New Homebuyers Guide
Owning a home remains a key component of the American dream. It’s the place you create cherished memories. It’s your sanctuary in an increasingly hectic world. It’s a reflection of your lifestyle, your tastes and your style.
It’s also where you can begin to build wealth for your future. When you rent, you pay every month to live in someone else’s home. Owning means that those monthly payments, over time, accrue back to you in the form of equity. History shows that homeownership has been a primary path to household wealth for most Americans.
But not everyone can or should own their own home. For those without the needed, regular income, or for those that don’t plan to stay in their home more than a year or two, homeownership may not be the best solution. Before you make the decision to purchase a home, do your homework and let us help!
Here are the basics to get started.
6 Steps to Buying a New Home
- Get prequalified or preapproved Talk to a mortgage banker to understand how much home you can afford and get prequalified or better yet, get an approval letter. That means you’ll be able to narrow your search and feel comfortable making an offer quickly, especially important when the housing market is tight like it is now.
- Make a budget Include your regular monthly expenses, savings and backup for unplanned emergencies. Then add in your expected mortgage payments and anticipated home maintenance and upkeep.
- Prioritize your needs How far from work will you be willing to live? What kind of neighborhood appeals to you? How many bedrooms and square feet do you need to live comfortably? How will you accommodate your hobbies and lifestyle needs? Make a list and prioritize from must-have to wouldn’t that be nice.
- Shop & research (do you need a Realtor?) Of course you should start with the Parade of Homes, an amazing resource to see the variety of new homes and neighborhoods on the market, all priced accurately so you can compare real costs. Perusing the internet will provide answers to almost every question you may have while showing what’s available in the resale market. Hiring a Realtor to help you through this step is a great solution for those that don’t have the time or inclination to dig in on their own. A Realtor can also help you understand the paperwork and legalities associated with buying your home.
- Make an offer When you find the home you want, write up an offer. If you hire a Realtor, they will help. If not, just write a letter stating the sales price you’re willing to pay and include any contingencies. You may want to include a little personal information and why you love the home, a good way to stand out when there are multiple offers.
- Change of address Remember to change your address and update your personal information when you move. There are plenty of online resources to help you with checklists of places you should notify, or for a small fee, you can find an online service to do it for you.
Be Budget Conscious
The first step in homeownership is knowing what you can afford.
For most of us, taking out a mortgage makes it possible to own. With mortgage interest rates remaining at near historic lows, ownership is more affordable than renting in many cases. And saving for a down payment just got a lot easier with Minnesota’s new First-Time Homebuyer Savings Account, passed into law during the 2017 session.
Fixed-rate mortgages remain the most popular loan type, usually with 30- 20- or 15-year terms, where your monthly payments for principal and interest remain the same through the life of the loan. A shorter term will have higher monthly payments but lower total interest costs over time.
Adjustable-rate mortgages mean the interest rate you pay may change as market conditions change, generally with minimum and maximum allowable rates. They usually have a lower initial interest rate than a fixed-rate mortgage, but will rise or fall based on movements in an index rate like the Cost of Funds Index.
Government supported loans include FHA (Federal Housing Administration), VA (Veterans Administration), or FmHA (Rural Development Services, previously the Farmers Home Administration), and often allow lower down payments with less stringent/more flexible qualification requirements. The federal government supports homeownership by offering these loan products, which protect the lender from a loss if the borrower defaults.
Conventional loans are any loan not guaranteed by the government.
INTEREST RATE, POINTS & APR
Your loan’s interest rate (the price you pay to borrow the money) is usually expressed as a percentage of the purchase price and quoted as an annual rate. Additionally, points (or discount points) may be part of a home purchase applied for a variety of reasons, and usually paid at closing. One point is equal to one percent of the principal of a loan. Points may be included to cover costs associated with obtaining the loan or to reduce a loan’s interest rate, and points can be negotiated between the borrower and seller. Lenders will also provide an annual percentage rate (APR), which factors in points and fees. Comparing APRs for various loan options will be a better indication of your final costs than the current interest rate.
