Buying a home is often the most important transaction a person will make in their lifetime. Although the process is intricate, it doesn’t have to be confusing. Whether you are a first time home buyer braving the market alone or have an expert by your side, there are many details of the home-buying process that are still misunderstood. Let’s break down a few myths about buying a home.
Down Payment has to be 20%
20% has consistently been thought of as the magic number to hopeful homebuyers. Although having a 20% down payment could never hurt your chances of getting approved for a mortgage, it is by no means required. Nowadays there are a plethora of options available to those who are not able to scrape together the tens-of-thousands of dollars required for the traditional 20%. Programs like these were created to encourage more people to pursue homeownership with as little as zero down for eligible borrowers. There are many options for hopeful buyers in a variety of circumstances including low-income borrowers, veterans, and first-time homebuyers. Ask your real estate expert for more information on programs that might work for you.
You need to have perfect credit to buy a home
If you currently have a less-than-perfect credit score, you might still be able to buy a home. Credit – a traditionally important aspect of the home-buying process – is no longer the end-all-be-all of getting approved for a mortgage. Generally, mortgage lenders deem credit above 700 as ideal and credit below 620 as riskier but still fair. If your credit is less than 620 you might still have options although you might face higher upfront costs and will have to do a little bit of searching to find a lender or program that is willing to work with you. The idea that lenders require a credit score of well over 700 to even apply for a mortgage is outdated and incorrect. While many lenders do require a score of at least 620 there are programs available that allow some flexibility with the final score. FHA loans, for example, require a minimum credit score of 580. Mortgage lenders look at more than just your credit when deciding whether or not to give you a loan, so make sure you take a look at all of your options and find a lender who knows what they are talking about.
Skipping the real estate agent will save you money
We all know that real estate agents work on commission and that their checks can sometimes work out to be a serious chunk of change. So it makes sense that not having an agent will therefore save you thousands of dollars – right? Wrong. In fact, not having a real estate agent may just cost you several thousand dollars simply because you don’t know how to negotiate the way a professional does. Real estate agents often say that their services are “free” for homebuyers because their commission, which is usually around 3% of the purchase price of the home, is paid by the seller. There are no hidden fees and you will not ever be asked to pay the agent’s commission as a buyer, so “free” is a good way to think of it. Real estate agents are highly trained professionals that are able to tell you when you are getting a good deal by being market experts, comparing properties, and negotiating terms. Real estate contracts are very complicated and often hard to digest if you are unfamiliar with the jargon. Having a competent agent on your side will not only increase your chances of saving money as a buyer, but will also protect you from signing your name against potentially unfavorable terms. Trust us – you want to have an agent.
Renting is cheaper than buying
Seattle is currently experiencing yet another wave of sky-high home prices – both downtown and in surrounding neighborhoods. With this, it’s no surprise that people think renting is the cheaper option in comparison. Unlike purchasing a home, renting does not require down payment fees, inspection costs, or closing costs. Maintenance costs are covered by your landlord and if your sink gets clogged you can call maintenance instead of paying for a plumber. This is all true with the exception of one small detail – almost all of those costs associated with purchasing a home can be covered by either the seller, down payment assistance programs, or other buyer programs. If you have a good real estate agent, chances are you will be able to find a house that has a mortgage payment that is the same or even less than what you pay in rent. And if you plan on staying there for a few years you will only be building your wealth by gaining equity. Imagine buying a house now and having it be worth an extra $100,000 in a year or two. That is the reality for people right now in this market.
Buying a fixer-upper will save you money
Picture this: you are working with your real estate agent to try and find the perfect home for you and your family. They present you with two options: option one is a move-in-ready stunner and option 2 is a significantly cheaper house that is comparable but needs some TLC. Buying a house that needs work is risky and generally not worth doing unless you know exactly how much the work will cost and have the resources to get it done. That information is almost always an educated guess that can change unexpectedly at any time due to unforeseen issues. “Fixer-uppers” as they are called can end up costing more than expected simply due to their unpredictability. Of course, inspections help, but renovations always come with a risk of things costing more than expected which can make the few thousand you saved initially obsolete.
The biggest upfront cost is the down payment
Upfront costs of home-buying are intimidating to many people. The down payment, although usually significant, is not the only cost to consider. Other costs can include home appraisal ($400-$500), home inspection ($400), closing costs (2%-5% of the home purchase price), and significant savings required by some lenders to cover 2 -3 months’ worth of mortgage payments. The good news is that most of these costs can be covered or massively reduced with the help of a competent real estate agent and the many programs that are available to first-time home buyers. The most important thing is to find a real estate agent that knows the process and can keep you informed every step of the way.
Skipping the home inspection will save you money
Home inspections are not intended to be just another extra charge; their purpose is to inspect your home before you agree to purchase it. Old homes and new homes alike need to have inspections in order to protect you from potential issues in the future. Mistakes could have been made during the building process, corners could have been cut in an attempt to save money, or things in the house could just be old or faulty and in need of repair. An inspection will make sure any issues are addressed and repaired before closing on the home so you are not stuck having to deal with issues in the future. Home inspections only cost about $400 and can save you thousands of dollars in repair costs – so they are well worth it to have that added protection. Recently it has become common for sellers to pay for inspections so you may not even have to worry about this one at all.
The best thing you can do for yourself as a first-time homebuyer is to stay informed. Find yourself a reputable real estate agent that knows the process in and out and will be able to help you make the best decision possible (and save you some money while they are at it). If you or someone you know is thinking about buying a home for the first time do them a favor and send them this article.