First-Time Home Buyers

By: www.quickenloans.com

Understanding the Home Buying Process

Buying a home for the first time can be an overwhelming and intimidating process. But it doesn't have to be. If you do your research, you can alleviate some of those first-time home buyer fears and make the process go more quickly and smoothly. These articles should help you get through the home buying process from start to finish.

Step 1: Benefits to Owning Your Own Home

Everyone's situation is different—owning a home may or may not be right for you. Many people have different needs in different parts of the country. It's up to you to gauge what your needs and financial abilities are.

When you're looking for a home, there are several things you should consider, especially if you're a first-time home buyer. With renting, you have no responsibility in terms of maintaining the home—it's the landlord's duty to take care of lawn care, snow removal, and repairs. Renting may also be good if you plan on moving within a year or if you are in an area, such as New York or California, where housing space is at a premium and can be very expensive.

Financial and Tax Benefits

However, owning has great financial and tax benefits—when you pay interest on a mortgage, that interest is usually tax-deductible*. If you pay points on your loan to reduce your interest rate on your home purchase, that amount is also tax-deductible* for that year. Plus, the more principal you pay, the more equity, or ownership, you have in the home, whereas no matter how much you pay toward rent, someone else always has ownership of your home.

How to Decide

In order to decide whether renting or owning is better for you, you need to answer some questions:

How much can I afford to pay monthly for a mortgage?

Will I have money left over to pay for any needed repairs or to buy necessities such as furniture? What about other expenses such as heat, water, electricity, phone, etc.?

How much will I need for closing costs to close my loan?

Can I afford a down payment? (Don't forget that it's possible to get a mortgage with no down payment.)

As with shopping around for the right home, it's important to shop around for the right loan. Do your research; ask friends and family members for referrals; go online. Remember, everyone is different, so it's up to you to decide whether owning a home is right for your individual financial situation.

Step 2: How to Avoid First-Time Home Buyer Mistakes

Buying a home can be a confusing and complicated process, especially for a first-time home buyer. But if you follow these tips, you can make sure things go as smoothly as possible.

Mistake #1: Not finding the right person to guide you through the home buying process

Mistake #2: Not checking your credit report and score

Mistake #3: Not making your offer look good enough to sellers

Mistake #1: Not finding the right person to guide you through the home buying process

Many people forget that it's just as important to shop around for the right real estate agent and lender as it is to shop for the right home. A wrong person leading you through this extensive process can lead to hassles and headaches. Having someone help you through the home buying process can match your needs and goals with the right mortgage possibilities.

Solution:

To find both the right real estate agent and lender, get referrals from family and friends. Do research online. Ask your potential real estate agents and lenders lots of questions! They should seem willing and able to answer any and all questions you may have. The more you ask, the more educated you can be to make the right decisions.

A good real estate agent should show you many houses that fall within your price range so that you know what's on the market and can compare each one to how well they suit your needs. A good mortgage banker should be willing to guide you through the entire mortgage process. Make sure you feel at ease with each person. They should be friendly and accommodating to your needs—you don't want them to pressure you into doing something you're not comfortable doing.

Mistake #2: Not checking your credit report and score

You wouldn't go into a car dealership and buy a car without knowing how much it costs. So why would you go to a lender without knowing what kind of mortgage you could get?

Solution:

Knowing what kind of mortgage you can qualify for depends on a number of different variables including your credit score. According to Federal law, you can now get a free copy of your credit report once every 12 months. Generally speaking, the higher your credit score, the better interest rate and loan you can get.

If your credit score is low due to mistakes on your credit report, you can dispute those errors to have them corrected. This could help raise your credit score. If it's low due to things like late or missed payments, then you can take action to improve your buying habits and eventually raise your score.

Mistake #3: Not making your offer look good enough to sellers

If you make an offer on a house, it's important to make it enticing to the seller. And if your offer isn't attractive enough, you could lose the home of your dreams to another buyer.

Solution:

To make an attractive offer on your dream home, you need to understand the difference between a pre-qualification, pre-approval and a firm approval.

