5 Things Every First-Time Home Buyer Needs to Know

Here's what every first-time home buyer needs to know to dive into house hunting with confidence—and with as few curveballs as possible. Whether it's getting a mortgage, choosing a real estate agent, shopping for a home, or making a down payment, we lay out the must-knows of buying for the first time below.

1. How much home you can afford as a first-time home buyer

Homes cost a bundle, so odds are you'll need a home loan, aka mortgage, to foot the bill, along with a hefty down payment. Still, the question remains: What price home can you really afford? That depends on your income and other variables, so punch your info into realtor.com®'s home affordability calculator to get a ballpark figure of the type of loan you can manage.

In general, experts recommend that your house payment (which will include your mortgage, maintenance, taxes) should not exceed 28% of your gross monthly income. So, for example, if your monthly (before-tax) income is $6,000, multiply that by 0.28 and you'll see that you shouldn't pay more than $1,680 a month on your home mortgage.

But online mortgage calculators give just a ballpark figure. For a more accurate assessment, head to a lender for mortgage pre-approval. This means the bank will assess your credit history, credit score, and other factors, then tell you whether you qualify for a loan, and how much you qualify for. Mortgage pre-approval also puts home sellers at ease, since they know you have the cash for a loan to back up your offer.

You can also decide if you're going to apply for a loan through the Federal Housing Administration (FHA).

"An FHA loan is a great option for a lot of home buyers, particularly if they're buying their first home," says Todd Sheinin, mortgage lender and chief operating officer at New America Financial in Gaithersburg, MD.

An FHA loan will have looser qualification requirements than a traditional mortgage, but there are still certain prerequisites borrowers must meet like getting private mortgage insurance and having a minimum credit score of 500.

2. Pick the right real estate agent

You buy most things yourself—at most, sifting through a few online reviews before hitting the Buy button and making a payment. But a home? It's not quite so easy. Buying a home requires transfer of a deed, title search, and plenty of other paperwork. Plus there's the home itself—it may look great to you, but what if there's a termite problem inside those walls or a nuclear waste plant being built down the block?

There's also a whole lot of money involved. (You know, a down payment, loan, etc.)

All of which is to say, before you make a massive payment, you will want to have a trusted real estate agent by your side to explain the ins and outs of the process. Make sure to find an agent familiar with the area where you're planning on purchasing; to her credit, the agent will have a better idea of proper expectations and realistic prices, says Mark Moffatt, an agent with McEnearney Associates in McLean, VA.

"Finding a Realtor is not hard, but finding one that is best suited for you and your purchase is a challenge," he adds.

You can search on realtor.com/realestateagents to find agents in your area as well as information such as the number of homes sold, client reviews, and more. Make sure to interview at least a couple of agents, because once you commit, you will sign a contract barring you from working with other buyer's agents—this ensures the agent's hard work for you pays off.

3. Know there is no such thing as a perfect home

It's your first home—we understand if you've dreamed about the ideal house and don't want to settle for anything less. We've been there! But understand that real estate is about compromise. As a general rule, most buyers prioritize three main things: price, size, and location. But realistically, you can expect to achieve only two of those three things. So you may get a great deal on a huge house, but it might not be in the best neighborhood. Or you may find a nice-size house in a great neighborhood, but your down payment is a bit higher than you were hoping for. Or else you may find a home in the right neighborhood at the right price, but it's a tiny bit, um, cozy.

Such trade-offs are par for the course. Finding a home is a lot like dating: "Perfect" can be the enemy of "good," or even "great." So find something you can live with, grow into, and renovate to your taste.

4. Do your homework

Once you find a home you love and make an offer that's accepted, you may be eager to move in. But don't be hasty. Don't purchase a home or make any payments without doing your due diligence, and add some contingencies to your contract—which basically means you have the right to back out of the deal if something goes horribly wrong.

The most common contract contingency is the home inspection, which allows you to request a resolution for issues (e.g., a weak foundation or leaky roof) found by a professional.

