Homepages First Time Home Buyer Guide
HOW TO FIND & BUY YOUR
FIRST HOME. START NOW!
So you want to buy a home. Congratulations! This decision
is an important step towards a rewarding and exciting
milestone in your life. You may soon find that every
homeowner you meet tells you about the joys of having a
place of your very own. And you’re never too young to own.
Figures from the National Association of Realtors show that
the average age of first-time buyers is 32 years.
Homeownership is not always easy, but most people will
agree that the rewards far outweigh the challenges. The
first challenge, of course, is to learn all the steps to buying
a home! This guide will provide helpful tips and information
you need to understand the process and get started on
your path to homeownership.
WHY BUY INSTEAD OF RENT
If you’re still on the fence, you may not know about the many great reasons to buy a home! Here are
just a few of them:
SMART INVESTMENT
When you invest in a home, it offers the possibility for appreciation in value. The equity becomes yours
even when you’re paying off your mortgage. And instead of giving rent money to the landlord, you pay
off your investment each month. Plus you get to live in it while your investment matures!
TAX BENEFITS
Since both mortgage interest and property taxes are tax deductible, homeownership can save you
significant amounts of money every year.
PREDICT HOUSING COSTS
You get to decide how much you spend on your home, including repairs and improvements. Unlike
renters, homeowners with a fixed-rate loan can lock in their monthly housing costs, and make plans
with the confidence that these expenses will not increase substantially.
OPPORTUNITY TO MAKE IMPROVEMENTS
Homeownerships puts you in control. You can decide which improvements to make to your
own property, such as a deck, kitchen remodel, or new paint, instead of needing permission from
your landlord.
HOW TO FIND & BUY YOUR FIRST HOME. START NOW!
HOMEOWNER SURVIVAL GUIDES
4
HOW MUCH HOME YOU CAN AFFORD
Your current financial situation will determine your home price range. You’ll need to look at your
income, credit history, the cash you have for a down payment and closing costs, and your debt.
How much you earn compared to how much you owe will likely determine how much you’re
allowed to borrow.
First, determine your gross monthly income. This will include any regular income that you can
verify with documents, such as your pay stubs. If you can’t document the income or it doesn’t
show up on your tax return, then you can’t use it to qualify for a loan. However, you can use
unearned sources of income, such as alimony. You can also use an estimate of the income
generated by your real estate or stocks.
Next, calculate your monthly debt. This includes credit cards, installment loans, car loans,
personal debts or any other ongoing monthly obligation like child support. Remember: you don’t
have to consider a debt at all if it is scheduled to be paid off in less than six months. Add all this up
to determine what’s called your “monthly debt service.”
Your total monthly debt service, which will include your monthly mortgage, shouldn’t be more than
about 36 percent of your gross monthly income. If it does, your home loan may not be approved.
Most experts say that your monthly housing expense, including taxes and insurance, should not
exceed about 28 percent of your gross monthly income. If you don’t know what your tax and
insurance expense will be, you can estimate that about 15 percent of your payment will go toward
this expense. The rest can pay down your principal and interest.
Of course, every situation is different, and each lender has different rules about working with
buyers. A number of factors within your control can affect your monthly payment. For example,
you might choose to apply for an adjustable rate loan which has a lower initial payment than a
fixed rate program. Similarly, a larger down payment may lower your monthly payment.
To find out the maximum amount you can borrow, talk to a mortgage professional. After you know
this amount you can add it to your down payment to get your home purchase price range. It’s a
smart idea to request multiple loan quotes from different lenders to find the best situation for you.
HOW TO FIND & BUY YOUR FIRST HOME. START NOW!
HOMEOWNER SURVIVAL GUIDES
5
TAX BREAKS
Many homeowners find that owning a home helps them lower their taxes. Homeowners can claim an
itemized deduction for interest on up to $1 million worth of mortgage debt used to acquire or improve
their principal residence. The same goes for interest on up to $100,000 of home-equity debt secured by
their principal residence. Real-estate property taxes can be claimed as an itemized deduction as well.
