While going to school, Ernesto and Brittany Gonzalez weren't sure where they would end up living.
But when Ernesto landed an indefinite contract as a translator and Brittany got a job as a lab technician at a local hospital, they began their search for a house to officially plant roots for the first time in Utah.
“It almost didn’t seem real,” said Brittany. “This is our first home, we had never done it before, and it was hard to really picture how it would be. But it was very exciting.”
According to the American Enterprise Institute, first-time homebuying has gone up slightly over the past six months while in February 2015 first-time homebuyers consisted of 56 percent of the mortgages issued.
The Gonzalez family feels satisfied with their first-time homebuying experience. Asked to come up with a regret, the only thing they could find was their daughter's room gets a bit cold at night.
“There are things that you really can’t know until you live in a house,” said Brittany.
Below are seven guidelines that the Gonzalez family and experts in the homebuying field say will help prepare first-time homebuyers.
The big question to answer before making what will likely be the largest single purchase in your lifetime is what can you afford. The Gonzalez family was surprised at how much their lender said they qualified for. But that doesn't mean it's a good idea to spend to the limit.
"We didn't spend the full pre-approved amount because the monthly payments would have been more than we wanted to spend," said Brittany. "It would leave us with little money for fun and travel expenses."
In order to figure out how much you can afford, BankRate offers this advice:
“As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income,” said BankRate.com. “To calculate your housing expense ratio, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense ratio.”
Depending on the type of home, other costs of homeownership could be a homeowners association fee, maintenance and landscaping costs and utilities that the landlord took care of when the buyers were renters.
Another expense the Gonzalez family looked at was tied to location. They wanted to minimize the cost of Ernesto's commute while staying close to Brittany's work.
The Gonzalez family wished they had had a better idea of what paperwork they needed when they started the homebuying process, instead of hunting down old W2s and other documents in the throes of qualifying for a loan.
According to Debbie Walker, a First Colony Mortgage loan originator, there are four general areas lenders check to determine loan qualifications: down payment amount, income and employment, credit rating and other financial obligations. Buyers need to prove their credit worthiness with documentation of their income, assets and liabilities.
The documents prospective buyers should have available during the loan application process are bank statements, paystubs, W2s, tax returns and a photo ID. Often the lender can run a credit report that will include the borrower's credit rating.
3. Types of loans
To find out the best loan for them, the Gonzalez family met with a loan officer.
“We had both been working less than two years and I had a friend who was turned down because of that,” said Brittany Gonzales. “But she went to one specific bank. Our loan officer worked with tons of banks and credit unions across the nation.”
The Gonzalez family applied for a traditional 30-year, fixed-rate mortgage with a lender out of California. Traditional loans can also come with a 15-year payoff period. According to Walker, a traditional loan with a fixed interest rate is usually the best option. A shorter payoff period and higher down payment also increases the chances of a low interest rate.
Walker explained that buyers who don't have at least a 20 percent down payment will have to pay mortgage insurance until 20 percent of the loan is paid off. According to BankRate.com, mortgage interest is anywhere between .3 and 1.15 percent of the total loan annually.
In addition to traditional, fixed-rate mortgages, there are adjustable-rate (ARM), balloon and reverse mortgages. The pros and cons of these types of loans, as well as others, can be found on USA.gov’s website.
There are also loans such as Federal Housing Administration (FHA,) Veteran’s Affair’s (VA) and rural loans for certain qualified buyers. FHA loans accommodate people with poor credit or little money, while VA loans assist those who have served in the military. Rural loans are for houses outside of the city and have lower mortgage requirements than other loans such as a lower required down payment and no required earnest money.
4. Emotion vs. reality
Buying a home can be the largest purchase most people ever make. In some cases there is a sense of urgency. Combine those two factors with the experience of falling in love with a particular house in the perfect neighborhood, and the emotions can sometimes overcome common sense.
"If you think about, everyone talks about how it’s an emotional process and buying a house is emotional, but I never really realized how much it is," said Brittany Gonzalez.
Steve Melman, the director of economic services for the National Association of Homebuilders, recommends buyers make decisions about affordability, space needs, proximity to work and schools, etc., before looking at homes. And if the house doesn’t meet those criteria, move on.
Realtors should have information regarding a buyer's deciding factors for the neighborhood, so time isn't wasted looking at homes that a buyer doesn't need or want.
The Gonzales family said what helped them keep their emotions in check was remembering to compare a house they were looking at to houses they had previously seen.
5. New vs. old
The Gonzalez family eventually bought an existing older home rather than a newly built home to stay within their budget.
Greg McBride, chief financial analyst of BankRate.com, said a benefit to buying an older home is they are usually found in communities where people want to live.
Unless the existing home is in an upscale neighborhood, a buyer may not have to pay as much to purchase an older house, but those savings will eventually be spent on repairs and updates to the house, utilities and appliances.
The main benefit to buying a new home, McBride said, is they come with a warranty to fix anything that isn’t functioning properly. The downside, however, is that buyers pay a nonnegotiable price for that guarantee and convenience of new construction and appliances.
But for the Gonzalez family, staying within their immediate budget was more important than having the home and appliances working perfectly.
Instead of established neighborhoods, newer homes are often built at the edge of town, where amenities like shopping and features like mature trees may not appear for several years into the future.
6. Home inspection
While a lender may not require a home inspection, the Gonzalez family found out it is worth paying to have an experienced home inspector go through the home. According to the National Association of Home Inspectors, 39 states license home inspectors, while additional homework will be necessary to find a good inspector in the others states.
"Originally we were going to use Ernesto’s friend, but the Realtor really recommended we use" an inspector, said Brittany Gonzalez.
In the end, the Gonzalez family was glad they did.
With an infrared camera, the inspector discovered a crack in the bathroom shower tiles that led to a leak that had damaged a basement ceiling. She recalled poking her finger straight through the damaged ceiling.
"If it weren’t for that camera, we wouldn’t have known it was there," said Brittany. "It’s not like we go around feeling the ceilings everywhere."
Frank Lesh, executive director of the American Society of Home Inspectors, said a typical home inspection covers many aspects of a home, including the roof, attic, chimney, siding, windows, gutters, bedrooms, electrical system, flooring, plumbing, foundation and the built-in appliances.
An inspector creates a report of his findings, explaining what needs to be fixed now and what can wait.
“Anything that is a safety-related item, I will always say that this needs to be fixed immediately,” said Lesh. “As to who fixes it, really it’s not up to the inspector. We just say this needs to be fixed.”
Some examples of safety related issues include electrical issues, fire hazards, uneven stairs and bad railings.
7. Questions to ask sellers
The Gonzalez family didn't speak with the owners at first but when the issue of the bathroom tile leak showed itself they got in contact with the old homeowners. The homeowners said that they would have the problem fixed before the Gonzalez family moved in.
"She also told us a bunch of stuff," said Brittany. "Like about how they never had the chance to paint the garage. And one of the garden beds has raspberries."
Lesh said it is important to ask the seller certain questions to understand not only what problems the house has, but what problems it has had in the past.
“Most states have some form of disclosure statement that a seller has to fill out,” said Lesh. “And what that’ll say is, ‘Are you aware of any particular things,’ and it will have a list of maybe 20 or 25 things.”
According to Lesh, if a problem exists, it is likely the seller didn’t know there was a problem in the first place. For that reason, it is important to ask questions about what repairs were made to the house over the course of the seller’s time in the home.
Another question to ask the seller is what items are still under warranty. When a house is purchased, usually warranties for furnaces, appliances and roofs transfer over to the new owner.