Another important first-time home buyer addition: a financing contingency, which gives you the right to back out if the bank doesn't approve your loan. If they believe you'll have trouble making a payment, a mortgage lender will not approve your loan. A pre-approval makes the possibility of having your loan application rejected much less likely, but a pre-approval is also not a guarantee that it'll go through.

You also might want to consider an appraisal contingency, which lets you bail if the entity who is giving you a loan values the home at less than what you offered. This will mean you will have to come up with money from your own pocket to make up the difference—a tough gamble if cash is already tight.

5. Know your tax credit options

The first-time home buyer tax credit may be no more, but there are a number of tax breaks new homeowners may not be aware of. The biggie: Mortgage interest deduction is a boon for brand-new mortgages, which are typically interest-heavy. If you purchased discount points for your mortgage, essentially pre-paying your interest, these are also deductible. Some states and municipalities may offer mortgage credit certification, which allows first-time home buyers to claim a tax credit for some of the mortgage interest paid. Check with your Realtor and local government to see if this credit applies to you.

The McLeod Group Network can help you find your new home! 971.208.5093 or admin@mgnrealtors.com. 

By: Realtor.com, Jamie Wiebe

3 Things You'd Better Know Before Applying for a Mortgage—or Else

Unless you’re sitting on a ton of cold, hard cash, you’re going to need a mortgage to buy a home.

Unfortunately, you can’t just show up at a bank with a checkbook and a smile and get approved for a home loan—you need to qualify for a mortgage, which requires some careful planning.

So, how do you please the lending gods? It starts with arming yourself with the right knowledge about the home loan application process.

Here are three things you need to know before applying for a mortgage.

1. What is a good credit score

Ah, the all-mighty credit score. This powerful three-digit number is a key factor in whether you get approved for a mortgage. When you apply for a loan, lenders will check your score to assess whether you’re a low- or high-risk borrower. The higher your score, the better you look on paper—and the better your odds of landing a great loan. If you have a low credit score, though, you may have difficulty getting a mortgage.

So, what’s considered a good credit score in the mortgage realm? While a number of credit scores exist, the most widely used credit score is the FICO score. A perfect score is 850. However, generally a score of 760 or higher is considered excellent, meaning it will help you qualify for the best interest rate and loan terms, says Richard Redmond, mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”

A good credit score is 700 to 759; a fair score is 650 to 699. If you have multiple blemishes on your credit history (e.g., late credit card payments, unpaid medical bills), your score could fall below 650, in which case you’ll likely get turned down for a conventional home loan—and will need to mend your credit in order to get approved (unless you qualify for a Federal Housing Administration loan, which requires only a 580 minimum credit score).

Before meeting with a mortgage lender, Beverly Harzog, consumer credit expert and author of “The Debt Escape Plan,” recommends obtaining your credit report. You’re entitled to a free copy of your full report at AnnualCreditReport.com. Though the report does not include your score—for that, you’ll have to pay a small fee—just perusing your report will give you a ballpark idea of how you're doing by laying out any problems such as late or missing payments.

2. What down payment you need

What’s an acceptable down payment on a house? In a recent NerdWallet study, 44% of respondents said they believe you need to put 20% (or more) down to buy a home. So, if you do the math, you'd have to plunk down $50,000 on a $250,000 house. Of course, that’s a big chunk of change for many home buyers.

The good news? That 20% figure is common, but it's not set in stone. It’s the gold standard because when you put 20% down, you won't have to pay private mortgage insurance, which can add several hundred dollars a month to your house payments. Another advantage of putting down 20% upfront is that that's often the magic number you need to get a more favorable interest rate.

But, if you’re unable to make a 20% down payment, there are many lenders that will allow you to put down less cash. And there are a number of loan products that you might qualify for that require less money down. FHA loans require as little as 3.5% down. The U.S. Department of Veterans Affairs loan program gives active or retired military personnel the opportunity to purchase a home with a $0 down payment and no mortgage insurance premium. Same with USDA loans (federally backed by the U.S. Department of Agriculture Rural Development).

