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How to Buy Your First Home in Huntsville, Alabama & Build Wealth
Buying your first home in Huntsville, Alabama, is a great way to build wealth. According to the US Census, homeowners have an average of 40 times the net worth of renters. That's $255,000 versus only $6,300 for renters. Let's jump into the six steps on how to buy your first home in Huntsville, Alabama.
1. Determine Your Budget
The first step is to determine your budget. A lot of that is going to be dependent upon you, it's going to be dependent on your credit, your income, and your overall debt level.
A good rule of thumb is a 28/36 rule. Basically, your house payment should not be greater than 28% of your gross monthly income. The 36 is if you add your house debt and any other debt like your credit card debt or student loan debt, that ratio should not be more than 36% of your monthly income.
2. Get Pre-Approved
The second step is to get pre-approved. You're going to want to have that pre-approval letter because sellers are going to take you more seriously and oftentimes it'll help you win or even be able to get into the negotiation game with the seller so it's important to get pre-approved and know what you qualify for. Also, if something comes up on your credit, it's important to be able to address that upfront versus on the back end.
We recommend looking at a local mortgage broker and we like local mortgage brokers for a reason. If you use a local mortgage broker versus a 1-800 number, if they don't treat you right we can go look them in the eye, we can go knock on their door, and make sure that they treat you right and provide you with that five-star service. We also like working with local mortgage brokers that we do a lot of business with, and the reason for that is accountability. They know that if they don't treat you right, they're not going to get that next client to serve from us.
When you talk to that local mortgage broker, you’ll find there are a lot of favorable financing options out there, especially for first-time homebuyers. There’s FHA financing which is 3.5% down and there are VA loans out there that are 100% financing if you're a military veteran. There are also USDA loans which are 100% financing and you'd be surprised by some of the areas that qualify for what is considered a rural development loan, but when you go that route, you can get 100% financing and a 0% down payment out of your pocket.
3. Budget for Closing Costs
The next step is to determine a plan for your closing cost. On average your closing costs are between 2% to 4% of the overall purchase price of your home.
A great benefit of buying in a buyer's market or a market where they're slightly more inventory is that you can sometimes get the seller to pay for either a portion or all of your closing cost. So if you're doing a USDA loan or a VA loan that's 100% financing, sometimes you can buy a home with zero money out of pocket.
Another great thing to do if you're concerned about closing costs or budgeting for closing costs is to look at shopping with builders. We can help navigate some of the builders that pay for either a portion or all of your closing costs when you buy that new home.
4. Plan for Upfront & Out-Of-Pocket Expenses
The next thing is to budget and plan for your upfront out-of-pocket expenses. There are several things that you're going to need to plan for when purchasing your first home and the first one is earnest money. Earnest money shows the seller that you are committed and serious about purchasing a home and the amount varies. We see anywhere between $500 to even up to $50,000 on a purchase but typically on your first home, you're going to see $500, $1,000, maybe $2,000 on that first purchase on average.
The second thing is the appraisal, this is one of your closing cost items. An appraisal is something that helps protect you and the bank so you don’t overpay for your home. That's the fee that you need to pay upfront and is typically going to range from $450 to $600 or so. That is paid out of pocket and upfront. However, if the seller pays your closing costs and you write the contract correctly, you can get that money reimbursed to you at closing.
The third thing is your home inspection and termite. Now that's something that you don't want to have the seller pay for because you want the home inspector looking out for your best interest. You're going to want to hire a home inspector and you’re also going to want to have a termite inspection because termites are bad in this area as well.
The fourth thing is your moving expenses and your utility hookups.
5. Select a Real Estate Agent
You've got your budget, you're pre-approved, you know the area that you want to purchase in, and it's now time to select a real estate agent. We're in this review economy so one of the best ways to find a great agent is to check out reviews. Don't take a real estate agent's word for it, check out their reviews to see what past clients have said about working with them.
If you look at our reviews, you’ll find that Matt Curtis Real Estate has thousands of five-star reviews and we're ready to provide you with five-star service in buying your first home.
It's important also to find an agent that's going to sit down with you and provide you with good advice to help navigate you through the purchase of your first home.
6. Paperwork
You’ve done all of the above steps and you’ve found your dream home, now your next step is your real estate agent is going to help you draft the paperwork to make that home yours. Some of the things that you think about in drafting that paperwork:
First is earnest money, which is a deposit that goes towards the purchase of the home and that will get credited back to you at the closing of that home.
Second is your purchase price, how much are you going to offer for that home? Your real estate agent is going to help provide what's called a CMA, a competitive market analysis, to make sure you're paying the right amount and not paying too much for that home.
Third is your closing costs. That is typically between 2% to 4% of the overall purchase price and you should now know what your closing costs are by working with that local lender. Your real estate agent is going to help estimate that but really what matters is the estimate that your lender gives you for the purchase of the home and that's your closing cost. You want to also negotiate or factor in, who’s going to pay that. Is it going to be the buyer or is that going to be the seller paying for closing costs at closing?
Fourth is the inspections. How long do you need to do the inspections? Oftentimes, we see anywhere between 5 to 15 working days which is 1 to 3 weeks. How much time are you going to give yourself and your home inspector to go through those home inspections?
The next thing to be thinking about is your closing date. Talk to your local lender to find out how long it takes to close your loan. For example, a USDA loan may take longer than a conventional loan. How long do you need to close the loan and how much time do you need personally to prepare your finances as well? What's typical is anywhere between about 30 to 60 days on average.
How to Build Wealth By Owning a Home
There are four key ways to build wealth through owning a home.
Appreciation
The first one is the biggest one and is through home appreciation or what's really inflation. We're going to continue to have inflation in this country because the government is going to continue to print money. They have to continue to print money because of the massive debt load that they have. They've got to reduce the amount of debt that they have by having more currency out there in the marketplace.
When you own hard assets such as homes, that's going to increase your net worth and it's going to increase your net worth even more than a lot of other investment vehicles because when you purchase a home, you can buy that through leverage.
If you're putting 5% down or 10% down, that money is being leveraged. You're not only getting the value of the appreciation of your 5% or 10% investment, but you're actually getting the appreciation of the entire investment which multiplies and compounds your investment to a very high level.
Principal Reduction
The second way is through principal reduction. When you have a 30-year or 15-year mortgage, a percentage of that payment goes towards principal reduction. That principal reduction portion grows over time as you continue to make payments which becomes equity that you're able to tap into when you sell your home.
Tax Savings
The third one is tax savings. The government is your business partner when it comes to buying your first home or even buying a rental property. The reason they do that is, one, investors are better at providing housing than the government is, and the second is they need first-time homebuyers. They need homebuyers taking on mortgage debt to be able to provide and fund the government debt that they have so they're your business partner providing tax savings and tax advantages for you to buy your first home and buy your rental properties as well.
Fixed Rate Mortgage
The fourth one is the fixed rate mortgage. This last one is really makes us the envy of the world with our 30-year and 15-year fixed mortgage rate products. Your debt simply becomes worth less over time as inflation rates go up.
How to Access Your Home Equity
I know what you're thinking, you’ve got all this home equity now since on average your home equity is $255,000 for a homeowner versus only $6,300 for a renter. How do you access that equity? Do you have to sell your home to be able to access it and buy another home? Of course, you can sell your home to access it. Or you can do what's called a home equity line of credit or do a cash-out refinance to pull out that money to be able to invest in other real estate properties or even go on a vacation.
If you're ready to start building your net worth by buying your first home send us an email at moving@mattcurtisrealestate.com or contact us here and we'll make sure we provide you with five-star service.
Posted by Matt Curtis on
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