Home-Buying 101

One of the most anticipated milestones in life is buying your first home. No more rent - you can finally build equity. Interest rates are still at historic lows, so maybe it’s time to make the move. Remember though, that leaking sink or unkempt grass is now your responsibility.

You should first ask yourself how much can you afford? As a rule of thumb, the mortgage industry uses debt ratios. A maximum of 28% of gross income should go to a mortgage payment. If you have other debt, your total debt to gross income should not exceed 36%. Too much math? Go online. Using a maximum mortgage calculator, decide how much house you can afford.  Enter income and current expenses such as car payments, school loans and credit cards. Now add estimated utilities, property taxes and homeowner’s insurance. Calculate and voila! The mortgage you can afford.

Down Payment

You’ll need a down payment. How much do you have saved? If the answer is not much, this is a good time to cut back and see if you can live on a reduced income, while the balance goes to savings. If you can offer a 20% down payment, you will not need mortgage insurance. Mortgage insurance is a policy that will compensate the lender if you default. Based upon variable factors, an annual premium can range from .3% to 1.2% of the principal borrowed. Once you have built at least 20% equity in your property, you can negotiate to remove the insurance.

Now that you know how much you can afford. Visit Zillow to get an idea of what is available in your price range. Make a list of what is important to you. Number of bedrooms, lot size, proximity to work/recreation. The absolute worst thing you can do is to casually visit open houses. You may fall in love with something out of your price range which makes it difficult to settle for less.

Next, choose a real estate agent. Get recommendations from friends, coworkers or even services such as Angie’s List.  Be sure to check the Pittsburgh Business Times list of top realtors.  Make an appointment and interview the agent.  What locations do they service? What home values do they typically sell? If you are looking for a small starter home, the agent representing million dollar homes may not give you the service you need.  Let the agent know your criteria then have he or she take you to see some properties.  If you are not comfortable with that agent, move on. Your realtor is your advocate; you are entrusting that person with a huge life decision. I’ll never forget a realtor who told us, when we did not like her choices, that we would just have to settle. We did not settle, and found a house without her help. It was a lovely old farmhouse with large rooms and a private lot. It also had tree trunks holding up the floors and walls full of butternuts. For quite some time I thought they were a kind of ancient insulation.

Get preapproved for a mortgate.  This will expedite the purchase process.  Find the best current rates and then visit the lender of your choice.  Don’t forget your local bank which may often offer more competitive rates and have the advantage of being close by.

Now you’ve got the details nailed down.  Stay tuned for Part 2 of this series: Purchasing Your Perfect Home.

© 2014 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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