It’s a big financial leap to becoming a homeowner. Historically, it has helped middle-class families build long-term wealth. Committing to a too high of a mortgage payment though can easily leave you house poor. If feel you are ready to transition from a renter to a homeowner, here are ten of the most commonly asked questions in home buying that could help make your decision.
Buying or Renting?
There is no question there are distinct benefits to both buying and renting. When making your decision, the first thing to consider is how long of a commitment you are willing to make to a location or property. Renting provides flexibility if you are not certain that you want a commitment or remain unsure about your future circumstances. You usually sign a one-year lease or rent month-to-month with the freedom to move or adjust your monthly rent based on your personal finances. Renting does not require a large down payment or cash reserves for maintenance and repairs. The biggest disadvantage to renting is there is no return on the money you have spent paying your landlord. On the other hand, there are many benefits to buying a home. Ownership comes with tax benefits (you can deduct a portion of your local property taxes and your mortgage interest) and, instead of paying someone else’s mortgage, you create equity in your home. The market is ever changing, so there is a risk of the value not going up but historically real estate appreciates long term. When buying, it is important that you account for the costs beyond your mortgage expenses such as maintenance and improvements that help a property maintain its value. There is no right answer but these are things to consider to help you narrow down what is right for you.
Does my credit score affect my ability to buy?
Your credit score determines your interest rate and other expenses associated with a mortgage loan. If your credit score is high, it tells lenders that you are fiscally responsible and likely to pay your loan payments on time. If your credit score is lower, banks may view you as a risky investment, which unfavorably affects your interest rate. Please remember that the amount of cash that you have in a bank doesn’t influence your credit score.
Am I ready to buy?
Your readiness to buy a property in this market depends on your individual circumstances. There are many loans available to buyers with high credit scores which do not require a 20% down payment. Buying a home is a big financial decisions and you should carefully examine your finances before moving forward. If you have considerable student, personal, or auto loan payments, you may want to reconsider opening up another long-term debt. Consult with a reputable mortgage broker to get prequalified before you start house-hunting.
Is buying a home going to be a good investment?
Whether you are consciously thinking about it or not, making sure the purchase is a prudent investment usually factors when acquiring real estate. To calculate an accurate estimate of the return on your investment, you should look at, amongst other factors, the interest you pay on your loan, local real estate taxes, homeowners insurance, in some cases, private mortgage insurance, utilities and inflation. Depending on the location, the type of improvements you put into the home will affect your resale value. Timing of the resale is equally important. An experienced real estate broker will help you put all of these numbers in a spreadsheet to calculate your rate of return.
What are homeowners tax deductions?
Homeowners may deduct a portion of mortgage interest and local property tax payments from their federal income tax. Mortgage interest for loans up to $750,000 and property taxes up to $10,000 can be deducted.
What is the difference between pre-qualified and pre-approved?
If you are pre-qualified, it indicates how much of a loan you can afford based on your income, debt and assets. It usually involves filling out an application on line. Pre-approval is a conditional commitment to actually grant you the mortgage based on a more in-depth analysis of your income, assets, debt and credit score. There are lenders who will issue loan commitments subject only to an appraisal which will give you a strong competitive advantage over other buyers.
How do I get the best possible mortgage rate?
Your mortgage interest rate will largely depend on your credit score, so it is paramount to have a high one. Having a good steady record of employment is important for a trail of income. Consult with a lender to find out your best options.
How do I get the best offer on the table with the best strategy?
When negotiating a contract, remember that the biggest discount is not necessarily the best value. Properties in good condition and priced well will sell close to the asking price while the outdated and overpriced will linger. Asking your broker for a list of comparable properties is key. Your broker will voice your concerns and use them as a leverage to get a good price. Avoid appearing eager and always be confident when negotiating the terms.
Should I talk with a bank before deciding to look at new real estate to purchase?
Consulting with a lender before house hunting begins is the best approach. It sets realistic expectations and will help you determine your budget. Your broker will be able to narrow down the properties that fit your criteria and thus avoid wasting time looking at houses you cannot afford. When you submit an offer with a pre-approval letter from a lender, sellers are a lot more likely to view it as a serious offer. You can use it to your advantage when negotiating price and terms.