Getting Started
Congratulations for taking a bold step forward! You are well on your way
to the ranks of home ownership. Perhaps you're a first-time buyer hoping to
pay towards a mortgage rather than a landlord, or you may be upgrading your
current home, at any rate, welcome.
All too often, many first-time buyers tend to feel that they need an agent. Their
parents and friends all used agents, so why would they want to buck the trend - that's
just how it's done. Well, once the process is complete, many of these first-time buyers end up asking themselves,
why they used an agent? The process wasn't very difficult and the agent really
didn't do much anyway.
We couldn't agree more. Our tutorial has been constructed to help
those going through the process the first time, as well as those of you
trading up. Hopefully, we can educate you regarding the process and give you
confidence to buy your next property like a pro.
Let's start by discussing the number one thing that dictates the entire process - money.
We'll need to give your finances a physical, as well as consider how much you can afford.
Financial Physical
You will need to start by conducting a personal financial check up. This will help you
determine what your comfort level is with monthly expenses, and the highest price property
you should be considering. The best way to do this is to look at your spending habits
over the past three to six months.
Start by gathering your monthly expenses over these months. Carefully look
at how much you spend on a monthly basis, compared to how much you save. Then try to estimate
what you think these costs may be once you have purchased property. If you are renting and you
think that you might be able to pay the same amount in mortgage payments as rent, you may
be in for a big surprise.
To quickly estimate how much your rent payments can buy you in the form of monthly mortgage
payments, take your monthly rent and multiply it by 200 to get the purchase price. For instance,
if your rent is currently $725 a month (strictly rent - no utilities) then the purchase price
would be $145,000. Since the average sale price is $177,500, we suspect this may be less than you
were imagining.
Another thing you should consider doing is checking your credit report. Knowing that you have good
credit will certainly help you when applying for a mortgage. However, don't despair if you have a few blemishes
on your report, knowing ahead of time, is the best way for you to fix them. Take the time to have
a credit checkup before
meeting with mortgage brokers and lenders. This will help you avoid any unpleasant surprises.
How Much Can You Afford?
Really you should be considering how much you are comfortable spending. You want to be careful
about not overextending yourself, or else you may be unprepared to properly take care of the
property once you have purchased it.
See, let's say you are currently renting, and your monthly
rent is $900 plus utilities, and you qualify for a mortgage loan of $300,000. Well the monthly
payments on that mortgage at 7% over 30 years will be $1,995, that's more than double your rent,
not to mention higher utility bills, insurance, maintenance, and taxes.
You will want to look at your total monthly home ownership expense. It comprises of the following
items:
- mortgage payment - calculate
- property taxes - varies from state to state, but the average is 1.5% of the purchase price (divide by 12)
- insurance - ranges from as little as $40/month for a $100,000 property to $160/month for a $500,000 property
- maintenance - a rule of thumb is 1% of the purchase price per year (divide by 12)
- utilities - varies greatly, hopefully the seller will have this information for you
So, let's look at that $300,000 mortgage more closely - mortgage of $1,995, property taxes of $375,
insurance of $110, and monthly maintenance of $250, yields a monthly total of $2,730. Ok, so this didn't
include a down payment, which will bring the mortgage payments down or the tax benefits, but it also doesn't
include utilities, so use this as a guide when determining your comfort level.
If you're used to paying $900 in
rent, owning property will become a significant lifestyle change when it comes to spending - if you're
not careful and wise before you buy. However, remember that buying property is an investment, unlike a
car which depreciates as soon as you drive it off the lot.
The Down Payment
How's your savings account these days? Hopefully, you've been doing a good job saving, or perhaps you
are looking to take the proceeds from the sale of your property for a down payment on the next. At any
rate, the question always arises, how much down?
This is a sticky subject. Typically, you will hear 20% down, but 10%, 5%, and even 0% down will work.
Basically it comes down to what your comfortable with. The more you put down towards the purchase, the
lower your mortgage will be. However, the down payment is not the only thing you're going to be faced
with as up-front costs, there are also closing costs to consider.
Closing Costs
If you're a first-time buyer, you may not be aware that there are many additional fees you will
be faced with - closing costs. Ask any home owner, these fees are typically more than anticipated.
The best thing to do is be prepared.
Closing costs typically range between 3 - 6% of the purchase price
of the property. So if you decide to purchase a $250,000 and have $50,000 that you are going to use
towards your purchase, it is quite likely that $12,000 will be going towards closing costs, leaving $38,000
for your down payment.
When negotiating your offer with the seller,
one of the things you may wish to negotiate is who is going to pay certain closing costs. We have provided
you with a list of potential closing costs to
help you better prepare yourself.
If you're like most of us, you're going to need a mortgage -->
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