The real estate industry has been much maligned in recent years. That’s not breaking news. In fact, even real estate tycoon Mortimer Zuckerman has lamented the current state of the housing market, stating that “the most critical factor subduing the demand for housing is that home ownership is no longer seen as the great, long-term buildup in equity value it once was.”
There is obviously truth in Zuckerman’s assessment. The early 2000s represented a huge housing bubble, and that bubble collapsed. However, the idea that home ownership no longer provides equity value is shortsighted. In fact, there is no reason to think that as the market corrects—and it will—that property ownership will not once again become a valued investment. And for first-time homebuyers, there may be no better opportunity to buy than now.
Maximizing value is a matter of timing
For all the talk of upside-down mortgages, rising taxes and declining values, it’s surprising that so few people are talking about the number one rule of investing: buy low, sell high.
It’s true that predicting the bottom of a market is a shaky proposition at best. But whether or not the current trend of housing prices finally increasing in value continues or if the industry experiences another dip—both impossible to forecast—this much is true: inventory exceeds demand and interest rates remain near historic lows. It is, quite simply, a buyer’s market.
“the most critical factor subduing the demand for housing is that home ownership is no longer seen as the great, long-term buildup in equity value it once was.”
So what does this mean for the first-time homebuyer? It means you can buy a great house at a great price for less money. It also means that if you plan on staying in your house for the foreseeable future, you will build valuable equity.
Seven tips for the first-time homebuyer
Don’t be unduly influenced by media reports that banks are not making loans. Banks are in the business of lending, and they want to help you.
Here are some things you can do to help ensure that you can take advantage of the optimal market conditions to find and finance your fabulous first house:
- Take a good look at your budget. Are you in good financial shape? If you do not currently have a budget, create one. At minimum you should review two to three months of income and expenses to see what type of mortgage payment your budget can accommodate.
- Consider your long-term plans. To make buying a home worth your while, Kiplinger.com advises staying in a home five to seven years. Always remember that your home is your shelter. The housing bubble of the last decade was unprecedented, and it is likely that we are returning to a more realistic market where house values only increase marginally year-over-year.
- Take a good look at your income. Remember, home ownership requires more than just a monthly mortgage payment. Will your income support home maintenance, upkeep and the occasional emergency? Don’t forget to account for taxes.
- Review your FICO score. This is what lenders will look at first to determine your rate. If your number is not as high as you would like, see what you can do to strengthen your credit before applying. You can view your credit report for free at annualcreditreport.com.
- Know your down payment capacity and don’t overlook closing costs? Ideally, you should have a down payment of 20 percent. This will save you from paying primary mortgage insurance, or PMI, and may help you get a better interest rate. But remember, low down payment options are available to creditworthy buyers. Closing costs are the fees you will need to pay to your lender, title company, local taxing authority and insurance companies to finalize the transaction.
- Research your market. On a national level, experts are forecasting that the housing market will stabilize. However, markets are shaped by local influences. Talk with realtors and lenders about trends and forecasts for your area. It will help you understand the market you are buying in, and it will help you predict what the value of your home will do in the foreseeable future.
- Assemble a great team. Buying a house can be a complicated and emotional process. A team consisting of experienced professionals—real estate agent, mortgage broker, insurance agent and attorney—can help you avoid many first-time homebuyer mistakes.
- Remember, purchasing a house is more than a long-term investment. While it certainly can generate a great yield if you buy smart and maintain or improve its value over time, it is first and foremost “home”—the place where you will build a lifetime of memories. And for those who have saved and are ready to make the move to buy their first house, there may never be a better time than now to make owning your own home a reality.
Joel Bisaillon Jr. is vice president and district sales manager, KeyBank Mortgage, for Key’s Capital Region. He may be reached at either 518-257-8601 or email@example.com.
What to expect from the mortgage process
When it comes to getting a loan, doing your homework pays off. You will want to make sure you know what to expect from the process, particularly if you are a first-time homebuyer. The following list will help prepare you.
Preapproval. A preapproval is an application for credit and a lender's written commitment (subject to verification) of how much they'll let you borrow. Getting pre-approved will show home sellers you are a serious buyer.
Loan application. This is how the bank determines if it will make a loan to you. You will need to provide pay stubs for the past 30 days, W-2 forms and tax returns from the past two years, as well as statements from bank and investment accounts. The lender will also examine your credit history while reviewing your loan application.
Lock in rate. To ensure you receive the rate you were quoted, you may elect to lock in your rate by paying an up-front authorization fee.
Points. You can pay points, a dollar amount based on a percentage of the loan amount, to the lender to reduce the interest rate on the loan. It adds costs up front but can help save you money over time.
Appraisal. The appraisal is conducted by an independent professional and determines the value of the home.
Down payment. Lenders prefer that a borrower have 20 percent of the purchase price for the down payment. If you make a down payment of less than 20 percent you may be required to purchase private mortgage insurance (PMI). PMI protects the lender if you default on the loan and is part of your monthly mortgage loan payment.
Loan review process. After the appraisal, the loan file is submitted to the lender for your loan to be reviewed.
Escrow and title preparation. A title company will hold the money and documents until all conditions of the mortgage approval are met. Title work will be prepared, including a title exam to ensure the title to the property is clear. Other documents such as the mortgage note and deed will be prepared.
Closing costs. The costs associated with processing and closing a loan, such as application fees, points, title, insurance and credit processing.
Signing. The documents will be sent to a title company for you and the seller to sign. Any remaining down payment and closing costs will be due at this time.
Title transfer. When all funds are collected and disbursed and the contract has been verified, the title is transferred—and you’re a new homeowner.