Your accountant will have more specific details as they apply to your financial situation.
THE IMPORTANCE OF PRE-APPROVAL
Pre-approval can be a very valuable step towards purchasing a home. Before you begin your home
search, talk to a mortgage professional about it. By completing your mortgage application prior to
choosing a home, you can get a pre-approval letter stating how much home you can afford.
Getting this pre-approval letter is a wise move because it lets you know exactly how much you can
spend, and shows home sellers and real estate agents that you’re serious about buying a home. This
may give you leverage in the negotiation process. Many sellers actually prefer to work with pre-approved
buyers, especially in hot real estate markets.
LOAN APPROVAL
After you’ve completed the application, your lender will verify the information you provided and make
a decision on your application. Your lender will discuss loan programs or terms that meet your specific
needs. Based on the information from your credit report and the type of property you want to finance,
you may need to provide additional documents or letters to:
• Confirm your income
• Verify that you have cash in the bank for the down payment and closing costs
• Clarify any discrepancies on your credit report
DOWN PAYMENT
Lenders used to require a down payment of at least 20 percent of the home’s price. These days,
however, many lenders offer flexible home loan programs allowing you to put very little down -- three
percent or less of the home price. For some buyers it’s possible to buy a home with no down payment at
all, or to receive help from local down payment assistance programs.
HOW TO FIND & BUY YOUR FIRST HOME. START NOW!
HOMEOWNER SURVIVAL GUIDES
6
If you decide to pay make a down payment of less than 20 percent, your lender may require Private
Mortgage Insurance (PMI), which protects the lender in case you cannot repay the mortgage. Talk with
your mortgage professional to find out the smartest deal for you.
You’ll also need to pay for closing costs, which are costs associated with initiating a loan. These can
include loan origination fees, discount points, attorney fees, recording fees and pre-paids. They often
will total from three to five percent of the price of the home, payable in cash.
YOUR MONTHLY MORTGAGE PAYMENT
Your mortgage payment consists of principal, interest, taxes and insurance (often abbreviated as “PITI”),
and sometimes additional fees, such as homeowners association dues.
Principal is the money you borrowed to purchase the home.
Interest is the cost of borrowing money.
Taxes are paid by homeowners to local governments, and are usually a percentage of the assessed
property value.
Insurance helps protect against financial loss from fire, natural disasters or other hazards. Most lenders
require you to have a homeowner’s insurance policy on your home because it will help protect their
investment as well as yours.
Typically the lender collects a portion of your monthly mortgage payment to cover taxes and insurance.
When these bills are due, the lender sends payment on your behalf. This process is known as “escrow.”
Using escrow for taxes and insurance is not required, and some homeowners take care of taxes and
insurance on their own. Once your mortgage is paid in full, you are still responsible for taxes and
hazard insurance.
HOW TO FIND & BUY YOUR FIRST HOME. START NOW!
HOMEOWNER SURVIVAL GUIDES
7
LOAN HELP FOR FIRST-TIMERS
There are several organizations designed to help people purchase their first home: Fannie Mae, Freddie
Mac and Ginnie Mae. While they do not lend money directly to buyers, they all help lenders make loans
to people with low or moderate income. If you qualify for one of these programs, they can mean lower
down payments and easier qualification limits than regular loans.
How do they work? They sell mortgage-backed securities (Fannie Mae), mortgage-backed bonds
(Freddie Mac) and pass-through certificates (Ginnie Mae) that generate monthly income for investors.
Ginnie Mae is a government entity, while Fannie Mae and Freddie Mac were commissioned by the
government and are owned by private shareholders.
These three use the money they raise on Wall Street to buy packages of local mortgages. This helps
ensure that there is loan money available for home loans and that interest rates are fairly consistent
across the country.
