The softening Florida real estate market may signal some good news for first-time home buyers, and many others who have been shut out of the local real estate market due to sky-high home prices.
But now, with more inventory on the market, lower fixed-rate mortgages, and sellers desperately cutting their asking prices, home buyers are starting to emerge and start looking again.
The renewed interest among first-time buyers is a marked change from early 2006 when the percentage of first-time buyers dropped to 36 percent, its lowest level since 1987, according to the National Association of Realtors.
Activity has definitely increased in the first quarter of 2007 over the last 6 months of 2006, from both the surge in first-time home buyers as well as other buyers who have been on the sidelines waiting for prices to go down. If you are one of the millions of would-be homeowners, remember that buying a home is a complicated process that is fraught with pitfalls.
Here’s how to avoid some of the most common errors made by first-time home buyers:
Set a budget and stick to it. With housing prices at historically high levels, it’s easy to see how first-time home buyers can get caught up in overspending. Mortgage lenders typically won’t allow monthly housing expenses to be more than one-third of a buyer’s household monthly gross income, so your budget is largely pre-determined by your paycheck stub. Costs associated with buying a new home also add to the monthly mortgage payments, including:
# A down payment – anywhere from 5 percent to 20 percent of the home’s purchase price.
# Property taxes, which average around 1.5 percent to 2 percent of a home’s purchase price.
# Homeowners’ insurance and private mortgage insurance, which is required by lenders if your down payment is less than 20 percent of the purchase price.
# Fees imposed for special tax districts, also known as special assessments, known as SAs, or special service areas, known as SSAs, which are becoming more common in subdivisions.
# Closing costs, which include points and other fees charged by the lender and can add up to 3 percent of the amount you borrow; title insurance, which can range from a few hundred dollars to more than $1,000, depending on the purchase price of your home; inspections, $200 to $500; and other miscellaneous fees.
# Maintenance. Varies year to year, but expect to spend about 1 percent of the purchase price annually on maintenance and repairs.
It’s very important to get pre-approved for a loan before you start shopping for homes. It is better to have a true pre-approval for a mortgage in hand vs. a pre-qualification. Pre-approval means assembling all of the documentation you need for a mortgage commitment. Once a home is found, the only thing left to do is get an appraisal. You need to understand what your total payments are going to be and how they could increase over the life of the loan. People buy based on the monthly payment, not on the purchase price.
The other components in addition to your principal and interest portion are your property taxes, homeowners insurance and HOA or condominium monthly payments. These also can increase every year, as we have seen over the last few years with the dramatic price appreciation and hurricanes we have had. Aggressive changes are being addressed now to lower these costs, but you still should have a cushion and be prepared for increases.
At this point, you also need to determine which type of mortgage makes sense for you: Fixed-rate or adjustable-rate? Fifteen-year or 30-year? There are so many variations of loan programs, that speaking with a mortgage broker or lender will help you understand what your options are.
First-time buyers are especially vulnerable to no-down-payment loans, since they don’t have equity from an existing home they can use. In fact, nearly half of first-time buyers bought their home with no money down, according to a recent NAR survey. Many so-called “no-down-payment loans” are money-making scams for unsuspecting buyers. If you plan to use a down-payment assistance program, work with well-known entities such as Fannie Mae and Freddie Mac, the governmental agencies that buy mortgages and package them as investments. The programs generally offer assistance to income-eligible families and first-time home buyers who have with at least $1,000 saved.
No-money-down programs are much more difficult in 2007 because of the increases in defaults, foreclosures and the problems in the Alt-A and subprime market. Lending criteria have tightened and the interest rates have gone up stubstantially for these types of loans even for buyers with 700+ credit scores. Make sure you understand your loan completely and ask a lot of questions. A couple of years can go by very quickly if there are going to be rate increases.
Gather your real estate team to help you with the process. According to NAR, almost 80% of home buyers start their search for a home online because they can easily preview so many houses to get an idea of what they want. Many people also choose their agent this way as well because they can get to know them a little from their websites and blogs. Many people also get recommendations from friends and co-workers. Interview several and pick one with whom you have confidence in who has dealt in the county where you are looking to buy.
Your agent can also give you several recommendations for lenders, mortgage brokers, inspectors, appraisers and surveyors. In each instance, ask what the fees are and what specific services they cover.
Look at as many homes as you need to so you are comfortable with your choice of neigborhood and home. Visit the neighborhood at various times of the day on various days of the week. Consider the qualities that make a neighborhood desirable, such as ample street lighting, sidewalks, parks or playgrounds and little through traffic. Talk to some of the neighbors if you like.
When you find the home you want to buy, you’ll make an offer by submitting what’s called a “contract for purchase and sale.”
Once the contract is signed, you’re legally bound to the terms. The document spells out the terms and conditions of the purchase – from the purchase price all the way down to who pays the utilities until you take possession of the house. The contract also is the blueprint or road map for the closing on the property – if an issue is not spelled out in the contract, then it’s not likely it will be addressed at the closing.
However, don’t think the pre-printed terms of the contract are written in stone. Rather, it’s how you and the seller begin the process of negotiating the terms of the contract that both of you will have to live with. Make sure you understand and are comfortable with all aspects of the contract – you will likely be living with it for a long time.
SOURCE: Statistics NAR