Your down payment will go directly toward the sales price. A traditional 20 percent down payment may still be a good idea for those that can afford it, but it’s not typical in today’s market. Down payments for conventional loans usually range from 10 to 25 percent, while an FHA loan requires a 3.5 percent down payment. If your down payment is less than 20 percent, you must pay for private mortgage insurance (PMI) on conventional loans, which is added to your mortgage payment. FHA loans include a Mortgage Insurance Premium (MIP) of which some is paid at closing (either in cash or folded into your mortgage) with the other portion escrowed with your monthly payments. You can generally cancel PMI or the escrowed portion of your MIP once your loan drops below about 80 percent of the home’s value.
Fees you’ll be expected to pay at closing may include application fees, a variety of title fees (examination, abstracts, insurance and survey fees), fees for completing settlement documents, attorneys’ fees, recording fees, credit report fees and more. You should receive a Loan Estimate (mandated by law) within three days of your loan application. This document includes an estimate of your closing costs with an itemized listing.
Especially valuable when interest rates are expected to rise, some lenders allow you to lock in or hold the current interest rate for a certain time frame while you conclude your new home purchase.
Fees and other costs that are escrowed are paid as part of your monthly loan payment. These can include PMI or MIP amounts and points. Homeowners often escrow their insurance and property taxes as well.
Mortgages are offered by a variety of institutions, from full service banks to credit unions. Mortgage companies (storefronts and online), mortgage brokers and even thrift institutions can provide financing for homebuyers. Because each may offer different loan types, rates and fees, you should shop around before deciding which is the best lender for you. Make sure you ask about the types of loans they offer and requirements for each, including:
- What is the current interest rate for each type of loan, and how volatile are their rates at this time?
- What is the annual percentage rate (APR) for each loan, and what is included in the rate (points, broker fees, credit charges etc.)?
- What kinds of fees do they charge and what are they for?
- What kind of down payment is necessary for each?
- Will you need to pay PMI or MPI and if/when can you cancel?
- Do they offer any special programs or incentives?
- Are they a broker (meaning they broker the loan for another lender)? If so, what are the costs to use their services? If not, do they anticipate selling loans they write at any time?
GETTING PREQUALIFIED OR A MORTGAGE APPROVAL
In today’s fast-paced market, you’ll definitely want to get prequalified or, better yet, a mortgage approval to make sure you and your prospective seller don’t spend a lot of time only to find out you can’t afford that home. To get prequalified, a lender will look at your income, employment, credit and other basics and give you an estimated loan amount you should be able to afford. But if you’re really ready to buy, go ahead and get a mortgage approval letter. This means your lender has reviewed your situation more closely and provided a letter stating the loan amount they will provide, subject to a property appraisal and other stated conditions.
Other Budgetary Considerations
Before you jump in with both feet, remember that home ownership does have a few additional expenses to keep in mind.
Property Taxes & Insurance If your loan doesn’t escrow your taxes and insurance, make sure you account for paying these costs out of your household budget. In Minnesota, property taxes are due in two parts, half due in mid-May and the second half in mid-October. Talk to your insurance agent about homeowner’s insurance that will cover liability for accidents on your property as well as replacement insurance for your home and your possessions.
Maintenance & Upkeep Regular homeowner maintenance is important to secure the investment in your home. There are plenty of online resources (we have several in our Homeowner Maintenance link) with checklists and timelines. You’ll need to consider lawn care, snow removal, garbage pickup, water and sewer costs, as well as normal repairs. Most furnaces need to have the filter changed on a regular basis, and it’s wise to have all your appliances and heating/cooling system checked out annually. With a new home, you’ll have warranties on the home and many of its components, so you won’t have to budget as much for repairs. But if you choose an older resale home, you should have it inspected by a professional. In any case, make sure to ask if/when various components (appliances, furnace, air conditioning, roofing, windows, electrical systems, and the like) were replaced or serviced, and if there are any warranties still in effect.
