Buying your first home is an equally exciting and daunting process. After months of renting properties, or even living at your family home, you finally have the money ready to begin the process… But where do you start? There are several legal and financial steps to take before you can buy a home. Read on for our complete first time buyer guide, which will help you get to grips with all of the steps required to purchase your very first house.
For simplicity’s sake, this guide will focus on buying your first house, rather than apartment or a property which you are going to share or let out. It’s no secret that the US housing market is huge, the total household value grew by $1.1 trillion in 2015, and it’s now worth an enormous $29.6 trillion. Before you can even consider buying a property in the US, you need to be aware of the local market and what exactly is driving house prices. You also need to be aware of the different rules and regulations, which can change from state to state. If there’s a particular trend in the state you are looking to purchase a property in, you need to make sure that you are aware of it to find out whether you’re getting a good deal on your mortgage.
In general, there are a few trends to be aware of in the US real estate industry which may differ from the rest of the world. While in the rest of the world it’s typical for the buyers to pay a fee to estate agents, in the US this is completely reversed. So, instead the seller is responsible for paying a commission to the estate agent – meaning that buyers don’t need to pay anything for an estate agent to work for them!
Retail agents in the US also need a licence in order to operate, which vary from state to state. So, always make sure you’re using a local, licenced retail agent, as this way you will know that they are qualified to guide you through the difficult maze of finding, evaluating and financing a property.
Again, it’s difficult to provide a generic guide on US property taxes as they can be completely different in each state. However, property taxes are generally used as funding for major state projects, such as improving education and maintaining green spaces. It’s always important for first-time buyers to familiarise themselves with the amount of property tax they are going to be paying, as this will give you a clear of idea of exactly how much owning a home is going to cost. In addition, it’s always nice to see the level of public investment in the area you’re planning to live – after all, taxes are typically used to make improvements to your surroundings which are always positive to see, especially if you’re not familiar with the area.
When you’re researching the market and are looking for your first home, budgeting becomes an all too familiar concept. Suddenly you will transform from being someone who regularly drops money on the latest trends and fads, to someone who scrimps and saves every penny in order to remain strictly within their tight, first-time buyer budget. Most lenders now require a downpayment of at least 20%, which means that buyers need to be prepared to close with at least 20% of the purchase price. However, the closing costs almost always need to be added to this 20% in order for the actual down payment to be calculated. Closing costs can vary from a few hundred dollars to a few thousand, so you need to be able to budget for a closing cost that’s attainable or you could find yourself in a difficult situation.
Calculating the average closing costs of properties within the area you are hoping to purchase your first half will give you a clearer idea of exactly how much you should expect to part with to secure a home. However, costs can vary significantly. In Connecticut, for example, closing costs average around $2,033 for a $200,000 loan. While in New York, the closing fees are around $1,911 on average. The national average is $1,847, so keep this in mind when you’re researching your options.
Once you’ve gone through the intense research process and have set your sights on a property, the next step is to arrange a mortgage. The US mortgage industry works slightly different to those in the rest of the world, but it’s still equally complex. Luckily, once you get past all the legal jargon it’s fairly easy to get to grips with how a mortgage works. You’ll be able to discuss every step of the process with your mortgage advisor but hopefully our guide will give you a quick overview of what you can expect.
When you apply for a mortgage in the US, you’ll usually work with an underwriter to help you complete the application process. Some examples of the steps required at this stage include:
- Submitting your details for a credit check.
- Verifying your current employment and regular income.
- Providing details of all your past addresses.
- Providing your financial details, such as checking and savings accounts.
There are both fixed and variable mortgage rates available in the US. Most people opt for a fixed-rate mortgage, which means that you’ll always be paying the same amount for the entirety of your loan term. There are pros and cons for this type of mortgage, it’s the most stable but it also means you can’t take advantage of lower interest rates without refinancing your house.
Variable mortgage rates or Adjustable-rate mortgages (ARMs) are available at lower interest rates than typical fixed-rate mortgages. However, interest rates for ARMs can often increase significantly which could put you out of pocket in the long term. It’s usually recommended that first time buyers opt for a fixed-rate mortgage, although of course the decision is entirely yours.
Having had all of your details processed and approved, you’ll soon have obtained your mortgage loan. After this, you’ll begin building equity. A percentage of each mortgage payment you make will go towards the principle, lowering the amount which you owe to your mortgage lender. Equity can also be built if your home increases in value over time. Either way, the way to access the money built through equity is through another type of loan, known as a home equity loan or second mortgage.
With your mortgage agreement made, the next step is to make an offer on your dream home. Your retail agent will be there to help you through all of the steps of completing the offer form. You’ll have determined exactly how much you’re going to offer well before you reach this step, taking into consideration the asking price and the prices of similar houses in the area. If the market hasn’t recovered, or other houses in the area are selling for considerably lower than the asking price and the house has been on the market for a long time, the buyer may be willing to accept a lower offer. However, you need to exercise caution as you don’t want to lose out on the house of your dreams. Additionally, if you’re making an offer in an area where the industry is thriving, you’ll probably have to settle for the asking price in order to stand a chance.
Exactly how competitive this process is will depend on where you are making an offer, some areas are hugely in demand with several people all putting bids on the same property which makes it difficult to secure an offer. If you’re outbid, don’t be disheartened. There are plenty of other properties out there!
After all of that, your offer has finally been accepted and you are now officially a homeowner! Well, almost. There are just a few last steps you need to take to seal the deal. Signing your contract is the official agreement between you and the seller, but before you do this you’ll want to have the house inspected. You can arrange a buyer’s inspection period, which usually lasts for around 14 days, before you can close the deal. During this period, you’ll have to pay for someone to come and inspect the property to look for signs of wood infestation, structural damage and any other potential property problems which could put you off buying! Once you’re satisfied, you can finally sign the contract and close the deal… All that’s left to do is sort your moving arrangements!
Hopefully you’ve now got a clear idea of exactly what’s involved when you become a first time buyer in the US. There’s plenty to think about but these are the most important things to know:
- Have a clear budget. You need to know exactly how much buying a property is really going to cost you, including all the hidden fees like property inspection and closing costs as well as obvious fees like your mortgage repayments.
- Know the retail market. If you don’t know the typical costs of the market you’re going to buy in, you could end up paying more than a property is worth.
- There are two types of mortgage. There’s fixed-rate mortgages, which means that repayments will always remain the same, and adjustable-rate mortgages, which fluctuate in-line with current interest rates.
- Arrange an inspection before signing the contract, to make sure you’re happy with your house before you’re committed.