down payment or other home purchase assistance. The United States Department of Agriculture and Veterans Administration provides qualified borrowers with access to zero-down loans. Under the Federal Housing Administration, borrowers can obtain a federally-backed loan with as little as 3.5 percent down.

The Budget

Whether you can afford a particular home does not rest solely upon the purchase price, but more so upon the mortgage payment. Consider what monthly payment you can afford even before you embark upon shopping for a home.

As a rule of thumb, your mortgage payment should not exceed 28 percent of your pre-tax monthly income. For instance, a gross monthly income of $4,000 means that your monthly mortgage payment should not go north of $1,120.

However, the 28 percent cap assumes that you have no other debt payments. The total of all your monthly debt payments should not exceed 43 percent of your gross income. This includes not only the mortgage payment, but your car payment, credit card payments and student loan payments.

The Inspection

In your life as a renter, the plumbing, electrical and heating were the responsibility of the landlord. You owe habitability laws for these landlord duties.

When you own a home, making sure the water, sewer and power are operating become your responsibility. If you are buying a pre-owned home, you should hire a home inspector to examine closely the components of the home. A home inspector checks items such as:

*Light switches

*Faucets and other water valves

*The presence of water stains or damage on walls or ceilings

*The existence of cracks in the walls or on sidewalks, siding or driveways

*Electrical outlets

*The condition and concealment of wires

*Insulation

*Paint

Your Realtor

We have already touched upon one of the advantages of using a realtor, which is access to the multiple listings service. Participating realtors use listing prices for comparable sales figures so that you can make the proper offer. An experienced Realtor should also have a strong familiarity with the neighborhood or community in which you are interested. With that can come valuable insights into the schools, attractions, recreation, and infrastructure in the community. Your real estate agent may know about upcoming developments or projects. Additionally, your realtor can help you with searching for potential homes that fit your financial and personal situation.

Opt for an agent who represents only you. If you deal with the seller’s agent or with a dual agent, you risk having someone who might not totally represent your interest or may have divided loyalties. When you have an agent to yourself, you can more likely control what information is confidential and what you wish to reveal to the seller or seller’s agent.

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