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The Hidden Costs
If you’re about to buy a home, it’s not going to be like walking to a department store, picking a voucher for a house, scanning it at the register, and then moving in. At minimum, you’re looking at a process that will take several months. Even if you are a cash buyer, and you close on the very first house you look at, you’ve still got a lot of “moving parts” to consider.
If you buy straight from the homeowner with no realtor involved, the paperwork alone will take a few days or weeks to get sorted out, then you’ve got to move and unpack. Simultaneously, you’ve still got to live your “normal” life. Family, work, responsibilities, obligations—you’ll have to juggle the home acquisition with these things. Expect a minimum of two months.
However, generally, you’re not going to be a cash buyer, you’re going to obtain a mortgage. That means you’re going to search more carefully for a house, and ultimately, you should expect the process to take about a year. You’ll look at a dozen homes, minimum, before you decide on one; and then that might even be bought out from under you.
Then you’ve got home inspections, contingencies, home insurance, title insurance, and appraisals to consider. COVID-19 resulted in “drive by” appraisals, which only took a few days. Then those ended, creating a backlog. A house that’s not smack dab in the middle of a city might take months to appraise. So all these things in mind, here we’ll explore a few notable things to think about when buying your first home.
1. Down Payment Size Can Affect Loans and Interest Rates
The larger the down payment, the smaller the interest rate, and the better the loan you can secure. Now, there are some funny things which affect insurance rates. In certain scenarios, increasing your down payment can actually work to increase your interest rate as well. It will depend on the property, state, city, down payment, and lender.
A good idea is to ask the individual helping you obtain mortgage approval what sort of interest rates will accompany different down payment sizes. While it is possible to buy a home with zero down payment, in all likelihood, you’ll do a lot better if you put money down from the start. What’s most advisable is 20% to 25%. So on a $200k house, $40k to $50k.
2. Credit Can Affect Your Ability to Secure a Loan
If you’ve got bad credit, you’ll either be found ineligible for a loan, or you’ll end up with some insane interest payment. Just because your credit isn’t the best doesn’t mean you are without options, though. You might just have to try multiple banks and lenders.
Options like Rocket Mortgage make their business model around approving as many new homeowners as they can. Local banks have greater risk, so they’re less likely to concede anything. Shop around.
3. You Need to Secure Home Insurance Prior Closing
You’ll have to have some sort of recognized home insurance before buying your home. The average monthly cost of home insurance will be between $60 and $200, depending on the policy and the property. Expect about $100 a month, or $1,200 a year, on a normal policy.
4. You’ll Need to Supply a Large Amount of Information
If you’re obtaining a mortgage, the mortgage broker will want your tax returns, bank statements, identification information, employment data, and everything they can get. Have all your financial information available, and expect underwriters to ask for the same documents multiple times.
5. Home Quality Can Affect Loans and Insurance Rates
Sometimes the quality of a property is too poor for anyone to offer you a loan anyway. If your new home is falling apart, banks won’t risk it, and neither will mortgage brokers. You could, however, still buy outright if you have the resources; and homes that are in declining quality are often affordable enough that you can pull this off.
The older and more broken down your home is, the higher the insurance rate. This tends to slightly affect loan and insurance. However, if you are savvy enough to refurbish the property, this can be a good move financially—you can “flip” the house. So know what your end game is before you buy.
Getting Through The Process
Pace yourself, because it’s probably going to take a few months. If you decide on a house in August, you may not close until the end of November. Turnaround time averaged 47 days in 2019; these days owing to how COVID-19 has affected appraisals, that will likely take longer. Expect ninety days, and be happy if the period is shorter.
With that in mind, remember that down payment size affects loan and interest rates, credit can impact loan availability, insurance is necessary prior to closing, a lot of information will be asked of you, and the quality of the property may affect loans or insurance rates.
The best way to understand the process intimately is to simply find a home you like and start the buying process. If you’re savvy, you can secure a mortgage that’s in the same neighborhood as monthly rent. The difference will be: you’ll be building equity with each mortgage payment.
