When you’re ready to start your new home shopping spree, you may have visions of glittering granite counters, a sunroom with French doors that open onto a terrace or a pristine master bath with heated flooring to warm your toes every morning.
This wide array of choices, while definitely appealing, can bring with it a little bit of uncertainty. Don’t worry, we’ll hold your hand as you go through the process of selecting an area of town where you want to live, a community with the amenities you want, a builder you can trust, and a home you can love.
What Do You Want in a New Home?
While educating yourself about your local market, builders, and new home communities in your area are important steps in your new home journey, the place to start is to determine what you really want in a home.
Purchasing a home is the largest financial decision that many people make. Investing time to define the must-have features (as well as the would-be-nice and can-live-without features) of your dream home is important. Also think about your long-term goals and financial plans. Financial advisors recommend owning a home for at least five to seven years before you sell it. That time allows for the market value of your home to appreciate, which can help you re-coup your real estate and moving costs. Decide if you’re ready to make the commitment to a home and a community for at least that long.
Of course, when you’re buying a home that you’ve personalized to match the way you want to live, you may never want to move. If you think the home you build will be your “forever home,” it’s wise to consider how you and your family will change over time. For example, if you have children, plan for their changing needs as they grow, leave home and perhaps return. You may want to plan for flexible space on the first floor for aging parents who may one day live with you.
An area to give particular thought to is the location of the master bedroom. Many parents of infants and young children prefer to have an infant’s bedroom near their own bedroom. That may change in the teenage years, when all parties may prefer privacy and separation. And you may prefer a first floor master bedroom for yourself as you age.
Thinking about the features that you and any family members need — now and in the future — will help you clarify what’s most important to you in your next home.
Dale C. Adams, Jr., new home sales manager of JLS Design and Construction in Maryland, helps prospective buyers clarify their priorities by asking this series of questions:
• How long have you been looking for a new home?
• When do you want to move?
• Do you own or rent now?
• What do like about where you live now?
• What do you dislike about where you live now?
• What are you looking for in a home?
You can get a head start on your home search by asking yourself these questions.
“I also ask people if they have an idea of how much they want to spend for their home,” Adams says.
“Sometimes they’ll say $250,000, but when I ask them if they have a monthly payment in mind they’ll say $2,000. A lot of new buyers don’t realize that they might be able to buy a $330,000 home for that amount.”
Figure Out How Much You Can Spend
While you’ll need a loan preapproval from a lender when it’s time to seriously shop for a home, you should develop your own budget and an idea of what you can spend on a home before you begin looking at homes. Some buyers opt to look at new home communities first so they can get an idea of what’s available at different prices, but the danger of doing that is the potential to fall in love with a community or a home design that’s far out of your financial reach. So, what steps should you take to determine how much you can spend on buying a new home?
Start your financial planning at the same time as you compile your wish list by requesting your free credit report from www.annualcreditreport.com. You should get your credit report from all three credit bureaus (Experian, Equifax, and TransUnion) at the same time and check for errors. For a small fee you can also see your credit score. A 2013 Federal Trade Commission report found that 20 percent of all credit reports contain mistakes. Correcting an error can take months and impact your ability to qualify for a mortgage loan, so taking this step first can save you time and frustration later in the process of buying a new home.
Second, identify your source of cash for your new home. Many move-up buyers sell their current home to generate down payment funds. You can get a general idea of how much equity you’ll have to use for your next home purchase by estimating your current home value on recent local sales, estimating that you’ll need to pay 6 percent to 10 percent of the sales price for closing costs and commissions and then subtracting your current mortgage balance.
For example, if the estimated value of your current home is $400,000, you’ll pay a maximum of about $40,000 in commissions and closing costs for a remainder of $360,000. If your mortgage payoff is $200,000 you’ll have $160,000 to use towards your new home, moving costs and for cash reserves.
In addition to, or in lieu of selling your prior home, you may have savings and investments you plan to use for a down payment. Many first-time buyers also rely on gifts from parents or grandparents. Steven Cohen, vice president of First Place Bank in Rockville, Maryland, says prospective buyers should make sure they clearly understand how much money a relative intends to give them for a home.
“I’ve worked with people who assumed their parents were giving them $20,000 when the parents intended to give them $2,500”, he says.
Next, estimate what your monthly payments would be for particular loan amounts. Most builders and lenders have online calculators that you can use to plug in different numbers. The rule of thumb used to be that you could spend 2.5 times your salary on a home purchase. The reality today is that mortgage lending standards are much more complex and depend on your income, assets, credit profile, and other debt. The majority of loan programs require borrowers to have a maximum debt-to-income ratio of 43 percent, so one way to estimate the maximum you can borrow is to calculate your own ratio based on your monthly gross income and the minimum payments on all recurring debt. Many financial planners recommend a maximum housing payment of 28 percent to 30 percent of your gross income.
A lender will preapprove you for a mortgage based on your documented debt-to-income ratio and credit, but it’s extremely important for you to decide for yourself your comfort level with a particular monthly payment. A mortgage lender won’t know about some of the expenses that you have, such as maintaining a high level of contributions to a college savings fund or a retirement account or even some discretionary spending on things that matter to you, such as playing golf every weekend or taking frequent ski vacations. If you don’t already have a detailed monthly budget, you should at least sketch out a general budget so you can see how a new mortgage payment will fit into your financial plans.
The emphasis here is on a monthly payment because while buyers often search for a home in a particular price range (such as $250,000 to $275,000), spending as much as $10,000 above your maximum price may not have as much impact as you think. For example, a $275,000, thirty-year fixed rate loan at an interest rate of 5 percent will have a monthly principal and interest payment of $1,468. A loan for $285,000 with the same terms will have a monthly principal and interest payment of $1,521, just $53 more per month and only $1.70 more per day.
“A lender can tell you how much you qualify for, but they can also work with you to match a loan amount to the monthly payment you want to make,” says Mike Kelly, senior vice president for Prospect Mortgage, one of the nation’s largest independent mortgage lenders.
You can use the estimated principal and interest in a mortgage calculator to generate an idea of how much you can borrow at different mortgage rates and loan terms and with various sizes of down payments.
If you make a down payment of less than 20 percent, you’ll need to pay mortgage insurance, so you should factor that into your monthly payment. Many mortgage calculators offer the option of showing your payment with an estimated mortgage insurance payment.
Bring in the Professionals
While it’s great to do a lot of your own research online and in person to get a sense of what’s available where you want to live, at some point you’ll want to turn to professional experts to help you move forward on your plans. The professional expertise you need depends on your own level of experience and confidence as a buyer of a newly built home.
For example, if you plan to pay cash, you don’t need to consult a lender.
If you have a clearly defined idea of your dream home and already know the work of several builders in your area, you won’t necessarily need to hire a Realtor.
However, if you need to finance your purchase or want outside expertise to guide you in your decisions, then you may want to interview several lenders and Realtors to make an informed choice for your support team.
This article is the first part of a three-part series discussing how to shop for your new home. For part two, click here. For part three, click here.
For more expert advice on buying and building a home, check out the free eBook download of New Home 101: Your Guide to Buying and Building a New Home at NewHomeSource.com.