SUMMARY: It’s a great market for first-time homebuyers. But be sure to count the cost before you make the move from renter to homeowner.
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Market conditions have never been better for first-time homebuyers – real estate prices and interest rates are low; there are a lot of homes on the market to choose from; and the government is offering great tax incentives. It’s a great time to buy your first home.
If you are thinking of making the move from renter to homeowner, here are five costs to consider:
COST 1: CREDIT REPORT – Work on improving your credit report. Banks are being more selective about making loans… even with first-time homeowners. The Federal Reserve says a March survey found half of U.S. banks tightened lending standards on prime mortgages in the previous three months, up from 45 percent in February.
A higher FICO score also gives you greater negotiating power over the terms of the mortgage and ultimately, the total cost of the loan. A stellar score ranges from 760 to 850, while scores below 640 might mean you have to pay a significantly higher interest rate.
COST 2: DOWN PAYMENT – Rates on 30-year fixed mortgages are at a record low of 4.78 percent. At the same time, more lenders are demanding larger down payments of 20 percent or more.
You can find out the down payment your lender will require as part of the pre-approval process. This is typically a free service where a lender evaluates your financial situation and tells you the terms of the loan they’re willing to give you. It’s a good idea to get pre-approval before you start looking at houses. That way you’ll know, in advance, what you can afford.
COST 3: ADDED FEES
New fees introduced by Fannie Mae and Freddie Mac in the past year will likely push the price of a mortgage higher for many people. The fees are based on credit profiles, the amount of the loan in relation to property value and the type of home you’re buying. As such, they’ll vary greatly depending on your personal situation, but could total as much as 3 percent of the mortgage.
There are also standard closing costs to consider… service fees charged by the lender covering items such as credit reports, appraisals, documentation and administrative costs. The total expense will vary depending on where you live and your particular situation. Lenders are required to itemize all closing fees, so review them carefully. Some of the more standard fees might be negotiable.
COST 4: INSPECTIONS
A comprehensive home inspection is a must… you don’t want any surprises. Fees will vary depending on the scope of the inspection and whether your inspector offers comprehensive packages. Other inspections might be for lead paint, pests or radon gas. Some of these checks might be required by the lender and included in the closing costs.
The seller might pay for inspections in some cases, but it’s more common for the buyer to foot the bill. After all, you want the inspector to work for you… to represent your best interests.
COST 5: MAINTENANCE
Your mortgage expense is only one of the monthly costs of home ownership alone. Maintenance, upkeep, and utility costs need to be included in your budget.
Your home inspection should alert you to potential large expenditures, e.g. roof and heating/air conditioning. As a general rule… the older the home, the higher the maintenance fees you can expect.
