Buy Your First Home
Even If You Don't Know Where to Start!
Don't be daunted by the leap into unknown waters! Buying a home for the first time may seem like an overwhelming process, especially when you have no idea where to start, but that's why we're here for you. Learn more about the process of obtaining a mortgage, finding the perfect home, and making an offer, and you'll be on your way to owning your very own home in Raleigh!
First and foremost, let's talk about mortgages. Most buyers need one, and there are a lot of options that vary greatly from lender to lender and from buyer to buyer. This means it's important to understand what you're looking for and talk to a lot of different lenders to ensure you're getting the best deal possible.
Types of Mortgages
There are four basic types of mortgages used by the majority of home buyers.
This is the standard loan used by buyers with good to excellent credit who make down payments of at least 10%. However, there are programs that offer options for lower down payments based on buyer credit and location.
These loans often apply to buyers with lower credit scores, as they offer a down payment as low as 3.5% and lower interest rates. However, FHA mortgages do also require mortgage insurance premiums, which can result in higher overall costs.
All veterans and active military members qualify for VA loans. These offer up to 100% financing, simplified loan approvals, and lower interest rates. They can be much lower than conventional loans.
What Do Mortgages Include?
There are four main components to a mortgage payment, often abbreviated as "PITI."
This is the repayment of the initial amount you borrowed from your lender (in other words, the price of your home).
This is a payment to the lender for the money borrowed (and is then added on to the initial price of your home).
Your annual city and county taxes assessed on your property are divided by the number of mortgage payments you make in a year and added into your mortgage.
Your monthly homeowner's insurance payment covers you against various hazards and is added to your mortgage payment.
Going Loan Shopping and Understanding Your Options
Before you decide on any particular loan or lender, it's important to do your research. That means meeting with AT LEAST two different lenders to ensure that you're getting the best rate possible. It's also important to understand two different types of interest rates offered by mortgage lenders.
The interest on an FRM will not change, so your monthly payments won't change, making them very predictable.
The interest rate on an ARM will often be lower initially, but as interest rates do fluctuate with the market, they can be somewhat unpredictable or even result in higher payments.
Calculating Your Monthly Budget
Now that you know what loan options are available to you, what you can expect to pay as a down payment, and what your likely interest rates will be, it's time to determine how much you can afford to pay every month, which will then be used to calculate the price range of your home.
Keep in mind that your mortgage costs will be based both on the price of the home and the CURRENT interest rates. A home's affordability can vary from one day to the next based on the current rates.
Your agent should be someone you know you can trust, an expert in real estate in your area and neighborhood, and very proficient in working with buyers of your experience.
Shopping Homes for Sale
Now it's time for the fun part! You get to start shopping! This is where you get to decide exactly what you want and need in a home, from the type of house or townhouse to the location of the neighborhood to all the exciting interior and exterior amenities you just have to have! Make sure you keep detailed records of the homes you visit, noting things you liked, didn't like, pros and cons, etc. Taking pictures can also help keep your memory fresh.
Tip: Before you start touring homes, determine the actual selling price of homes in your preferred neighborhoods - not just their listing price - to get a better idea of the actual affordability of the location.
You found the perfect house, and now it's time for your and your agent to sit down and discuss your offer. It's important to work together to determine a price you can comfortably afford but will also be a realistic offer for the seller to accept and will not be dismissed against any competing offers the seller might receive.
An Explanation of Costs
Due Diligence money:
Think of this as your security deposit. It's paid to the seller when you submit your offer to show the seller that you are serious. It isn't due to be paid until after your offer is accepted. If a buyer backs out of their contract to buy a home, the due diligence money remains with the seller as a means of recourse for their time off the market. Once you get to the closing table, the due diligence money you paid is applied to your down payment or closing costs. We get asked all the time "How much is due diligence?" Unfortunately, there is straight forward answer and it can vary based on the overall market interest of a home.
Think of this as a second security deposit. This is paid and deposited with an attorney or one of the real estate brokerages. During the due diligence period the earnest money would be returned if you decide not to purchase the property after all. After the due diligence period, the earnest money would be forfeited if the you are unable to close on the home as the recourse for the seller's additional time off the market. The good news is, if the buyer makes it to the closing table this money is also credited back to the buyer to offset any money they would have to pay for down payment or closing costs.
This is determined by your loan, or possibly any government programs or assistance you have requested. This is a percentage of the total amount of your home. For example if a home is $200,000 and your loan program requires a 3% down payment, your down payment would be $6000. There are some first time home buyer loans that do not require any down payment or offer assistance.
These are charges associated with closing the loan and finalizing the purchase with an attorney such as any lender origination charges, title work, title insurance, flood certification and paying the attorney to do all the paperwork and record the deed. To give you an idea, this can range between $4000 - $7000. There are some first time home buyer programs that build in a credit for closing costs.
Requesting a Home Inspection
If the seller accepts your offer, it's time for a home inspection. During the Due Diligence Period, you'll want to have an experienced professional walk the house to ensure that there aren't any lingering problems or maintenance issues that might not be visible at first glance. You don't want to be hit with a serious maintenance or structural issue right after you move in. If necessary, you can request that the seller repair any issues you find however there is no contractual obligation for them to make any repairs to the home.
Once you are under contract, your lender will likely be obligated to order an appraisal on the property as a condition of the loan. They are generally less than $500 for a single family home on an average lot. The appraiser is an impartial party that will determine a market value of the home for the banks. Think of this like an audit. The bank finalizes the loan based on the lower of the two numbers (contract price vs. appraisal price). If your appraisal price was higher than your contract price, congratulations! You are walking in with instant equity. If appraisal amount was lower than your contract price, the loan will be based on the appraisal price. What to do about the difference in the amounts? There are 4 potential outcomes are:
- The seller brings the purchase price down to the appraised value
- The buyer pays the difference between the appraised value and the contract price
- The buyer and seller meet somewhere in between the two numbers
- The seller is not willing to lower and the buyer cannot come up with the difference and chooses to walk away. For those of you wondering if that means the buyer looses their due diligence money, the answer is yes.
If everything looks good, it's time to sign the paperwork, make final negotiations and payments, and get your keys!
Review Your Contract
Before you sign any paperwork, it's important that you carefully read over the contract with your agent or lawyer to ensure there are contingencies - that is, if something falls through with your mortgage, you aren't still obligated to buy the home.
Finalize Your Mortgage
Still Have Questions About Buying Your First Home in North Carolina?
We bet you do! Buying your first home is no simple process, and though we have tried to provide as many important details as possible, there's still much to ask and learn. So don't wait - contact us today and ask away! Want to do some more reading? We have plenty of resources to help you out. Learn more about buying a home today!