Local Real Estate News

From your local Sacramento neighborhood expert, Carlos Montoya

Sacramento First Time Home Buyers Questions Answered

If you’re thinking about buying a home in the Sacramento area, read the most common questions first time home buyers ask before buying a house as well as some mistakes to avoid.

Why Should I Buy Instead of Renting?

Answer: Think of your home is an investment. When you rent a home or apartment, you pay your rent and then that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes. This saves you a lot each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. In addition, the value of your home may go up over the years. Finally, you’ll enjoy having something that’s all yours. Decorate your home, make renovations, make it whatever you want. Your home is your castle.

What is The First Step in The Home Buying Process?

Answer: Mortgage Pre-Approval should come first. Unless you are paying cash for your home, you will need to get a mortgage. In order to know how much home you can afford, you will need to get pre-approved for a loan. This should always be the first-step in the home buying process, otherwise you could be setting yourself up for a huge disappointment.

How Long Does It Take To Buy a Home?

Answer: Typically, most deals are closed within a month. The timeline for finding a house varies greatly from person to person. If you have all your ducks in a row, it should actually be a pretty streamlined process. Once you find a house and have an accepted offer, it usually takes around 30 days to close.

Can I Become a Home Buyer With Bad Credit or Don’t Have Enough for a Down Payment?

Answer: Traditionally, you need a credit score of at least 620 to think of purchasing a home and qualifying for a good interest rate (there are some lenders that will accept up to 580). If you have difficult credit circumstances you may qualify for one of the federal mortgage programs.  Typically you’ll need at least a 5% down payment, most lenders would like to see a 20% down payment. There are a variety of programs available for those buyers who are looking for a mortgage with no down payment (especially for veterans).

How Much House Can I Afford?

Answer: Mortgage lenders calculate affordability based on your personal information, including income, debt expenses and size of down payment. The most important factors to consider are debt-to-income ratios (how much you earn / home much your debts are). Front-end ratio, (your monthly housing payment should need exceed 28% of your income before taxes). Back-end ratio, (all debt commitments, car loans, student loans, credit card payments shouldn’t exceed 36%), credit history, down payment, and life style are also factors that come into play when factoring a rate for your mortgage. Use this great mortgage calculator to find out exactly how much house you can afford.

Should I Use a Real Estate Agent?

Using a real estate agent is a great idea. All the details involved in home buying, particularly the financial ones, can be mind-boggling. A good real estate professional can guide you through the entire process and make the experience much easier. Real estate agents are well-acquainted with all the important things you’ll want to know about a neighborhood you may be considering…the quality of schools, the number of children in the area, the safety of the neighborhood, traffic volume, and more. He or she will help you figure the price range you can afford and can line up properties you should be looking at. They’re also familiar with mortgages and can help navigate you towards a lender that can help qualify you for the home you want to buy.

How Much Money Will I Need To Buy a Home?

Answer: Well, that depends on a number of factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money – the deposit you make on the home when you submit your offer, to prove to the seller that you are serious about wanting to buy the house; the down payment, a percentage of the cost of the home that you must pay when you go to settlement; and closing costs, the costs associated with processing the paperwork to buy a house. When you make an offer on a home, your real estate broker will put your earnest money into an escrow account. If the offer is accepted, your earnest money will be applied to the down payment or closing costs. If your offer is not accepted, your money will be returned to you.

What Does a Mortgage Cover?

Answer: Most loans have 4 parts: principal: the repayment of the amount you actually borrowed; interest: payment to the lender for the money you’ve borrowed; homeowners insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders; and property taxes: the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year. Most loans are for 30 years, although 15 year loans are available, too. During the life of the loan, you’ll pay far more in interest than you will in principal – sometimes two or three times more! Because of the way loans are structured, in the first years you’ll be paying mostly interest in your monthly payments. In the final years, you’ll be paying mostly principal.

Which Type of Mortgage Should I Choose?

Answer: There are many types of mortgages, and the more you know about them before you start, the better. Most people use a fixed-rate mortgage. In a fixed rate mortgage, your interest rate stays the same for the term of the mortgage, which normally is 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be, and you can plan for it. Another kind of mortgage is an Adjustable Rate Mortgage (ARM). With this kind of mortgage, your interest rate and monthly payments usually start lower than a fixed rate mortgage. But your rate and payment can change either up or down, as often as once or twice a year. The adjustment is tied to a financial index, such as the U.S. Treasury Securities index. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower.

How Much Should I Offer on a Home?

Answer: Again, your real estate agent can help you here. But there are several things you should consider:

  1. Is the asking price in line with prices of similar homes in the area?
  2. Is the home in good condition or will you have to spend a substantial amount of money making it the way you want it? You probably want to do a home inspection before you make your offer. Your real estate agent can help you arrange one.
  3. How long has the home been on the market? If it’s been for sale for awhile, the seller may be more eager to accept a lower offer.
  4. How much will your mortgage be? Make sure you really can afford whatever offer you make.
  5. How much do you really want the home? The closer you are to the asking price, the more likely your offer will be accepted. In some cases, you may even want to offer more than the asking price, if you know you are competing with others for the house.

What if My Offer Gets Rejected?

Answer: Sorry to inform you, but most offers actually get rejected! But don’t let that stop you. Now you begin negotiating. Your agent will help you. You may have to offer more money, but you may ask the seller to cover some or all of your closing costs or to make repairs that wouldn’t normally be expected. Often, negotiations on a price go back and forth several times before a deal is made. Just remember – don’t get so caught up in negotiations that you lose sight of what you really want and can afford!

What Happens At Closing?

Answer: Basically, you’ll sit at a table with your broker, the agent for the seller, probably the seller, and a closing agent. The closing agent will have a stack of papers for you and the seller to sign. While he or she will give you a basic explanation of each paper, you may want to take the time to read each one and/or consult with your agent to make sure you know exactly what you’re signing. After all, this is a large amount of money you’re committing to pay for a lot of years! Before you go to closing, your lender is required to give you a booklet explaining the closing costs, a “good faith estimate” of how much cash you’ll have to supply at closing, and a list of documents you’ll need at closing. If you don’t get those items, be sure to call your lender BEFORE you go to closing. It will help you understand your rights in the process. Don’t hesitate to ask questions.

Common Mistakes First Time Buyers Make

  1. Buying too much house. There’s more to it than just mortgage payments. Property insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs that first-time homebuyers tend to overlook when shopping for a place.
  2. Homebuying doesn’t begin with home searching. It begins with a mortgage prequalification — unless you’re lucky to have enough money to pay cash for your first house. Many times buyers will fall in love with a home first before knowing whether or not they will even qualify for a mortgage. It’s always smart to pre-qualify first and know where you stand before shopping.
  3. Not getting professional help like going through a real estate agent can put you at a distinct disadvantage, especially when purchasing your first home. It’s always advisable to seek the counsel of a seasoned Sacramento Real Estate Agent to help you navigate the process.
  4. Spending all or most of their savings on the down payment and closing costs is one of the biggest mistakes first-time homebuyers make. It’s better to pay mortgage insurance than to be left with absolutely no savings.
  5. You have prequalified for a loan. You found the house you wanted. The contract is signed and the closing is in 30 days. Don’t celebrate by financing another big purchase. Put off purchasing that new car until you’ve unpacked all your boxes.

Buying or selling a home in Sacramento? Speak with Sacramento Real Estate expert, Carlos Montoya!

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