A pre-qualification only gives you an idea of how much you might be able to borrow. But you haven't applied for anything and your financial information has not been verified by the lender. With a pre-approval, the lender may have pulled your credit to look at your liabilities, but your income and asset information is still not verified.

A firm approval is probably the best way to go. Quicken Loans offers a Power Buyer® approval* that's good for four months while you shop for a home. Because all your information has been verified, you'll have an edge over other buyers. You'll know exactly how much you can spend on a home and sellers will know you're serious about your offer. Learn more about Quicken Loans Power Buyer® Approval.

Step 3: How Much Home Can You Afford?

The type of home you buy depends on many factors. But being able to afford your first home may be easier than you imagined. Here are some things that you can do to make the home of your dreams a reality.

Calculate an Affordable Price Range

If you've ever asked your parents about buying a home or getting a mortgage, they probably told you that you should always put down 20 percent of the homes' value as a down payment. While that's good advice, it's no longer a requirement, but it's a great way to avoid paying costly private mortgage insurance. Lenders are no longer requiring 20 percent for down payments. Some loans require as little as five percent down which means you can finance a larger amount of the purchase price. There are also interest-only loans that give you the option to pay less than the standard monthly principal and interest, which allows you to funnel more money elsewhere—say, toward furniture or home remodeling. Learn more about interest-only loans.

The Quicken Loans Home Affordability Calculator can help you figure out how much you can afford for monthly payments toward a mortgage.

Don't Forget About Other Costs

While you're figuring out how much you can afford monthly on your mortgage, it's critical not to forget about how much you'll need for other costs. You'll need to put aside some money for closing costs—the costs and fees for settling (or closing) your loan. Closing costs can include title fees, recording fees, attorney's fees, and appraisal fees among others.

Remember, also, that once you have included your monthly mortgage payment into your budget, you should still have money set aside for expenses such as repairs and maintenance, electricity, heat, water, furniture and other necessities.

Get a Power Buyer® Approval

Pre-qualifications and pre-approvals are not guarantees that you'll get financing. Even if you have a pre-qualification or a pre-approval, it still could fall through for any number of reasons. The best thing you can do to find out how much you can afford on a home is to get a Power Buyer® approval. You are approved* for four months while you shop for a home and you'll know exactly how much you can spend, so you won't waste time looking at houses that aren't in your price range. Not to mention that since you are already approved for financing, any offer you make on a home will have much more weight than other buyers' offers. Learn more about Quicken Loans Power Buyer® Approval.

What If I Have Bad Credit?

If you have bad or blemished credit, it's not the end of the world. You may still be able to qualify for a mortgage. Be aware that you may be required to pay a higher interest rate to offset the risk to the lender. If you still have trouble getting a mortgage, you can try to get someone to co-sign the loan with you, or you can try to improve your credit rating before you get the loan. Get tips on how to improve your credit.

Step 4: Finding the Right Mortgage Lender

When you're buying a home, you'll most likely need financing and as with anything you buy, it's wise to shop around for the right one.

You probably wouldn't buy the very first house you looked at; you'd look around at others to compare and see what's available. In the same vein, you should shop around for the right mortgage lender. Talk to at least three or four lenders. Remember: the best lender may not always have the best interest rate or get you the lowest payment. For example, if one of your needs was to save money by paying less in interest over the long term, you might choose a 15-year mortgage with a higher rate rather than a 30-year mortgage with a lower rate.

A Good Mortgage Lender Should:

• Ask lots of questions about your personal financial situation

• Be readily available to answer any and all questions you have

• Be committed to finding the most appropriate loan for you, not getting you into a "one size fits all" type of loan

• Never ask you to do anything that you feel uncomfortable with

• Return your calls and emails promptly

Tips on Finding a Lender:

Ask your friends and family which lenders they've used and what their experiences were like with their mortgage lenders. Find out who they would recommend.

Do your research. An easy way to research many mortgage companies is to go online; there are more lenders at your fingertips than you can count.

