Buying Your First House
So, you’ve gotten your financial situation in order and are ready to buy a house. Do you know how much house your monthly budget can handle?
In this installment of Buying Advice, we’ll look at the costs associated with homeownership and give you tips on how to better prepare for those expenses. We’ll also check in with the latest housing statistics and answer the questions: “What is a good-faith estimate?” and “Why do I need one?”
Budgeting for your first home purchase
You’ve probably used a mortgage calculator to get an idea of the price range in which you should be looking. While that might give you a very rough idea of the homes you should consider, it shouldn’t be the only budgeting you do, said Kelli Roland, housing manager for American Financial Solutions, a nonprofit credit-counseling agency.
In addition to your down payment, there are other expenses to consider, both at closing and after your moving truck pulls up, including:
- The upfront cost of a home inspection ($300 to $400).
- Closing costs, including appraisal, loan, title and lender fees. The average closing cost on a $200,000 mortgage is $3,754, according to Bankrate’s annual survey of closing costs.
- Monthly homeowners-association fees.
- Moving costs.
- Maintenance costs; credit counselors suggest putting aside 1% of your home’s value annually to make needed repairs.
- Higher utility costs.
The bigger gas, electric or water bills that come with a home often take new homeowners by surprise, Roland said. She suggests calling your local utility company before you buy to get an idea of what the average bill is in your area.
Roland and other credit counselors also suggest that before you purchase, you practice making mortgage payments, transferring the difference between your current rent and the expected mortgage bill into savings. Roland did this when she bought a house in 2011, putting an extra $700 a month into a savings account.
“We needed to know, ‘Can we really afford that and live comfortably and not end up with $40 until the next payday?’” she said.
Other expenses that buyers don’t remember to budget for are things such as curtains or blinds for their new house, a lawn mower, garage shelving and new appliances if the ones in the home are on their last legs. “You need to make sure you have money set aside for those things,” Roland said. It’s important to be realistic about what you can afford each month and still maintain the lifestyle you want, complete with vacations, piano lessons and the occasional dinner out.
Get preapproved for a mortgage before you start shopping for a home. But just because you’re approved for a certain amount, don’t think you necessarily should spend that much. “Banks will often qualify you for more than you should get,” Roland said.
Fannie Mae advises that buyers spend no more than 28% of their gross income on a mortgage payment and no more than 32% on total housing costs, including mortgage, insurance, property taxes and private mortgage insurance (PMI), which is required if your down payment is less than 20%.
So be house proud, and not house poor, by setting a realistic budget and sticking to it.
Existing-home sales increased 0.4% to 4.92 million in January from 4.9 million in December and were up 9.1% from January 2012’s 4.51 million-unit pace, according to the National Association of Realtors. Sales rose in every region but the West, which had the greatest shortage of inventory.
“Buyer traffic is continuing to pick up, while seller traffic is holding steady,” said Lawrence Yun, the NAR’s chief economist, explaining the nation’s incredible shrinking for-sale inventory. With buyer traffic up 40%, Yun said, “We’ve transitioned into a sellers market in much of the country.”
Total housing inventory at the end of January fell 4.9%, to 1.74 million existing homes for sale – a 4.2-month supply at this sales pace, down from 4.5 months in December and the lowest since April 2005, before the real-estate bubble burst.
Unless there’s an influx of properties hitting the market for the spring selling season, Yun expects the multiple offers and “faster-than-normal price growth” to continue.
The national median price for an existing home was $173,600 in January, up 12.3% from January 2012 and down 4% from the previous month’s $180,800.
In the West, where low inventory pushed sales down 5.7% in January, the median price surged a whopping 26.6% to $239,800 from January 2012.
Gary Thomas, broker-owner of Evergreen Realty in Villa Park, Calif., said homes are selling four weeks faster than they were a year ago, putting a bigger burden on agents to strike a balance for buyers between moving quickly and protecting their interests with home inspections.
The outlook for spring is positive, too. The NAR’s Pending Home Sales index, which is based on contract signings rather than closings, was up 4.5% in January to 105.9, the highest score since April 2010, shortly before the deadline for the homebuyer tax credit ended.
However, there are a lot fewer foreclosure bargains to snap up: Distressed homes made up a declining share of the market: 23% compared with 35% at the same time last year.
Indeed, the number of foreclosures fell 17.8% in January, to 61,000 from 75,000 at the same time one year ago, according to CoreLogic.
“The backlog of distressed assets continues to fade as the foreclosure inventory has fallen to a level not seen since mid-2009, with less than 3% of all mortgages in foreclosure,” said Mark Fleming, chief economist for CoreLogic.
Only six states and 13 of the largest 100 metro areas posted an increase in the foreclosure rate, Fleming said.
Real estate 101: Good-faith estimate
Many new buyers are confused about the good-faith estimate. “What is it?” they ask, and “How is this different from a quote or a worksheet?”
What it is:
The GFE (PDF) is a detailed estimate of a loan’s terms, points and all other charges such as title insurance, taxes, daily interest charges and homeowner’s insurance. Lenders are required under the federal Real Estate Settlement Procedures Act to give this form to borrowers within three days of the loan application.
What it is not:
It is not a binding contract and does not require you to accept the loan.
It does not specify the exact charges you will pay at closing. It is simply the best estimate the lender has at that time. Some large banks have trouble estimating title insurance and government fees for each jurisdiction, in part because they can vary by location. But it has to be close.
Moreover, because it’s so complete, it’s a lot more accurate than a quote and therefore a better tool to use when shopping around for a loan. And because it’s so clearly outlined, it makes it easier for borrowers to question charges or terms they don’t understand, such as rate lock fees.
Mortgage experts suggest comparing GFEs from several lenders before choosing a loan to make sure you’re getting a fair deal at the closing table. While the GFE is intended to discourage lenders from lowballing closing costs to get your business, many have tried to pass off worksheets or “loan scenarios” because they don’t have the same bar for accuracy.
Because GFEs are broken down so clearly, they also can be used to negotiate down some of the fees that are involved, such as origination and processing fees. Other state and local government fees are not negotiable, and neither are some third-party fees such as appraisals, generally. However, if those and other fees come back lower in another loan’s GFE, it might provide more incentive to choose that lender if all other terms were comparable.
The only time you will not receive a GFE, according to the Department for Housing and Urban Development, is if you are denied for a loan before the three days have passed. If anything changes in the loan applied for, including the rate, a new GFE must be given to the borrower.