The maximum dollar amounts for these loan programs may make it hard to cover the cost of a house in
expensive areas. If this is the case for you, you may want to save more money to cover the difference in
price, or else try to find a house or condo that is within the loan amount. If you’re interested in learning
whether you qualify for these programs, ask lenders when you get loan quotes.
HOW TO FIND & BUY YOUR FIRST HOME. START NOW!
HOMEOWNER SURVIVAL GUIDES
8
GLOSSARY
AGENT
An individual who represents a seller, a buyer or both in the purchase or sale of real estate.
AMORTIZATION
The schedule of loan payments that establishes the amount of payment to be applied to the principal
and the amount to be applied to interest, usually on a monthly basis, for the full term of the loan.
ANNUAL PERCENTAGE RATE (APR)
The total interest rate of a mortgage, including the stated loan interest as well as any upfront interest
paid in securing the loan. The APR will invariably differ from the mortgage rate quoted due to the
inclusion of these items.
APPRAISAL
An estimate of value of a real estate property by a professional third party. Virtually all non-owner
financed mortgages will require an appraisal, which is generally paid for by the buyer.
ADJUSTABLE RATE MORTGAGE (ARM)
A mortgage in which the interest rate is adjustable, meaning that the rate can go up or down according
to prevailing financial market conditions.
ASSESSMENT
The value of a property as determined by the local tax jurisdiction, used to determine the amount of
your property taxes.
BUYER’S AGENT
A real estate agent that has made an agreement to represent the buyer exclusively, rather than the seller.
COMPARABLE MARKET ANALYSIS (CMA)
A comparison of the prices of similar houses in the same general geographic area. A CMA is used to
help determine the value of a property, either for a seller or a buyer.
CLOSING
The process that affects the final transfer of the deed from the seller to the buyer, as well as finalizes all
aspects of the mortgage of the property.
HOW TO FIND & BUY YOUR FIRST HOME. START NOW!
HOMEOWNER SURVIVAL GUIDES
9
CLOSING COSTS
Funds needed at the time of closing (separate from and in addition to the down payment). Loan
origination fees, discount points, attorney fees, recording fees and pre-paids are some items that may be
included. They often will total from 3% to 5% of the price of the home, payable in cash.
CONTINGENCIES
These are conditions, or “safety valves,” written into real estate offers and contracts to prevent a buyer
from being forced to buy a house that is unsatisfactory— either structurally or financially. Examples
of contingencies are: “This contract is subject to the buyer obtaining a satisfactory whole house
inspection,” or “Subject to the buyer being able to obtain a mortgage.”
CONDOMINIUM
Housing where the owner owns only the unit in which they live — from the interior walls inward,
generally — as well as a portion of the common area.
DEBT-TO-INCOME RATIO
The ratio of a borrower’s total debt as a percentage of their total gross income.
DEED
The document that, when recorded with your local government, determines ownership of a property.
Transferred from seller to buyer at closing.
EARNEST MONEY
Money that is submitted with an offer to purchase and indicates a buyer’s seriousness and good faith. In
virtually all cases, earnest money must be submitted at the time of the offer and remains in escrow until
the time of closing, at which time it becomes part of the down payment.
EQUITY
The difference between the value of a property and the total of any outstanding mortgages or loans
against it.
ESCROW
Funds held in reserve both prior to closing (for example, the earnest money and deposit) by a third party
and after closing by the mortgage company to pay future taxes and homeowners insurance. In some
areas, “escrow” also refers to the closing process.
HOW TO FIND & BUY YOUR FIRST HOME. START NOW!
HOMEOWNER SURVIVAL GUIDES
10
FIXED-RATE MORTGAGE
A mortgage loan where the interest rate is established at its origination and continues unchanged
through the life of the loan.
FSBO (FOR SALE BY OWNER)
Real estate that is sold without the assistance of an agent. FSBO can refer to both the individual selling
the property — “They are a FSBO” — or the property itself — “That house is a FSBO.”
FORECLOSURE
The process through which a lender takes back property from a defaulting owner and re-sells it.
