Thinking of buying a home? Kiplinger shares details on what it takes to become a home owner.
Tired of renting? It could be a great time to buy your first home. In many cities, home prices have bottomed and rents have risen. Mortgage rates are still superlow. In fact, homes haven't been as affordable since 1971. On the downside, in many cities buyers have fewer homes from which to choose and more competition for the best houses.
In Austin, Tex., newlyweds Mark and Ariane Corcoran bought their first home in March. They were renting in a popular downtown neighborhood, where they paid $1,200 a month for a 500-square-foot loft apartment, when they inherited enough money for a down payment. When they began shopping, they expected to buy a classic 1930s Austin bungalow. They found lots of prospects online but drove by most of them. "Agents are really good at taking photos that exclude what they don't want you to see, like the used-car lot out back," says Mark.
They put in an offer on a $225,000, 800-square-foot home. But after the home inspection, they realized that it needed $20,000 to $30,000 in renovations and repairs and that they'd quickly outgrow it. They walked away during the state-mandated rescission period (during which a buyer can back out for any reason and get back any earnest money deposited).
Ariane identified their next prospect within an hour after the listing appeared online. It was a newly built, 1,600-square-foot home with three bedrooms, 2.5 baths, and a yard for the dogs. The builder asked $270,000, the couple offered $260,000, he countered and they paid $268,000. They put down 20% to avoid private mortgage insurance and snagged a 30-year fixed rate of 3.75% from a credit union. Their monthly mortgage payment is $1,524.
Before you take the plunge, consider the answers to questions often posed by first-time buyers:
Will I qualify for a mortgage?
Lenders will scrutinize your "three C's"—credit history (your credit score as well as a deeper dive into your record of debt payment), capacity (income, savings and investments) and collateral (your down payment and the value of the property you want to purchase, as determined by an appraisal).
Lenders will verify your employment (job, school or military) for the past two years and try to predict how likely it is that you will keep your job. If you're weak in one area, strength in the other two areas or in a spouse's bona fides may compensate. Or you may need to beef up your credit score (see Improve Your Credit Score Before Applying for a Loan), establish a more stable income history or save for a bigger down payment.
Read on for more.