Choose the Right Home
Custom Built: This is probably what most people think about when they think new—a home designed and built specifically for a client. A true custom home will generally cost a bit more, but if you have the wherewithal, you’ll get a home that is uniquely tailored to your family, your lifestyle and your tastes. Generally speaking, designing and building a custom home can take between six and 12 months.
Standard Plans: For many buyers, the best choice is a new, standard plan. Many builders offer a portfolio of floorplans and architectural designs for you to choose from. In some cases, you’ll even get customizable options for room layouts and exterior designs, and you get to choose colors and styles for finishes. Some builders have their own showrooms and let you choose from a limited number of options, while others will send you to independent showrooms to make your selections. When you choose a standard plan you could be in your home within four to six months.
Spec Home: Many builders begin homes on “speculation” or spec. These will be popular floorplans/designs that they know are in demand. You can find specs at various stages of completion. If you’re looking for a quick move-in, or don’t want to spend the time making a lot of selections, consider a spec home.
Condos and Townhomes: Attached housing can be found in almost all price points. These homes offer convenience in that you’re not responsible for exterior maintenance and lawn care, however you will pay a monthly fee to your homeowners’ association. Often, attached housing can be an on-ramp to homeownership for first-time homebuyers.
There’s always a little bit of luck and timing when you buy a resale home. You’re dependent upon the current resident deciding to move. Prices fluctuate based on the current market and how badly a family wants to sell. But if you’re lucky and you find the right home in the right location, there’s one more step: make sure it’s in good working order. There are numerous professional inspectors who will, for a fee, provide a full inspection to make sure there are no serious problems. In many cases, families choosing a resale home will want to consider remodeling. If this is the route you choose, be sure to check out Housing First Minnesota remodelers at ParadeofHomes.org and tour the Remodelers Showcase during the final weekend of each Parade of Homes.
Appraisal: Before a lender will approve loaning money on a home (whether a resale or new home), a registered/certified appraiser will examine the home and provide an independent opinion as to its value. Recently, Freddie Mac and Fannie Mae have been taking steps to allow appraisal-free mortgages but only under very limited circumstances.
Easements: Many residential properties are subject to some form of easement, which is a document that provides a non-landowner some interest in the property, from mineral rights and water access to right-of-way and even negative access where a neighbor is prohibited from blocking views. Most common in our area is an easement that requires property owners to avoid building on parts of the property where utility companies have right-of-way to run power and cable lines.
Freddie Mac and Fannie Mae: These are government sponsored enterprises (GSE) that purchase loans and package them into Mortgage Backed Securities (MBS), which they then sell to investors in the secondary mortgage market. By purchasing loans from banks and other institutions, these two giants free up dollars so those banks can make additional loans.
Home Inspections: Home inspectors are paid to examine a home and create a report of its condition. In Minnesota, home inspectors are not regulated. However, there are professional organizations (e.g. the American Society of Home Inspectors) that require ethics agreements and provide training and resources.
Homeowners Insurance: Most insurance policies for homeowners will cover the home structure, your personal belongings and liability protection should someone get hurt on your property. It’s up to you to purchase the amount of coverage you need.
Liens and Lien Waivers: Sub-contractors or other hired parties that do work to build or remodel a home can file a lien against a property if they are not paid in full. A lien waiver is a signed document that asserts the lien holder has been fully paid.
Mortgage Insurance: Required for loans on real property that exceed 80 percent of the property’s value, mortgage insurance is usually paid as part of a monthly loan payment. It’s up to the homeowner to cancel the insurance once their equity is greater than 20 percent of the property value.
Title or Deed: A title means you own the right to use a property as you see fit. A deed is the legal, written document that transfers title from one person to another.
Warranties: These are written guarantees from the manufacturer or builder about the condition of item(s) under warranty and the facts presented by the seller. Many of the products in new homes have manufacturer warranties (roof, appliances, etc.) that protect buyers from defects. In Minnesota, new homes are required to include warranties for one year (the home must be free of defects caused by faulty workmanship or materials); two years (the home must be free of defects caused by faulty installation of heating, cooling, electrical, or plumbing systems); and ten years (the home must be free of “major construction defects”).