Visit each lender's Web site—see if they're offering you helpful information. Visit the Better Business Bureau's (BBB) Web site at www.bbb.org and find out what kind of reputation they have with the BBB.

The last and probably most important thing to remember is that you should look for a lender before you start shopping for a home. This may sound backwards, but it's actually a smart thing to do. If you get the mortgage process started before you shop for a house, it can make things easier. Quicken Loans offers a Power Buyer® approval that approves you for four months* while you shop. The benefits to this are that you know exactly how much you can spend—there's no guesswork. Plus, once you're ready to make an offer on a house, you can make a firm offer, which gives your offer more weight and credibility over other offers.

Ultimately, the mortgage lender you choose should guide you through the entire mortgage process. The best lender must be one that is committed to taking care of your needs—one you're comfortable working with and one who will work to get you the best mortgage to fit your situation.

Step 5: How to Find Your First Home

How to Find Your First Home

Although buying your first home and going through the mortgage process can be a somewhat intimidating process, it's only because you've never been through it before. Looking for your first home can be quite exciting.

So where do you start?

Begin to look for your first home by driving around and observing different neighborhoods where you think you might like to live and keep an eye out for "For Sale" signs. If the home offers information sheets, take one so you can compare each of them when you get home. If the information sheet does not have a photo of the house, take one with your own camera. Once you've looked at a dozen houses, you'll forget which one is which.

Another way to look for a home is to check newspaper classified ads, listings on the Internet which you can find at www.realtor.com or through real estate company Web sites.

Why use a real estate agent?

A real estate agent can be very helpful in searching for homes. They can give you the ins and outs of home buying from an experienced professional's point of view. Some people prefer not to use a real estate agent—that's your prerogative. But if you're an inexperienced first-time home buyer, you wouldn't want to be swindled or taken advantage of by a seller's agent your first time out. Be prepared that a portion of what you pay for the home goes to pay for the commissions of both real estate agents—yours and the seller's.

What to Look for in a Home

You hear people say it all the time: "Location, location, location!" But that doesn't just mean where the home is located—it involves everything having to do with the location. When you look at a home, you also have to consider the kind of neighborhood the home is in. Are the other homes well-taken care of? What kind of businesses are nearby? Are there grocery stores or malls that are convenient and easy to get to? Don't forget to also consider:

Schools-If you have kids or plan to have them, you'll want to research the school system that's in the area you like to make sure your kids will be getting an education that's up to your standards.

Safety-Consider the crime level of the area. When you look around the area, ask yourself if you and your family would feel safe and comfortable living there. Contact the local police department or check the Internet to find out more about the crime level.

Traffic—If you like a particular area, think about the traffic level. If you lived there, what route would you take to work? How long would it take you to get there? Does the traffic create too much noise (if you're, say, next to a highway or set of railroad tracks)?

Local Property Values—Find out what the rate of home appreciation is in the area and how much people are paying in property taxes (since these taxes may be factored into your monthly mortgage payment). New construction or new homes may indicate a possible increase in property values (as well as traffic) in the future.

Finding a Good Real Estate Agent

Don't go into a real estate office�most good agents are out in the field working. If you just walk in, you're likely to get the agent whose turn it is to meet whoever walks in.

Ask for referrals from trusted friends and family—talk to them about their experiences with the agents they used and find out who they'd recommend. Besides, if they're happy with a particular agent, it's likely they'll do a good job for you.

Interview more than one or two agents. Like shopping for a home, a car or any other major investment, it's wise to shop around for the right real estate agent. They should be someone who has your interests at heart, answering any questions you have, and especially someone who you feel comfortable working with.

Real estate agents are there to answer your questions and lead you through the home shopping process. If you're a first-time home buyer, finding your dream house begins with finding the real estate agent.

Step 6: Making an Offer On Your Home

Making an Offer on a Home

Alright, you've found the home of your dreams, or at least the one you like most that you can afford. Now you're ready to buy the home. So the next step is to make an offer on the home.

