BUYING YOUR STARTER HOME
The advantages of home ownership are many: building equity; tax deductions; the promise of appreciating value; and having a place that belongs to you. With mortgage rates at historic lows, this is an opportune time to take the big step. But first, make sure that homeownership is right for you. If you plan to stay in the home for at least five years and your monthly nut will not exceed 43 percent of your income, the federal Consumer Finance Protection Bureau says you can give yourself the "go" sign.
The first thing to do, even before looking at the real estate listings, is to make sure your credit is good. Request a copy of your credit score from one of the three credit reporting bureaus. The higher the score, the better the mortgage rate you'll qualify for; the ideal minimum is 750. If your score is less than 680, you will have to come up with a larger down payment or pay a higher interest rate. Start working now to boost your score -- pay bills on time, pay off old debts, and pay down your credit card balances.
Use a calculator to determine how much house you can afford, based on your salary, outstanding debt, and monthly expenses. Be honest rather than hopeful. If the monthly payment will be way more than the rent you're currently paying, lower your sights. Meanwhile, research home prices in the target area to determine whether your budget aligns with reality.
In addition to the monthly mortgage payment, you'll be paying utility bills, property taxes, home owner's insurance, and possibly, higher commuting costs. Figure all this into your expected monthly outlay. Home maintenance costs are always an issue -- there is no such thing as a home that never needs repairs. Be prepared to install a new roof or water heater by having the equivalent of five months of mortgage payments in savings.
Gathering enough money for the down payment is the hardest part of preparing to buy a starter home. Plan to amass about 20 percent of the purchase price. The median price of homes currently on the market is $214,900, according to Zillow, which means adown payment of about $40,000. You can put up less than 20 percent but you will have to buy mortgage insurance. Note that closing costs run about 2 to 5 percent of the sale price, depending on location, so be sure to have that on hand, as well. Use Bank of America's closing-costs calculator to estimate how much cash you'll need.
NEST EGG BUILDING
Your 30s are a critical decade for getting your financial house in order, especially if you plan to buy a home. Building a nest egg might seem impossible if you're already paying rent, but there are strategies worth trying. Aim to live on one income if there are two working people in the household. Sacrifice little things, like morning lattes and lunches out, and big things, like a large apartment or two cars. Try to lower or renegotiate monthly expenses like phone, cable, and health insurance. Arrange to automatically deposit part of your paycheck into savings along with all windfalls, large and small, such as tax refunds, bonuses, and birthday money.
In the event that your savings fall short of the standard upfront outlay, there are sources first-time home buyers can tap. If you have an IRA, you can withdraw up to $10,000 without a penalty. Some financial institutions make down payment loans, and the FHA insures mortgages with down payments as low as 3.5 percent. The Veterans Administration helps active and former military members buy a home. The USDA provides loan guarantees for qualified borrowers that allow up to 100 percent financing for homes in many rural counties. Check with your local state and local housing authority for other available programs. Zillow, a real estate marketplace, counts more than 1,000 down payment assistance programs.
Securing pre-approval for a mortgage is a helpful tool. The process involves a lender checking your finances and credit and verifying that you are eligible for a particular loan amount. Doing this before starting your search will give you a very real check on how much house you can afford and what the monthly mortgage payments will be. Sellers are more likely to negotiate with people who already have proof that they can obtain financing.
Wisdom dictates, particularly with a starter home, that you buy the worst home in the best area. The school district should be one of the prime considerations, even if you don't now or ever will have, children. Resale value in the best school districts is always higher than in poorer-performing districts. Houses on busy streets may be more affordable, but they will also be more difficult to sell later to anyone with children. If the neighborhood is populated mostly by renters, this will affect the immediate vicinity as well as the home's attractiveness to potential buyers later on. And an area full of elderly people might not be a welcome place for a family with young children.
DETACHMENT, NOT LOVE
Buying a home is very emotional. We all have attachments to certain kinds of homes, and there are often little details that tug at our heart strings. But this is a major financial decision that you must consider with a cold heart before making an offer. Pay attention to the structure of the house rather than the dressing, which can be added or subtracted later. Make a checklist of all the must-have features and take it along while you're looking; it will help you make an objective decision about a given property.
When you click with a house, look beyond the cosmetics. Turn on the taps to check water pressure and take a taste to be sure the water is drinkable. Flush the toilets. Turn on all the lights. Look for cracks, water damage, presence of electrical outlets, and mold under the sink. Make sure the windows open and close properly. If there is a homeowners' association, check the contract terms -- you may want to rent out your house down the road or pull out the grass on the front lawn and replace it with a rock garden; make sure this allowed. Who is responsible for shoveling snow on the sidewalk -- you, the association, or the town? Get answers to all your questions.
When submitting an offer, be sensible -- don't make it insultingly low. The real estate agent will go over comparable properties to give you a sense of an appropriate bid. Expect some back and forth until you reach agreement on the price.
Usually, inspections occur only after a preliminary agreement to buy is reached. At this point, arranging a professional home inspection should be at the top of your to-do list. Finding out right away that the foundation is crumbling, the heating and cooling systems are at the end of their useful life, or the insulation is inadequate can save you from buying a money pit or give you great leverage in negotiating the final price.
CLOSING THE DEAL
You've found the perfect house in the perfect neighborhood at a perfect price. Now you go to the bank to secure a mortgage. Then hire a good lawyer to handle the closing paperwork and call attention to anything you might have missed. Assuming all goes well, you sign on the dotted line and become a homeowner.