Step By Step to Your First Home

Step by Step to Your First Home

Buying a first home can be a scary, confusing and stressful process. Many would-be buyers are understandably nervous at the prospect of making the largest purchase of their lives. Rather than diving in and hoping for the best, you should prepare carefully before you begin the house search. It's our job to make sure you understand each step in the process:

Establishing a realistic price range

One of the most common mistakes that first time homebuyers make is buying more home that they can afford. You should never depend on banks to determine what you can comfortably afford to spend on a new home. Lenders are very skilled at determining what your monthly debt is, however they have no way of knowing what you spend on utilities, entertainment and food.

Often times there is a big difference between what you can get approved for and what you would feel comfortable paying for. Making your home purchasing decisions based on your established budget rather than your credit limit saves time and disappointment by eliminating homes that are outside your price range or would force you to overspend.

How much cash to put down

When you’re considering buying a home, the amount of your down payment plays an important role. A down payment is a percentage of your home’s purchase price that you pay up front when you close your home loan. Lenders often look at this down payment amount as your investment in the home, so it plays an important role. Not only will it affect how much you’ll need to borrow, it can also influence:

  • The requirement for mortgage insurance*
  • What type of loan is best suited for you
  • What your interest rate will be

* For conventional financing, if your down payment is lower than 20%, your loan-to-value ratio will be higher than 80%. In that case, your lender may require you to pay private mortgage insurance, because they are lending you more money to purchase the home and increasing their potential risk of loss if the loan should go into default. Keep in mind that private mortgage insurance will increase your monthly payments.

Qualifying for a mortgage

Obtaining pre-approval for a mortgage provides proof to your would-be home seller of your seriousness when making an offer on their home. Home sellers will always view an offer including a pre-approval more favorably than an offer lacking one.

There is a difference between pre-qualification and pre-approval. During pre-qualification, lenders will estimate what you can afford to borrow based on the undocumented information you provide about your total income, assets and total expenses. A pre-approval, on the other hand, requires documentation including tax returns, pay check stubs, financial statements, and full credit reports. Pre-approvals naturally carry much more weight while negotiating purchase offers.

How much your payments will be

Nearly every homebuyer we work with wants to know the bottom line... how much their payments will be. The simply answer is there is no simple answer. Monthly mortgage notes are influenced by a number of factors, including but not necessarily limited to the following:

  • Your down payment
  • The amount of your loan
  • The term of your loan
  • Escrowed taxes and insurance
  • The amount of your tax and insurance

We've provided a mortgage calculator at right to help you estimate what you could expect to pay for your mortgage based on the input you provide. And as always, if you have any questions about your options for a loan, simply complete the form at right and we'll get right back to you.

Tax advantages of buying a home

There are significant tax advantages afforded to home owners that renters simply don't get to enjoy. They are as follows:

The Purchase

During the purchase of your home, most of the expenses are NOT tax deductible. There are however two notable exceptions. The IRS says you can deduct interest in the year that it is paid, and that is usually part of your monthly loan payment. Additionally, if your closing took place on any day other than the first day of the month, you likely paid a daily interest charge between your day of closing and the end of the month. Be sure to review line 901 on your settlement for these expenses.

Even more important though, the IRS says that in most cases loan discount points and origination fees are tax deductible to the buyer, regardless of who paid for them. Look at lines 801 and 802 of your settlement statement to see if you have potential deductions coming your way. These items can potentially add up to thousands of dollars of deductions.

Mortgage interest

In general, home owners can deduct interest charged on a loan used to acquire or improve your principal residence in the year that it is paid. During the early years of most mortgages, the majority of your monthly payment is interest, so the deductions can really add up. If you are in the 28% federal tax bracket, this can have the net effect of reducing your borrowing costs by nearly one third, which is what makes this a very popular tax deduction.

The sale

If you have owned and occupied your principal residence for at least two of the past five years, you can earn up to $250,000 on the sale of that home and pay no federal income tax on it whatsoever. At that's as a single person. If you're married, that amount doubles to $500,000. The beautiful part about this though is that you can do this as often as every two years, in perpetuity.


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