by Sean Hess (www.SeanHess.com), broker and manager for St. Augustine Team Realty (www.StAugustineTeamRealty.com)
So you’re a first time buyer and you want to take advantage of the $8,000 tax credit which expires on April 30. Where do you go from here?
St. Augustine Team Realty will handle the helping-you-find-the-real-estate-in-St.-Augustine part (that’s a no brainer). But first we’ve got to get you qualified for a mortgage.
Get ready for paperwork. Lots and lots of paperwork. In most cases you’ll need your last two years bank statements, W-2′s, tax statements, and pay stubs. You have any stocks, bonds or other assets? Have a list of those organized as well, because they will help your net worth.
The next thing to think about is your credit score. The FICO score, which ranges from 300 to 850, is the credit rating lenders use to help determine if you get a home today (or not), and what rate you’ll have to pay (if you’re a good risk versus a marginal risk).
The FICO score is based on the information contained in your credit report, and you can get your credit report through Equifax. If there’s anything that reflects badly on your credit report you may have to get it cleared before a lender will lend you money for a home.
At this point we’ve got the paperwork together and credit looks good. Now you need a down payment: a minimum of 3.5% for an FHA loan (10% if your FICO is below 580), and probably a minimum of 10% on a conventional loan. If you’re going VA you may not need a down payment at all (we did a post on the VA loan back in November which you can access here).
If you’re going FHA for example, and the house you plan to buy is $150,000, you will need to put at least $5250 down. This can go towards your closing costs (which will run $4000-$5000 depending on your loan and the lender).
Sometimes you can get a seller to contribute to your closing costs. If you pay full price for your $150,000 house, you may get the seller to contribute up to 3% ($4500) for your costs, leaving you $750 to contribute at closing.
Just on a procedural note, if you only have $750 in the bank, you probably shouldn’t be buying a house, even if you have great income/credit and can get the loan. The market is full of foreclosures from those type loans. If you need to make an expensive repair, if you lose your job and there’s no savings to fall back on you too will join the ranks of the foreclosed, with the resulting deficiency judgement and credit that will be bad until the end of time. Take some time and squirrel away a down payment and some savings.
Also, if you put less than 20% down you will need to pay for something called mortgage insurance, which will add $50-$100 to your monthly payment.
Now we have to find a house and have it under contract by April 30 to take advantage of the $8000 tax credit (we can close on it anytime up to June 30). You have to take this credit off on your 2009 taxes (2009 amended tax form if you’ve already filed) or your 2010 taxes. You do not get it at closing, you cannot use it as part of your down payment.
First time buyers love to lowball their first offer and they always lose the home. You will too. Let’s just get it over quickly and move on to the next home where you will offer a more reasonable price. A note: you can’t lowball if you need closing costs help from the seller, and you can’t lowball on a VA if the seller will need to make repairs. For those think: “Full Price.”
Now we’ve found the second house, you’ve made a reasoable offer. The sellers have accepted. Congratulations!