Buying a home represents so many things to us as Americans. First and foremost, owning a home is a dream, one of the major accomplishments of a person’s life. More practically, it’s a place to live. And lastly, it’s an investment. Building equity by paying down the mortgage, and from the rising value of the house, is one of the principal ways to build wealth for most people and families.
Here’s what you need to know before you before jumping into your first house
Make sure your credit is in good working order
Begin by visiting myFICO.com and getting your true credit score. If you and a partner or spouse want to buy a home, you may want to try to qualify for mortgage underwriting on just the income of the person who has a better score; most lenders will base your rate on the lower score if you’re a couple. In addition to your credit score, you’ll also want to pull a free copy of your credit reports at AnnualCreditReport.com. Make sure there are no surprise delinquencies eating up your credit. If there are, many times they’ll be small piddling bills of a medical nature. Get those things paid off pronto before you apply for a mortgage.
Read more: How to raise your credit score
Pre-qualify for a mortgage
It’s very important to pre-qualify for a mortgage before you start the formal shopping process. By doing this, you can get an idea of what kind of home you can afford and what the monthly payment will look like.
Most people only get one mortgage quote. That’s the wrong way to go about it. You’ll want to get quotes from multiple lenders. Check with a local bank or credit union and maybe even get an online quote or two. Credit unions in particular offer creative mortgages that can save you money. But know this: Each time a lender pulls your credit to give you a quote for a mortgage interest rate, it will ding your file. You can minimize the damage by getting all quotes within a 14-day period, so it doesn’t look you’re applying for multiple loans from multiple lenders each time.
See what you qualify for when it comes to a traditional 30-year fixed rate loan. Then back off and go house shopping at only 90 percent of that dollar amount. So if you qualify for a $200,000 mortgage, for example, don’t look at houses above $180,000. By doing that, you will help create extra financial breathing room in your life. In the past, people mistakenly thought that stretching to buy a home would create wealth for them.
BONUS TIP: When you apply for a mortgage, you’ll face a variety of junk fees. Many of them can negotiated down or away altogether. Know the junk fees so you can take action!
How much down payment is necessary?
The FHA Loan Program offers you the ability to generally bring the least amount of money to the closing table possible. Most FHA loans require 3.5% down payment of the purchase price. If you don’t go the FHA route, many loans will require 20% down payment.
Use a home inspector
First-time homeowners often skip the inspection because they think government workers have somehow inspected the house. Although they have, these kinds of inspections are not enough.
Two sites that offer great referrals are the American Society of Home Inspectors’ Web site at ASHI.com and the National Institute of Building Inspectors at NIBI.com. NIBI requires that its inspectors carry errors & omissions liability insurance, which means they accept responsibility for any oversight. You also want to be sure whoever you hire is CABO certified by the Council of American Building Officials, which means they are current on all building codes.
Spend some additional money when buying a house and get an inspection. It’s worth it. And before you sign a contract with a home builder, make sure you inspect the contract. Some builders forbid you from hiring an inspector and that wording is included in the contract. So, if you see it in there, give that builder the boot.
Know the deal about biweekly mortgage payments
Want to set up your own biweekly mortgage plan without paying any fees? Keep making monthly mortgage payments and add one-twelfth extra in the additional principal box. You’ll pay 13 months in a 12-month period.
Don’t fall for the home warranty ploy
With a typical home warranty policy, you pay anywhere from $400 to $600 annually. In return, you supposedly get peace of mind when one of the mechanical components of your home breaks. Yet here’s how it plays out in reality: If something goes wrong in your home, the warranty companies are brutally difficult to deal with. They require you to use their contractor only. That contractor may or may not come on schedule while you’re burning up in the heat of summer without AC or freezing in the dead of winter without heat. And then you’ve got a deductible on top of that! As an alternative, put $50 a month into a repair fund in lieu of renewing that $600 annual home warranty policy.
Plan to stay put for years
Sure, real estate is a deal, but only if you buy and hold. Plan to stay in a traditional single-family home a minimum of five years. Seven years will be even better for your wallet because it gives time for appreciation of real estate values before you go to move and sell again. If you’re starting out in a townhome, you need to dig in your heels and stay put in a townhome for at least 10 years.
Here are some common home-selling myths
If you’re on the other end of the transaction as a seller, USA TODAY has a few things you need to know:
- I must buy another home with the proceeds from sale of last home or I’ll pay tax. This is not true so long as you’ve lived int he home you’re selling as your primary residence for two of the last five years.
- I will automatically owe an extra 3.8% surtax when I sell because of Obamacare. This would only be true for two reasons. First, if you didn’t live in the home for two of the five previous years. Second, if your have adjusted gross income of $200,000 for an individual or $250,000 when filing as a married couple.
- Loss on the sale of my home can be written off against income. This is not true for your primary or second home, so long as neither is held for investment purposes.
For more money-saving advice, see our Money section.