Another option worth pursuing is qualifying for down payment assistance. There are 2,290 programs across the country that offer financial assistance, kicking in an average of $17,766, according to one study. (You can find programs in your area on the National Council of State Housing Agencies website.)

There are some cases, though, where you’ll have to put more than 20% down to qualify for a mortgage. A jumbo loan is a mortgage that's above the limits for government-sponsored loans. In most parts of the country, that means loans over $417,000; in areas where the cost of living is extremely high (e.g., Manhattan and San Francisco), the threshold jumps to $625,000. Since larger loans require the lender to take on more risk, jumbo loans typically require home buyers to make a bigger down payment—up to 30% for some lenders.

3. What is your DTI ratio

To get approved for a mortgage, you need a solid debt-to-income ratio. This DTI figure compares your outstanding debts (on student loans, credit cards, car loans, and more) with your income.

For example, if you make $6,000 a month but pay $500 to debts, you’d divide $500 by $6,000 to get a DTI ratio of 0.083, or 8.3%. However, that's your DTI ratio without a monthly mortgage payment. If you factor in a monthly mortgage payment of, say, $1,000 per month, your DTI ratio increases to 25%.

Lenders like this number to be low, because evidence from studies of mortgage loans shows that borrowers with a higher DTI ratio are more likely to run into trouble making monthly payments, according to the Consumer Financial Protection Bureau.

For a conventional loan, most mortgage lenders require a borrower’s DTI to be no more than 36% (although some lenders will accept up to 43%), says Ray Rodriguez, regional mortgage sales manager at TD Bank.

The good news? If you’re above the 36% ceiling, there are ways that you can lower your DTI. The easiest would be to apply for a smaller mortgage—meaning you’ll have to lower your price range. Or, if you’re not willing to budge on price, you can lower your DTI by paying off a large chunk of your debts in a lump sum.

Let The McLeod Group Network help you with all your home-buying needs. 971.208.5093 or admin@mgnrealtors.com.

By: Realtor.com, Daniel Bortz

Having Trouble Saving Enough for Your Down Payment? Crowdfund It!

You read that right! First-time buyers across the country are getting creative when it comes to saving the necessary down payment to buy a home.

Many couples are asking their wedding guests to contribute to their “Down Payment Fund” rather than fulfilling a traditional registry. This is fueled by the fact that many couples live together prior to marriage and already have the necessary items to make a house a home…they just need the house!

The average wedding in the United States has 120 guests who give wedding gifts valued, on average, at $186. This means that couples could walk away from their nuptials with over $22,000 towards their down payment!

Services like HomeFundMe allow friends, family members, and almost anyone else in a buyer’s network to contribute funds toward the buyer’s down payment. Contributors can determine, at the time of their donation, if their gifts are ‘conditional’ or ‘non-conditional’ on the beneficiary buying a home.

According to a recent Wall Street Journal article, “about 400 borrowers have used HomeFundMe to help buy homes since the program launched in October and on average, they raise about $2,500.” The article went on to explain that most borrowers use these funds in combination with their personal savings to shorten the time needed to achieve their goal of homeownership.

There are more and more programs surfacing from lenders that allow buyers to put down as little as 3% to buy their dream home. Fannie Mae and Freddie Mac loan programs require 3% down payments, while FHA programs require as little as 3.5%, and VA Loans are often approved with 0% down!

Bottom Line

Gone are the days of 20% down or no loan! If your dreams include buying a home of your own in the next year, you can get creative with your down payment savings to make it happen!

Let the professionals on The McLeodGroup Network help guide you through the home-buying process. 971.208.5093 or admin@mgnrealtors.com.

By: KCM Crew

First-Time Home Buyers Continue to Put Down Less Than 6%!

According to the Realtors Confidence Index from the National Association of Realtors, 61% of first-time homebuyers purchased their homes with down payments below 6% in 2017.

Many potential homebuyers believe that a 20% down payment is necessary to buy a home and have disqualified themselves without even trying, but in March, 71% of first-time buyers and 54% of all buyers put less than 20% down.

