I have been a long-time renter. I’ve never owned a house, but I’ve been thinking that somewhere down the line, I might like to consider taking that leap into homeownership. Notice I said somewhere down the line. I don’t know when–at least two or more years, maybe closer to five or six. That being said, is there anything I should be doing now to “prepare” for entering into homeownership?
I’ve figured out I’ll need a boatload of money, but just how much is needed to purchase a home? There’s the down payment which is usually how much of a percentage of the purchase of a house? What other things (fees, points, etc.) are tacked onto it? And just what the heck is a ‘point’? What else might I be overlooking?
I’m also working towards paying off all my credit cards, but the school loans will probably never be paid off (they’re not delinquent, however), so they will always be present. Does that hurt my prospects for getting a house loan?
Get your credit in good shape. It’s hard to overstate how important your credit rating will be to the interest rate you get for your mortgage, or if you can even get a mortgage at all. And this is becoming more important every day as poor credit risk people who got suckered into bad loans are defaulting, and so loan writers are becoming much less inclined to take a chance on someone who looks like a credit risk. So check out what your credit score is and if it isn’t great, start taking steps to improve it – lower your debt load if it’s too high, make your payments on time, get it cleaned up.
Other than that, start saving for a down payment. If you are a bad credit risk or you don’t want to pay mortgage insurance, you will need to put down 20%. If you are a good credit risk and a first time homebuyer who meets certain guidelines, you might be able to put as little as 5% down. The more you can put down, the better.
Decide what sort of house you want/need, and where you want to live. Put your income and expenses into a mortgage calculator (there are a zillion on the web) and find out your general price range. Then see what’s out there in the area you want to live in, that is in your price range.
Fix your credit, first, second, and last. If your credit is good, don’t screw it up.
If you do nothing else, buy ‘Homebuying for dummies’ and read it. It’ll explain what points are, and what they are for (basically a point is 1% of the cost of the house).
Quick rundown of your questions (some are much more involved than can easily be explained here, but this’ll get you started):
How much is needed to buy a home - depends on what kind of house you want and the area you live in. Old rule of thumb was that you needed 20% down payment, although that restriction has been relaxed in recent years.
Banks dont want to lend out more then 80% of the cost of the house - so if you make them, they tack on a mortgage insurance payment - PMI. That is the reason why it used to be 20% down - so that you didn’t have that extra payment.
Nowadays, people take out 2 loans, one for 80%, and the other for whatever else they need. In my case, my wife and I put down 10%, and took out two loans - one for 80% and one for 10%.
If you are talking 4-5 years down the road, you should have plenty of time to save up a good chunk of change towards the downpayment. But it sucks seeing 5 years of savings go away in a matter of weeks… I just went through that.
Other fees - closing costs. You hear ads about no closing costs, etc - but usually they are teaser loans - they give a great rate for a small period of time, and then it balloons up - or its adjustable rate. If you are like me and like stability, a fixed loan is the way to go. It might be at a slightly higher rate, but it will not change - and mortgage rates can change A LOT. For example, my parents bought their house in the early 80’s and they had an interest rate of around 18%. Rates have gone down to just a few percent in recent years, so even todays rates of 6-6.25 are historically very low. Doesn’t seem like a comparison of rates from 20 years ago makes a difference, but most loans are for 30 years. Plus, the way the economy and this country is going, I wouldn’t be surprised if we see high interest rates again for a period of time (but thats another discussion) during that next 30 years.
Anyway - closing costs. There are many to list here, but a good estimate is that they will total 2-3% of the cost of the house. Between property taxes that must be paid back to the seller, having to purchase a full year of homeowners insurance up front, all the bank fees and lending fees - it adds up. Keep that in mind and make sure you dont spend all your cash on the down payment, otherwise you’ll be left with nothing left over.
As I mentioned, there are some loans that advertise no closing costs. It gets confusing, but there are costs that the bank will waive for those programs, and costs that they wont waive. For example, they might wave the application fee of $250 (and charge you a higher rate for it), btu they will NOT pay your homeowners insurance or taxes for you - both of which need to be paid upfront. What the bank considers “closing costs” are their fees. What the consumer considers closing costs are all fees associated with buying a house. The two are not equal, and unfortunately, for marketing reasons, the bank does not bother to make a distinction between the two.
Then there are other costs like home inspection cost, pest inspection, radon testing, etc. Those add up as well.
So do yourself the 2 biggest favors you can:
get homebuying for dummies to understand the process and,
start saving a certain amount per month, every month. Depending on where you live and your situation, this might be $300/month or $1000/month.
Those will be the two best things you can do for yourself.
Let time be on your side. Check out the neighborhoods assiduously. My theory is try to get into a house that you’ll be happy living in for a long time. You may not be able to “trade up” for a very long time or never.
Try to save 20% for a down payment. This will allow you to bypass personal mortgage insurance. It also means that you have good financial responsibility. Real estate agents are ridiculously optimistic touts who are trying to get their 6% commission. Try to get a fixed loan at a reasonable rate. A lot of people are right now getting burned on their zero interest loans with a balloon payment or a jump to above market interest rates. Do not assume that real estate prices are on a neverending upswing and that you will magically be able to refinance once your low interest period comes to an end. Try to time your purchase during a buyer’s market. Seller’s markets like the past 5 years in California made for some extremely shortsighted purchasing decisions.
Be realistic about your remodeling skills. I’m an engineer with excellent analytic and craftsman skills, but I’m the laziest bastard on the planet, so my house is in a state of terminal deterioration.
Also keep in mind that on top of your mortgage payment, you’ll have to pay property taxes and insurance, and we’re not talking chump change here. I just bought a house this week (eeeeek!), and my monthly taxes are going to add 35% to my monthly mortgage payment. Insurance will be more–I’m getting that lined up today, actually.
Lots of good advice upthread. Thought I’d comment on the Harrisburg area in particular. Housing is still pretty affordable there, so you should stand a good chance of getting a decent place for an affordable price. My mother’s house sold 2 years ago for 240,000, on 1+ acres, 3000+ square feet, well-maintained. My townhouse in the DC area - half the size, zero property, really nothing special, sold for twice that the same year (not by me… by the people who bought it from me a couple years earlier… but we sold it to them for more than 240K). Mom’s house was in Dauphin County, near Linglestown Rd to give you a visual for the area.
Do check into schools that serve the area you’re looking at. I know you have a kid; depending on his age schools may not be an issue for you personally, BUT they’ll have a big impact on your property values. This may rule out living in Harrisburg itself; my info is surely out of date but at one point, the city schools were considered utterly horrible. Things may have improved. I think Dauphin County schools are OK depending on the township, ditto the schools on the West Shore (again, may vary by township). We all went to parochial school so didn’t have direct experience of them.
Watch for flood plains, obviously places near the river or near creeks should be looked at cautiously, but even places away from water may get flooded basements from rain or underground springs (neighbors of ours had to run pumps constantly because of underground springs).
Older places may have lead paint, lead in the pipes, and radon issues. Well, the radon may affect newer places as well; it’s probably good to have a radon test as part of the purchase contract. Radon remediation isn’t all that pricey, a couple of thousand, and you can make the seller pay for that. Central PA has a fair bit of trouble with that, IIRC.
However your property taxes and the interest on your mortgage are generally tax deductible so you’ll save a slug of money later. You can download forms from the IRS’ website, get a rough estimate of what your taxes will look like including all those big fat deductions you are now able to claim by itemizing, and then alter your withholdings so that come next April you wind up just about even (and you’ll be taking home more $$$ each paycheck).