Congratulations! You’re ready to buy your first home. While exciting, the process can be daunting. From the first open house to the final walk-through, there is a lot on the line. To help navigate the process, I’ve highlighted five common misconceptions and pain points my first-time home buyers encounter.
You Don't Need 20% Down to Buy
A conventional mortgage isn’t insured by the federal government and likely has a fixed or adjustable rate. It will also require that you have a 20% down payment when you purchase your home. This doesn’t seem like a lot but, according to Zillow, the median price of a home in Chicago is $223,400….a number that has gone up 7.9% since 2016. According to the 20% down rule of thumb, you would need at least $46,680 in order to buy a standard home in our great city.
Factors such as your credit score, the size of your down payment, and existing debt impact whether or not a lender is willing to offer you a mortgage with as little as 5% down. If you qualify for a FHA loan–a mortgage issued by the Federal Housing Administration, this number drops to 3.5%.
Regardless of how much or little you put down, you have to be honest about your overall budget from the start. In theory you might be able to cut back on $500 worth of expenses a month but, in practice, is this realistic? What happens if there’s an emergency or you want to take a vacation? The last thing you want during your first year as a homeowner is avoidable stress brought on by a monthly mortgage payment that’s out of reach - we call this being “house poor.”
Rely on Your Attorney to Review Contracts
You don’t have to be a Property Brother to need a real estate lawyer. In fact, in Illinois, most standard real estate contracts allow you to have your attorney review the contract and make changes even after you’ve signed it. Take advantage of that right! The homebuying process is complex and your attorney will help you navigate the lending process, negotiate potential repair work or closing cost credits, and explain the volumes of paperwork that you will sign at your closing. Your attorney should be seen as a trusted resource and advocate throughout your home buying process.
Don’t Forgo Title Insurance
One of the most confusing roads along the path to purchase for first time homeowners is title insurance. Put simply, title insurance “insures” that you own the property that you’re purchasing, and your lender will require it. Title insurance protects you in the event some other person ever tried to say they owned your home. An extreme example could go like this: Your seller already gave the property to a friend several years ago, but that friend never moved in, so of course you did not know. Imagine two years from now that friend decides they want to move in to the house and shows up on your doorstep...what would you do? It sounds crazy, but your title insurance policy should pay to defend your ownership of the property in court. Typically, in Illinois, the seller will pay for your title insurance, and you will have to pay for the title insurance for your lender… I know, it’s confusing. Your attorney and real estate agent will walk you through this very standard process, so don’t worry.
Once Your Offer Is Accepted, Put a Pause on Spending
Once your offer is accepted, you’ll likely want to celebrate. While tempting, now is not the time to open a new line of credit and buy the sectional sofa you’ve been eying from West Elm. During the mortgage underwriting process the bank will be examining all of your finances under a microscope. It’s important that you forgo any major spending or lifestyle change such as quitting your job. To be safe, avoid any credit card purchases, cash withdrawals or deposits over $300. These actions can potentially raise a red flag and jeopardize or significantly delay the purchase process.
Overestimate Closing Costs
Unfortunately, when it comes to closing costs, there’s no hard and fast rule as to what to expect. A good rule of thumb is to budget between 2% to 5% of the purchase price and expect to pay several thousand in closing fees. To help navigate the closing process, Zillow offers a laundry list of the different closing cost types you might run into. But the best piece of advice I can offer? Overestimate. This is the one area where you’re likely going to occur the unexpected and you’ll want to be prepared.
Buying your first home does not have to be scary or stressful. Plan accordingly, come prepared, and the process will be enjoyable and exciting. Call upon the resources you have at your disposal such as my upcoming Facebook Live event on September 12! Your attorney and broker have seen many of these issues time and again, so do not be afraid to ask them for help!