Find out what a first-time homebuyer should know.
With home prices falling in most areas of the country, there are some deals to be found for a first-time homebuyer. The federal government offered financial incentives to first-time homebuyers early in 2009 to try to boost the economy. The federal government can also make it easier to qualify for a mortgage or purchase a fixer-upper that needs immediate repairs. Getting prequalified for a particular loan amount helps first-time homebuyers know what they can afford before shopping and making an offer on a home. Understanding the basics of the home buying process is essential to the first time home buyer.
Knowing what a potential homebuyer can afford is an important first step in the buying process. Getting prequalified for a loan is a good way to estimate what purchase price is affordable. The loan application will require information about income, other loans and credit card debt. The qualifying amount of the loan and monthly payments will depend on the borrower's credit rating, income-to-debt ratio and amount of down payment . Under the Fair Housing Act, a lender cannot discriminate against a borrower based on age, race, color, national origin, religion, sex, marital status or disability .
For homebuyers with less-than-perfect credit, a loan insured by the Federal Housing Administration (FHA) can help make home ownership a reality. FHA loans are backed by the government, so lenders have less-stringent credit requirements. FHA loans may only require 3.5 percent as a down payment and have lower closing costs , which means less money is needed up front.
Hiring a real estate professional can make the home buying process less daunting for a first-time homebuyer. Real estate agents have access to the Multiple Listing Service (MLS), which provides information about homes available for sale in a particular price range and area. This can save a tremendous amount of time by narrowing down the number of homes by other search criteria, such as the number of bedrooms. According to the Federal Trade Commission (FTC), a homebuyer should evaluate a real estate agent's experience and expertise in particular communities before signing a contract. In return for services, a real estate agent receives a percentage of the sale price as commission.
A real estate agent takes potential homebuyers around to look at properties that meet their specifications. Once a property is selected, the real estate agent will submit a written offer, usually for an amount that is less than the asking price. There is often some back-and-forth negotiations between the buyer and seller before reaching an agreement on the purchase price (if an agreement is not reached, the buyer is free to make an offer on another house for sale).
Once the purchase price is known, the details of the loan can be finalized, which includes having the home appraised. The lender will estimate closing costs and provide a written Good Faith Estimate. It is the buyer's responsibility to have the home inspected to make sure there are no hidden structural defects or other problems . At the "closing" meeting with the real estate agent and the title insurance representative, the buyer signs all the paperwork and pays the down payment and closing costs. At this point, ownership transfers to the buyer .
According to the Internal Revenue Service (IRS), first-time homebuyers who purchase a home as a primary residence before December 1, 2009, are eligible for a tax credit up to $8,000. First-time homebuyers include anyone who has not owned a home during the previous three years. The amount of the credit equals 10 percent of the purchase price but cannot exceed $8,000. To qualify, single buyers can have an income up to $75,000 or married couples can earn up to $150,000. To further help first-time homebuyers, FHA-approved lenders are being allowed to extend a short-term bridge loan so that buyers can use the tax credit as a down payment .
Some of the best deals can be found on a fixer-upper. Buying the worst house on the block can be a way for a first-time homebuyer to get into a better neighborhood with better schools and have more assurance of the home retaining its value or increasing in value. First-time homebuyers purchasing a fixer-upper may be able to qualify for a 203(k) loan through the U.S. Department of Housing and Urban Development (HUD).
The buyer can make an offer on a home in need of repairs that is contingent on receiving approval for a 203(k) loan. Then the buyer seeks approval from a FHA-approved lender by submitting a plan for repairs with detailed cost estimates. The appraisal is based on what the home's value will be after the repairs are completed, and the value of the 203(k) loan is equal to the purchase price and the remodeling costs. The funds for remodeling are placed in an escrow account after the loan closes and the money is withdrawn as the work is completed.
HUD provides special incentives in designated "revitalization areas" that meet criteria relating to income levels, home ownership percentages and number of FHA loan foreclosures . According to HUD, community professionals, including teachers, law enforcement officers, firefighters and emergency medical personnel can receive up to a 50 percent discount off the purchase price of a home in a revitalization area. The HUD Web site can help a potential first-time homebuyer identify revitalization areas in a specific state or find out if a property is located in a revitalization area.
For homebuyers who are unable to qualify for a loan or need some advice, a HUD-approved counseling agency may be able to help. On the HUD-Approved Counseling Agencies page, first-time homebuyers can locate a home counselor who can help with saving for a down payment or paying off debt.
The FTC publishes an 18-page glossary of real estate terms that can help a first-time homebuyer understand what a real estate agent and lender are saying.