Dear Kirk: My husband and I are getting ready to start hunting for our first piece of property. What should first-time homebuyers know as they look at lending options? What questions should we ask up-front to minimize costly surprises down the line?
Kirk Says: First off, congratulations! The fact that you are asking this question indicates that you are on your way to a more positive experience in buying your first home. However, remaining both patient and flexible will be key to keeping your sanity during this process. Here are some of my key tips to minimizing costs and time delays—and paving your path to home ownership as smooth as possible.
• Know how much home you can afford. As a first-time home buyer, it’s important to know how much money you can borrow for a new house and, even more importantly, how much you can afford. Your mortgage banker can assist you with determining both of these numbers. Sometimes they are not the same. If this is your case, always go with what you can afford. There is nothing more frustrating than finding the “perfect” house and then finding out after the fact that you can’t afford it.
• Pick the right mortgage product. Fixed vs. adjustable? Five-year, 15-year, or 30-year? Confused yet? Don’t be. Your mortgage banker will help you determine which is best for your situation, once he asks you some questions, such as: How long do you intend to live in this house? What is your current financial situation? Do you expect your income to stay steady or fluctuate? Do you expect it to increase significantly over the next few years?
A very conservative approach is that your payment on a 15-year fixed mortgage should not exceed 25 – 33 percent of your monthly take-home income. However, one size does not fit all, and a 5-year Adjustable Rate Mortgage (ARM) may be a nice fit for your situation if you are planning to sell the house in the next five years due to an anticipated job change.
• Ask yourself—am I Pre-Qualified or Pre-Approved? Pre-approval often involves a much more detailed look at your financial situation (credit check and debt-to-income ratios are verified) vs. pre-qualified (typically none of your information is verified). With a pre-approval, you’re in a better position to negotiate because the seller knows that your offer is more solid. Additionally, you will avoid wasting time looking at homes outside your price range.
• Lock in your rate. Your mortgage banker can’t tell you when to lock your rate, but the information they provide will prove invaluable to making your decision. Track your rates daily so that you have a good feel for what the market is doing. Are rates moving up or down? What’s it going to cost me to lock my rate? How long does the rate-lock last? What happens if there are delays in my closing and we miss the lock date? Can the lock be extended?
I typically look for a 45- to 60-day lock that costs me no additional fees or “points” on my loan. Also, if there are any agreements to extend the lock for whatever reason, get it in writing.
• Get a home inspection. Do you really need a home inspection? Absolutely! Spend the few hundred dollars and the 3-4 hours with the inspector, and you will be glad you did. First off, always make sure that your offer to purchase the property is contingent on the property passing the home inspection. A thorough inspection will evaluate the condition of the plumbing and electrical systems; the roof; the HVAC system; the structural integrity of the walls, floors, foundation, and ceilings; and the condition of gutters, downspouts, insulation, garage, and major appliances.
Keep in mind that the first time you ever did anything you probably didn’t do it perfectly, so give yourself permission to make mistakes along the way. But if you follow these tips, you will surely minimize the cost and frustration associated with the first-timer mistakes.
Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at kirkgwaltney.com.