What's a Reasonable Offer?

If you've never bought a house before, you probably don't even know where to start in terms of making an offer. Most sellers will price their homes a little high, knowing there will be some bargaining involved. Generally, a good place to start is at five percent below the asking price.

You can also get a comparable home sales report from your agent. That will tell you what similar homes actually sold for and will give you a good ballpark where to start. If the housing market in your area is hot, you may have to make an offer that's close to the asking price.

Contingencies

A contingency is nothing more than saying that you will purchase the home as long as certain things are done. Contingencies can be written into purchase agreement and can include making sure that:

• The appraisal and title reports are satisfactory.

• The mortgage you're taking over is paid up to date.

• The seller gives you a comprehensive loss underwriting report (CLUE) on the property.

• Certain repairs are made.

Set a time limit on how long it should take for the contingencies to be met. If the seller receives another attractive offer, be prepared to remove certain contingencies. At that point, you could make a higher offer, firm your offer or drop out.

The Offer and Counteroffer

You'll need to include an expiration date for your offer. Usually 48 hours or so, depending on your circumstances. You'll also want to set a target date for the closing, perhaps four to eight weeks from the date you sign the purchase agreement. That should be enough time to get your mortgage application processed and get all the contingencies removed from the purchase agreement.

Once you make an offer, the seller has the right to review it at their leisure, but must respond within the time limit that has been set. If there has been no response, you can assume that deal has been rejected.

The seller can make a counteroffer, but understand that you are not obligated to accept it. In fact you can make a counteroffer to the seller's counteroffer and at that point, it may be wise to split the difference, otherwise you may risk losing the house and the deal.

Also, when making an offer, consider asking about seller concessions—fees and costs which the seller agrees to pay for on your behalf at the closing. These costs may include attorney fees, title insurance, discount points, origination fees, appraisal fees, inspection fees, and processing fees, among others. Seller concessions can help the seller sell his or her house more quickly and can reduce the financial burden on you to buy the home. Seller concessions are limited to between two and nine percent of the home's purchase price or appraised value; the amount varies by the type of mortgage you get, your loan amount and how you plan to occupy the home.

A Show of Good Faith

An earnest money deposit is made to show good faith, that you're serious about making an offer on the house. The money goes in escrow—a neutral, third party account—and goes towards your closing costs. The amount of the earnest money deposit is really up to you, but it should be enough to let the seller know you're serious. Remember that if you back out of the deal, the money may be kept by the seller.

Once you and the seller both sign the purchase agreement, you are entering into a binding contract. As with anything you sign, be sure to read it carefully and in its entirety so that you know exactly what you're getting into. Your real estate agent can help you understand anything you may still be confused by.

Always Get a Home Inspection

Though it's not required, every home buyer should have a home inspection performed to make sure there are no problems with the structure or condition of the home. An inspector examines everything from the roof to the foundation and everything in-between—plumbing, electrical systems, septic or sewer systems, heating and air conditioning units, insulation, etc.

Home inspections do pose an extra expense, but it's not a corner that should be cut. You wouldn't want to move in to your home and find out months later that you have significant termite damage or that the sub-floor of your bathroom was rotted out and needed replacing.

A good place to find a home inspector is by visiting www.ashi.org, the American Society of Home Inspectors (ASHI) Web site.

Other Tips to Remember:

• Always get title insurance to ensure that the title is free and clear.

• Make sure you get home insurance-it's required by the lender in order to close your loan.

• It may be wise to hire a lawyer to help you review all documents and to protect your interests.

Step 7: Mortgage Loan Options

What Kind of Loan Should You Get?

Now that you've found a home, you need to find a way to finance it. But how do you know what kind of mortgage you need to get? Well, traditional thinking says that you should always get a traditional 30-year amortizing fixed rate mortgage. But everyone has different needs and no lender should put everyone in a "one-size-fits-all."

These days, there are several mortgage loans that fit many different people for various reasons. But there are three basic types of mortgages that you should be aware of: fixed-rate, adjustable rate, and interest-only.

