Tuesday, March 24, 2009

Buying a First Home in a Tight Economy

The mortgage crisis has created a surplus of homes for sale with very few buyers. This means that many people have a golden opportunity to get a great deal on a nice home. Plunging prices tempt buyers to purchase homes at a discounts of approximately fifty percent of what the house sold for a few years ago in many cities. First time homebuyers might be skittish about buying a home in such an unstable economy, but if you do your “homework” you can safely get a good deal.

First, look at the big picture. Examine the industry in which you work and take a close look at how your company is faring. If your industry is particularly unstable, or if your company is considering layoffs or pay cuts, you should be very careful about committing yourself to a mortgage. You should try to minimize the chance that you will not be able to pay your bills by considering the chance that you will be facing unemployment or decrease in pay.

Second, when you start shopping for a home, carefully consider how much you should spend. Traditionally, lenders have desired that a mortgage payment be no more than 25% of borrower’s take-home pay and that all payments be less than 32% of the total take home pay. For example, if you make $5,000 per month after taxes, your mortgage payment, including escrows for homeowner’s insurance and property taxes, should be less than $1250 per month. Similarly, your total monthly obligations, including credit cards, car payments, etc. should be less than $1600 per month. This ensures that there will be plenty of money left over to pay utilities and buy other necessities, such as food and clothing. In the current economic climate, a borrower would be wise to be even more conservative than these traditional guidelines.

In the past, borrowers could finance almost all of the cost of a home. Now, however, mortgages with no money down or small down payments are a thing of the past. To minimize their own risks, most banks are requiring a down payment of at least twenty percent of the sale price. This means that most borrowers will need a sizable nest egg to qualify for a mortgage. Banks normally require that the down payment money be verified over a period of time. For example, it is not uncommon to require six months of bank statements or documentation showing the source of the funds. Gifts are normally acceptable, but it is common to require that the donor complete forms that state that the money is a gift and not a loan. Gifts or abnormal sources of down payments will likely trigger additional scrutiny of loan applications these days.

Shop around to find the best interest rate and down payment. Dealing with a mortgage broker instead of individual banks makes it easier to find the best deal. A major cause of the current crisis is that many people were not fully aware of what type of mortgage they were buying. Ask questions and find out exactly what is being offered. This is particularly important if you are buying an adjustable rate mortgage (ARM). You should find out how much the interest rate can adjust and how much that will increase your payment. Also find out if there is a prepayment penalty or a balloon payment. If you do not understand what you are signing, don’t sign!

The best way to shop for a house is to get pre-approved for a mortgage before you start looking at houses. This way you will know in advance how much the bank is willing to loan and you can shop for houses within your price range. This also makes it easier to close on your house quickly when you find your dream home. Since your finances have already been approved by the lender, only items dealing with your specific house will have to be completed.

When you begin shopping for a house, consider foreclosures and other distressed sales. These homes often sell at deep discounts, but do carry some additional risks. For example, such homes are often sold “as is” with no warranty. Since the previous owner could not afford to make the mortgage payments on the home, it is unlikely that they were able to pay for upkeep and maintenance on the home as well. In some cases, the previous owner may even have vented their frustrations on the house’s windows, walls, and doors. This damage will probably not be repaired by the seller and therefore will add to the real cost of buying the home. If the house has been unoccupied, there may be damage from vandals as well.

To minimize the risk of finding unpleasant surprises in the form of expensive repairs after closing on your new home, it is essential to have both an appraisal and a home inspection done before you buy your home. The appraisal confirms the market value of the home and will likely be required by your lender. The home inspection checks the condition of the house and protects the borrower from hidden defects. Additionally, you should maintain a cash reserve to cover any unexpected expenses that arise after the closing.

You can also obtain valuable inside knowledge on local real-estate markets from realtors. You should understand that the listing agent on a house works for the seller. To get the maximum benefit of a realtor, you should hire your own realtor to work for you. This creates a fiduciary relationship between you and your realtor that does not exist between you and the seller’s realtor. Having two realtors will not add to the cost of the house since the two realtors will split the commission.

The collapse in home prices has caused many problems within the financial sector of the United States, but for certain individuals it is also a great opportunity. For a prospective buyer who has excellent credit and money for a down payment, there are plenty of opportunities to buy a very nice home at a fire sale price.

March 24, 2009
Enroute from Atlanta to Newark NJ

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