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By Charles J. Kovaleski
(Click here to download as a PDF)
If you’re a first-time homebuyer, the housing market isn’t all bad.
Those purchasers– defined as buyers who will reside in the property and have had no ownership interest in residential property for three years preceding the purchase date – account for a larger part of transactions in 2008 compared to the previous two years, according to a recent survey conducted for the National Association of Realtors.
First-time buyers account for more than two of every five purchases (41 percent) compared to 39 percent last year and 36 percent in 2006.
“Although modest, this is a meaningful gain for the 12-month period ending at the close of June, and more recent independent data show a stronger uptrend in first-time buyers who are helping to reduce excess inventory,” said Lawrence Yun, chief economist for the National Association of Realtors.
Buyers increasingly are turning to non-traditional methods of purchasing, including foreclosures and short sales. That elevates the need to consult a real estate attorney to help navigate potential legal pitfalls that could impact sellers and buyers.
Only 1 percent of home buyers purchased a home in foreclosure in 2007. That number jumped to 6 percent this year. A larger number – 38 percent of those who responded to the survey – said they considered buying foreclosed property but couldn’t find the right home.
Falling home prices throughout Florida have put first-time buyers in strong negotiating positions. Mortgage rates, while not at all-time lows, remain competitively priced, even if requirements are stricter than in previous years and their track has been exceedingly erratic over the past several weeks.
Increased activity by first-time home buyers encourage real estate professionals that this segment of purchasers ultimately may pull with them the next group of consumers – cash buyers and those looking for higher-end homes.
“First-time buyers are much more flexible in entering the market because they aren’t concerned about selling an existing home,” Yun said. “Given low home prices, plentiful supply and affordable interest rates, it’s been an optimal time for entry-level buyers with a long-term view.”
While there are many factors that could pull a first-time buyer into the market, the consumer should pay attention to the basics, especially during this volatile economic period. Here are some tips for first-time home buyers.
Evaluate selling prices: Though prices in some areas may have declined 40 percent or more, others have fallen much less or remained stable. Know the selling prices of comparable homes in the areas that you’re considering. Consumers can ask their real estate agents for a market comparison. Do-it-yourselfers also can search MLS listings online and visit sites like Zillow and Homegain to gain an initial idea of selling prices.
Understand what you can afford: The first step in house-hunting has nothing to do with looking at neighborhoods. Instead, first-time buyers first should examine their finances. Knowing what you can afford will save not only money but also time. The savvy consumer won’t waste days or weeks looking at homes out of their price range. Buying within your means also lessens the potential of foreclosure later and improves chances of qualifying with a lender. Start by figuring out how much of your monthly budget can be applied to a mortgage payment. A conventional rule of thumb is that annual housing costs – mortgage payment, utilities, repairs, insurance, property taxes and other associated bills – should not exceed 30 percent of your income. For instance, a household with annual income of $50,000 should plan spending $15,000 a year – or about $1,250 a month – on housing.
Pre-qualify for a mortgage: Lenders will run a credit check to see how you’ve handled previous loans. Pull your FICO score before applying to know what will need to be fixed when a lender reviews your report. Your potential home purchase will close much more quickly if you are pre-approved, which means you’ve submitted nearly all the documents needed for a lender to approve you application, including pay stubs, tax forms, W-2s and current debt information. Depending on the program, many lenders now are looking to substantiate that borrowers can provide a 20 percent down payment - $20,000 for every $100,000 in purchase price. Consumers also will need to decide what kind of mortgage – fixed-rate mortgage (FRM) or adjustable-rate mortgage (ARM) – is best for their financial situation. Rates for FRMs remain constant over the life of the loan. Rates for many ARMs remain fixed for a certain amount of time but change depending on the financial index they’re tied to.
Evaluate tax incentives: A recent provision passed by Congress provides up to a $7,500 tax credit to first-time homebuyers who purchase between April 9, 2008 and July 1, 2009. The “credit” – which consumers must pay back in $500 increments on their annual taxes for 15 years – is phased out depending on income. Charles J. Kovaleski is president of Attorneys’ Title Insurance Fund, Inc., (The Fund) the leading title insurer in Florida and the sixth largest title insurance company in the country. Acknowledged as the Florida residential real estate expert, The Fund has been in business for more than 50 years and supports a network of more than 6,000 attorney agents statewide who practice real estate law. The Fund, based in Orlando, Fla., underwrites more than 300,000 title insurance policies for owners and lenders in Florida every year. For more information, visit myrealestatestory.com.
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