Fixed-Rate Mortgages

As the name suggests, a fixed-rate mortgage has a fixed interest rate over the life of the loan. They are commonly available as 15- and 30-year terms, though they are also available with 10-, 20-, 25-, and 40-year terms. Your loan balance is amortized over the life of the loan which means your payment is fixed for the life of the loan. So, for example, if you had a 30-year fixed-rate mortgage, you would make 360 equal principal and interest payments—one payment a month for 30 years—to pay off your loan.

The most obvious advantage to a fixed-rate mortgage is that your rate and payment never change. If you plan to stay in your home for 10 years or more, a 30-year fixed-rate mortgage might be right for you. But you might choose a different mortgage term depending on your goal. If your goal was to pay off your mortgage faster, you might choose a 10- or 15-year term. If you don't plan on moving and wanted a lower payment than what a 30-year mortgage payment would offer, you might choose a 40-year term, since your payments would be lower as it is amortized over 40 years, rather than 30.

Adjustable Rate Mortgages (ARMs)

Adjustable rate mortgages are just that—mortgages with an adjustable interest rate. They are generally shorter-term than fixed-rate mortgages, usually with 1-, 3-, 5-, or 7-year terms, and offer lower interest rates than a fixed-rate mortgage. If you have an ARM, your interest rate is fixed for the first 1-, 3-, 5-, or 7-years. After that, your rate generally adjusts once a year within a two percent cap. It can adjust up or down, depending on the market.

Most Americans move out of their homes within seven to nine years. Adjustable rate mortgages can be very good if you know you're going to move within that time period and are looking for a lower rate and payment.

However, this type of loan is a bit more of a gamble since your interest rate adjusts after the initial fixed years of the loan. So anyone who gets this loan should be more comfortable with risk, since you don't know whether your rate will go up or down.

Interest-Only Mortgages

"Interest-only" means that for a specified period of time during the loan, you are allowed to make payments that cover only the interest portion of your monthly mortgage payment. This can significantly lower your payment if your budget is tight for that month. However, you can add as much as you like to your payment and that amount will be applied toward your principal balance.

The concept of "interest-only payments" is more like a feature that comes with a loan, rather than a loan itself. Like buying a car with leather seats, you can get fixed-rate or adjustable rate mortgages with an interest-only payment. QL offers loans with an interest only period.

Interest-only loans can be greatly beneficial to people who value increased cash flow. You might want to shift the money you would be paying toward your principal balance toward something else—you might want to contribute more toward your 401k or pay off other bills for instance. It can also be a way to be able to afford a larger home when you know you can depend on an increased salary later on.

One myth about interest-only loans that seems to be circulating is the idea that you're not building equity if you're not paying anything toward your principal. This isn't necessarily so since many homes in many areas tend to appreciate in value. So even though you're not paying off principal, you're still building equity through home appreciation.

So your particular circumstances and your financial goals are factors that should definitely drive which type of mortgage you choose. Having the right mortgage can greatly benefit you just as having the wrong one can cost you. Do your homework and talk to a mortgage banker to find out which loan is right for you.

Step 8: Understanding Closing Costs and Fees

Understanding Points, Rates and Fees

Not only do you have to understand what type of mortgage you should choose, you have to understand the costs associated with your mortgage. All of these costs will be paid upon closing your mortgage.

Purchase Points

Purchase points, also known as a "buy-down" or "discount points," are an up-front fee paid to the lender at closing to buy-down or lower your interest rate over the life of the loan. Each point is equal to one percent of your total loan amount. If you have a $100,000 loan, one point would equal $1,000. The more points you buy, the lower your interest rate, but the more money you'll need at closing.

How do you decide whether you should buy points and if so, how many? Well, the decision should be based on how long you plan on living in your home and what you can afford to pay each month toward your mortgage. If you plan on living in your home for more than five years, it's probably a good idea to purchase points. The longer you live in your home, the more you can save on interest over the life of the loan.