HOMEOWNERS’ ASSOCIATION
An owners group, whether in a condominium, townhouse or single-family subdivision, that establishes
standards and general guidelines for the operation of the community.
INSPECTION
A thorough examination of a home being considered for purchase which looks for defects
in the property.
INTEREST
That portion of a mortgage payment that is the “charge” for using the lender’s funds.
LIEN
A legal claim against a piece of property that can prevent it from being sold unless the lien is satisfied
(paid off). Liens can be filed by unpaid contractors or other debtors in a legal process so that they will be
paid when a property is sold.
LISTING
A property for sale by a real estate brokerage and agent.
LOAN ORIGINATION FEE
A charge imposed by the lender, payable at closing, for processing the loan.
LOCK-IN
An agreement by the lender at the time of mortgage application or shortly thereafter, to write the
mortgage at a specific interest rate, whether rates rise or fall, up to the date of closing. Obviously a good
move if rates are rising, not so good if they are falling. Lock-ins have specific expiration dates, such as
30, 60 or 90 days in the future.
HOW TO FIND & BUY YOUR FIRST HOME. START NOW!
HOMEOWNER SURVIVAL GUIDES
11
LTV (LOAN TO VALUE)
The ratio of the amount of the mortgage as a percentage of the value of the property.
MLS (MULTIPLE LISTING SERVICE)
A listing (almost always computerized) of all the properties for sale by real estate brokerages in a given
geographical area.
PMI (PRIVATE MORTGAGE INSURANCE)
Required on virtually all conventional loans with less than 20% down payment. The payments for PMI
are included in your mortgage payment, and it protects the lender if you default on the loan. On FHA
loans, you will pay a MIP (Mortgage Insurance Premium), which accomplishes the same purpose.
POINTS
One point is equal to 1% of the loan value, paid at closing. Points can be loan origination fees or
“discount points,” which reduce the interest rate of the loan (you are actually paying a finance charge
up front). For example, when a lender quotes a rate of 8 1/2% with 1 + 1 points, 1 point is for the
origination fee and 1 point is for the discount fee.
PREQUALIFICATION
The first stage of a mortgage application where the lender will run a basic credit report and determine
your debt-to-income ratio in order to see how much mortgage you qualify for.
PRE-PAIDS
Items paid for (in cash) at closing, such as homeowners insurance for one year and real estate taxes for
several months.
PRINCIPAL
The amount borrowed for a mortgage loan. Your monthly mortgage payment will be applied to both the
interest and the principal. (The lion’s share of your payment will go to the interest portion in the first
years of the loan).
PROPERTY TAX
An annual or semi-annual tax paid to one or more governmental jurisdictions based on the amount of
the property assessment. Generally paid as part of the mortgage payment.
RECORDING
The act of entering deed and/or mortgage information into public record with your local
government jurisdiction.
HOW TO FIND & BUY YOUR FIRST HOME. START NOW!
HOMEOWNER SURVIVAL GUIDES
12
SUB-AGENT
A real estate agent who is working with a buyer but who represents the seller in the transaction.
TITLE INSURANCE
Protects your title - your ownership rights to a home - from claims against it. Paid at closing, title
insurance may be the responsibility of the buyer, the seller, or both, depending on what is traditional in
your locality.
WARRANTY
Covers either most of the house in a new home, or selected items (for example, the heating and air
conditioning system or the water heater) in a used home. Warranties can vary widely and are optional in
used homes (paid for by either the buyer or the seller).
ZONING
Laws that govern specifically how an area can be used. For example, an area may be zoned for single-
family residential, condominiums, commercial or retail, or a mix of two or more uses.
HOW TO FIND & BUY YOUR FIRST HOME. START NOW!
HOMEOWNER SURVIVAL GUIDES
13
HOME WISH LIST
Before you begin looking for a home, you should spend some time thinking about the features you want.
Create your wish list to help you identify all the things that you absolutely must have, as well as those
things that would be nice to have but you could live without.
Price Range