Ralph McLaughlin, Chief Economist and Founder of Veritas Urbis Economics, recently shed light on why buyer demand has remained strong,

“The fact that we now have four consecutive quarters where owner households increased while renters households fell is a strong sign households are making the switch from renting to buying.

Households under 35 – which represent the largest potential pool of new homeowners in the U.S. – have shown some of the largest gains. While they only make up a third of all homebuyers, the steady uptick in their homeownership rate over the past year suggests their enormous purchasing power may be finally coming to [the] housing market.”

It’s no surprise that with rents rising, more and more first-time buyers are taking advantage of low-down-payment mortgage options to secure their monthly housing costs and finally attain their dream homes.

Bottom Line
If you are one of the many first-time buyers unsure of whether or not they would qualify for a low-down payment mortgage, let’s get together and set you on your path to homeownership! 971.208.5093 or mcleodgroupoffice@gmail.com.

By: KCM Crew

What Is Private Mortgage Insurance (PMI)?

When it comes to buying a home, whether it is your first time or your fifth, it is always important to know all the facts. With the large number of mortgage programs available that allow buyers to purchase homes with down payments below 20%, you can never have too much information about Private Mortgage Insurance (PMI).

What is PMI?

Freddie Mac defines PMI as:

“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.

Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”

As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. Freddie Mac goes on to explain that:

“The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.” 

According to the National Association of Realtors, the average down payment for all buyers last year was 10%. For first-time buyers, that number dropped to 5%, while repeat buyers put down 14% (no doubt aided by the sale of their homes). This just goes to show that for a large number of buyers last year, PMI did not stop them from buying their dream homes.

Here’s an example of the cost of a mortgage on a $200,000 home with a 5% down payment & PMI, compared to a 20% down payment without PMI:

The larger the down payment you can make, the lower your monthly housing cost will be, but Freddie Mac urges you to remember:

“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”

Bottom Line

If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and help you make the best decision for you and your family. 971.208.5093 or mcleodgroupoffice@gmail.com.

By: KCM Crew

It’s Tax Season… Use Your Refund to Jump Start Your Down Payment Savings!

According to data released by the Internal Revenue Service (IRS), Americans can expect an estimated average refund of $2,840 this year when filing their taxes. This is down slightly from the average refund of $2,895, last year.

Tax refunds are often thought of as ‘extra money’ that can be used toward larger goals; for anyone looking to buy a home in 2018, this can be a great jump start toward a down payment!

The map below shows the average tax refund Americans received last year by state. (The refunds received for the 2017 tax year should continue to reflect these numbers as the new tax code will go into effect for 2018 tax filings.)

Many first-time buyers believe that a 20% down payment is required to qualify for a mortgage. Programs from the Federal Housing Authority, Freddie Mac, and Fannie Mae all allow for down payments as low as 3%, with Veterans Affairs Loans allowing many veterans to purchase a home with 0% down.

If you started your down payment savings with your tax refund check this year, how close would you be to a 3% down payment?

The map below shows what percentage of a 3% down payment is covered by the average tax refund by taking into account the median price of homes sold by state.
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The darker the blue, the closer your tax refund gets you to homeownership! For those in Alabama looking to purchase their first homes, their tax refund could potentially get them 69% closer to that dream!

Bottom Line

Saving for a down payment can seem like a daunting task. But the more you know about what’s required, the more prepared you can be to make the best decision for you and your family! This tax season, your refund could be your key to homeownership!

Contact The McLeod Group Network to start your home search! 971.208.5093 or mcleodgroupoffice@gmail.com.

By: KCM Crew

6 Mortgage Questions a First-Time Home Buyer May Be Embarrassed to Ask

Mortgage questions abound when you're a first-time home buyer. Compounding the challenge is the embarrassment over interrupting the conversation with a would-be lender or seller to ask, "'Scuse me, what is a credit score? How much money do I need as a down payment?" Everyone knows this stuff, right?