Interest Rate

When you get a mortgage, you are charged an interest rate—this is the rate which the lender charges you for using their money to buy a home. It determines how much your monthly payments will be. Generally speaking, the higher the interest rate, the higher your monthly payment.

Mortgage interest rates change constantly—daily, even hourly. If you speak to a lender and are quoted a specific interest rate, that's not to say you'll necessarily get that rate when you close on your loan. Not unless you formally lock-in that rate with the lender—locking in an interest rate will guarantee you get your loan with a particular interest rate. Lenders will allow you to lock in for 15, 45 or 60 days. But the longer you lock in, the more expensive it will be, since it's more of a risk to lenders.

Fees

There are always fees associated with getting a mortgage, these fees cover the cost of processing and underwriting the loan. These fees can include charges for ensuring the title to the home is free and clear; paying for a land survey; or paying for a home appraisal which gives you the estimated value of the property (lenders require an appraisal to close on your mortgage).

Deciding which mortgage to get may depend on what each lender does because different lenders may charge different amounts. Some may charge lesser closing fees to lure you in, but may charge you a higher interest rate, which means you may pay more in the long run. But everyone has different needs—you may or may not be able to afford to pay more at closing and are willing to pay more over the long term.

Before it comes time to close, do your homework, make sure there are no hidden fees, and ask your lender lots of questions so that you understand all the costs involved with your mortgage.

Step 9: Applying for a Mortgage

What You'll Need When You Apply for a Mortgage

Applying for a mortgage for the first time can be intimidating and sometimes overwhelming. But if you have all the right documents prepared ahead of time, it will make the process go much smoother and faster.

First, lenders will need to know your date of birth and Social Security number in order to pull a credit report. They do this to find out how risky you are as a borrower. Generally, the higher your score, the less risky you are and the better loan you'll qualify for. Then, you'll need to give your lender:

Documents you will need:

• The signed purchase agreement.

• Copies of your W-2 forms.

• Proof of income (original pay stubs; verification of employment; or two years' worth of tax returns).

• Proof of assets (bank statements; investment statements, etc.) to show you have money to cover closing costs.

• Copy of the earnest money deposit.

• Copy of your homeowners insurance.

It may take some time to gather all of them, but it will be worth it when it comes time to close your loan. Not everyone will be able to document everything and that's ok. There are very flexible loans available with little to no documentation. But generally speaking, the more documentation you provide, the better interest rate you'll get on your loan.

Step 10 :Closing On Your Home

Closing on Your Home

Ok, you've found your dream home and you've applied for a mortgage; now comes time to close on the house.

Closing is the completion of the real estate sale and mortgage loan transaction. Many parties may attend the closing besides you including (but not limited to): the seller, a representative for the lender, attorneys (yours and the seller's), and a representative from the title company.

Closing Documents

At the closing, you'll have to review and sign several documents which will complete the entire process. These include the HUD-1 settlement statement which lists all the closing costs and fees you'll need to pay in connection with your loan; the mortgage note which says you promise to repay your loan; the mortgage or deed of trust which provides a detailed legal description of the property you're buying and confirms that you are pledging the property as collateral for repaying the loan; the Truth-in-Lending statement which states your annual percentage rate (APR); and the monthly payment letter which shows a breakdown of your monthly mortgage payment—it may also contain payment coupons.

Closing Fees

You will have to pay closing costs which are settlement fees that may include: the appraisal, credit report, processing fees, attorney fees, underwriting fees, and purchase points. Closing costs will vary by geographic location, so make sure you ask your mortgage banker what costs you'll have to pay so that you don't run into any problems on the day of closing.It's possible for the lender to roll your closing costs into the loan which will make your loan and monthly payment a bit larger, but depending on your circumstances, it may or may not be something you need to do.

Few loans come without closing costs and some lenders may charge less closing costs, but charge you a higher interest rate to make up the difference. Talk to your mortgage banker so that you're absolutely clear on all the terms of your loan contract and you know exactly what fees you'll be paying.