Part 1: Common Questions From First Time Home Buyers

July 5, 2012

With the improving housing market, many first time buyers are starting to ask themselves if they should buy a home rather then continue to pay rent. Why should I buy rather than rent? Rather than writing a check and watching your money disappear into thin air as a housing cost, wouldn't it be nice if you got some of that money back at the end of the year? As a homeowner, that is exactly what happens. You can deduct the cost of your mortgage loan interest from your federal and some state taxes. You can also deduct property taxes. In the beginning most of your mortgage payments are comprised of interest, so in the early years of owning a home you have the largest deductions. How much money will I have to come up with to buy a home? This depends on several factors which include the type of loan you qualify for, the cost of the house, and what if any seller concessions are being offered. Sometimes home builders will offer closing cost assistance. However it's best to consult with a loan officer though there are 3 different costs associated with purchasing. You'll need:
  • An Earnest Money Deposit - This is the amount that accompanies the initial contract on the home. This is necessary in order to prove you are willing to complete a contract if it is accepted.
  • Down Payment - This is the amount you need to pay when you go to settlement. This will be determined by the percentage required by your loan type. This amount includes whatever was initially put down for the Earnest Money Deposit.
  • Closing Costs - These are costs associated with the processing of the paperwork and can vary. On average you can expect these costs to be 3-4% of the purchase price. However when you apply for your loan you should receive an estimate from your lender so that you will not be caught off guard by the amount.
How do I know if I can afford a home? Work with a lender and look at your debt to income ratio, credit score, and other factors to see what kind of loan you can qualify for and how much you qualify for in order to purchase. You can work with your local credit union, your bank, a savings and loan, or a private mortgage company. Often when looking at new homes, the builder will have one or more mortgage companies that are familiar with their properties and offer a wide range of loan options. This is often the lender of choice because it can make for a smoother closing. What other monthly costs are associated with buying a new home? While of course mortgage is part of the monthly puzzle, you will also have property taxes and insurance to consider in your monthly payment. Often though this is put into escrow with your overall payment and taken care of for you. If your utilities were covered in your previous rent, also take into account the possibility of paying water, sewage, trash removal, electricity and or gas. You may also have homeowner association (HOA) dues, or condo dues. Don't let this sound daunting as some of the utilities may be incorporated into your HOA. In our next installment we will have more details on mortgages and home ownership.
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