No, they don't all know—so you should ask these questions. Or, at the very least, study up a bit so you know the basics. To help get you up to speed, here's a crash course on the most common mortgage questions and answers you need to know. Take five to read on, and wonder no more.

1. What do you need to get a mortgage?

Before loaning you money, lenders want to see proof that you've proven reliable paying off past debts, so you'll need to start establishing credit.

"There are ways to verify your past payments on utility bills, cellphone, and rent," notes Michael E. Matthews, senior vice president of PrimeLending. "Get a credit card, pay it back carefully. Your car and college loans—those things help you establish credit and help you get a mortgage."

2. If you have bad credit, how do you improve it?

Matthews talks to a lot of borrowers who come to him with this mortgage question. They think they have bad credit but are doing better than they think.

His first tip: Check your credit report. It's free to download one copy each year, and you may be pleasantly surprised by what you find. And if the news is bad, there's still hope.

"If you’ve got bad credit, a lot of times there’s aged activity on there—an old collection, a medical bill, something you didn’t know about," Matthews says. And these "errors" can often be fixed, boosting your credit score fairly quickly.

If you do have a bunch of bad marks and late payments, however, start paying on time and your score will gradually improve. Here are some ways to raise your credit score.

3. What’s the difference between a mortgage pre-approval and a pre-qualification?

"Pre-qualification is not going to hold the same weight as a pre-approval," says Matthews. "You can go online and get somebody to print you out a pre-qual letter. And you’ll find that if you’re negotiating with an agent and they’re looking at a pre-qual letter, it’s probably not worth much to them."

A pre-approval letter—involving lenders fully checking your finances in a verifiable way—takes more time and effort, which is exactly why it carries much more weight. If you're serious about buying a home, get pre-approved to show you mean business. Here's more on the difference between mortgage pre-approval vs. pre-qualification.

4. How much down payment do you need for a mortgage?

The gold standard down payment for a mortgage is 20%—so if the home's price is $200,000, you'd ideally have to pony up $40,000 of your own money to get the loan.

If you don't have that much, all is not lost. You can put down less, but that means you'll have to pay PMI, or private mortgage insurance. It's an extra fee of about $50 to $100 a month that lenders will require to mitigate the risk that you might default on your loan due to your lack of funds.

"There’s risk there that literally has to be accounted for, and that ends up being insurance that adds to your mortgage payment," says economist Jonathan Smoke. "When you put less down, the trade-off is you actually have to spend more on a monthly basis."

That said, there are some exceptions that allow a buyer to avoid PMI even with a small down payment. Buyers who are in the military, veterans, and family members of veterans may be able to avoid PMI with a Veterans Affairs loan. And once your equity in your home rises above 20%, you can stop paying PMI.

5. What kind of down payment assistance is available?

If you're looking for help with a down payment, Smoke says, the "bank of Mom and Dad" may be a smart start—if your parents have the means to pitch in. Gifted money can help many people qualify for a loan, he says, although you absolutely must tell your lender that the money was a gift—fibbing on this front will raise red flags.

If private assistance isn't an option, or isn't enough, never fear—there are over 2,000 down payment assistance programs across the country that can help, as long as you meet eligibility requirements in terms of income and credit.

Check with your real estate agent or lender, as they may be able to tell you about programs in your area that will help you become a homeowner.

6. What types of home loans are available?

Loan types vary widely, but Barbara A. Carrollo-Loeffler, director of consumer and residential lending at Provident Bank in Jersey City, NJ, says loans typically fall into two camps. The first includes loans with an adjustable rate, meaning the interest rate could change after a period of time. The second includes loans that are "fixed" or "term," meaning the rate will stay the same for the length of the borrowing period. Generally term or fixed-rate loans are more common and considered the safer option, but it all depends on your circumstances, including how long you plan to stay in the home.

Here's more info on the pros and cons of various types of home loans, and which one is right for you.

Contact your local experts at The McLeod Group Network for all your Real Estate needs! 971.208.5093 or mcleodgroupoffice@gmail.com.

By and photo credit: Realtor.com, Jeanne Sager