BUYING YOUR FIRST HOME
So you’re getting ready to buy a home of your own! That’s great news, because home ownership is one of the best ways of building long-term financial security. As you make your monthly mortgage payment, more and more of your home will belong to you.
There’s a lot to know when buying a home, and Indiana Members Credit Union created this guide to provide most of the general information you’ll need.
Owning a home offers many advantages. As a homeowner, you’ll be able to make the decisions about your home. Do you want to paint a room? You won’t have to get anyone’s permission. Do you plan to have pets? Nobody will charge you more money. A home is yours.
But the biggest advantage of owning a home is the ability to build equity. Each time you make a payment on your mortgage, a portion of the payment increases the part of your home you own. That’s called the equity. If you take the market value of your home (what it would sell for) and subtract your mortgage balance, the number that results is the equity you have in the home. Over time, that equity can become substantial, and it can help you become more financially stable.
ARE YOU READY TO BE A HOMEOWNER?
As you determine whether you should become a homeowner, the first question to ask yourself is if you can afford a home. Many people look at the expected mortgage payment, and if they can afford that, they assume they can afford the home. But your mortgage is only part of what you’ll have to pay for. In addition, you’ll have other home-related expenses to consider in your budgeting, such as property taxes, and homeowner’s insurance (which your mortgage lender will require). You will also have to pay for electricity, natural gas, water, sewer, trash pickup, and if you live in some neighborhoods, homeowner’s association dues. You’ll also want to prepare for costs of maintenance and repairs. Maintenance costs aren’t always predictable, and they can be sizable so you’ll want to budget for an emergency situation such as a furnace going out. You will also want to consider paying for maintenance of the property, from mowing the lawn to shoveling snow.
That’s why it’s a good idea to find out how much home you can comfortably afford, and not spend every penny. It’s better to be conservative, and make sure your mortgage doesn’t take all your money.
WHAT CAN YOU AFFORD?
Very few people have enough cash sitting around to pay for a home, so they need to finance the purchase through a special kind of loan called a mortgage. When Indiana Members Credit Union and other lenders make a mortgage, we want to be sure that the homeowner will be able to pay it back and also that you are paying a fair price for the home.
hen you apply for a mortgage, we ask you for all sorts of information about your finances including how much money you make, how much you have in the bank, what your monthly bills are, and so forth. We then compare what you make each month to what you spend. We also take a close look at your credit reports to see how you’ve handled credit in the past. We have an expert, an underwriter, analyze the information you provide to determine if you can afford the home. If you’ve done a good job of managing credit and paying your bills promptly, we’ll be more confident that you can handle a mortgage payment.
A SMART APPROACH: PRE-APPROVAL
We recommend starting with IMCU’s free mortgage pre-approval process. Before you start looking at houses, you can apply for an IMCU mortgage. We’ll determine how large a loan you can comfortably afford, and we’ll tell you what that means in terms of house prices. That way, you can look at homes in that price range, knowing that you will be able to receive a mortgage. Having pre-approval can also help you when negotiating a purchase, especially if others are trying to buy the same house. Because the owner knows you already have a pre-approved mortgage, there’s less risk in selling to you, and the process can move more quickly.
To apply for IMCU pre-approval, visit the Mortgage Loan page on our website, which explains the information you’ll need.
HOW DO YOU APPLY FOR A MORTGAGE?
Indiana Members Credit Union makes it easy to apply for mortgages by giving you options. You can apply by person in any branch, over the phone, by email, or online — whichever you prefer!
The process is easier than you might expect. For example, applying online typically takes about 20 minutes. Whichever way you apply, you’ll answer a variety of questions about your financial situation and the home you’re buying. You’ll be asked to give IMCU permission to review your credit report and tax information. You’ll also be asked to supply proof of your income and assets for the last two years. This may include pay stubs from your job, copies of your employer’s W-2 statements, past tax returns, and copies of bank statements. Your mortgage loan officer will walk you through the process step by step and if we need additional information or verification, we’ll contact you.
DO YOU NEED A REAL ESTATE AGENT?
With online real estate sites, you can quickly search through all the available homes in your area and pick out the ones that look most promising. So why would you need to work with a real estate agent?
Buying a home is a more complicated process than most first-time homebuyers realize. There’s a lot more to it than finding homes to look at. You have to be able to negotiate a fair and realistic price. There’s also a lot of paperwork and legal information that has to be considered. Working with an agent puts an expert on your side. Agents know whether homes are priced properly, and they can handle the negotiations and other details on your behalf.
More importantly, agents know a lot about choosing the right home. They know about communities, schools, parks, and other resources. They can look through a house and spot potential areas of trouble, or issues that would need to be addressed. They can also bring insight that a first-time buyer might consider. For example, if you’re planning to have children in a couple years, they can tell you whether a house you’re considering would be a good one for kids, or if you’d have to invest in a lot of changes.
HOW DO I FIND THE RIGHT AGENT?
The good news is, because you’re an IMCU member, there’s a great option available to you. Through our Home Advantage program, we can connect you with approved REALTORS® from top local agencies. We know that these agents treat our members
well, so we can recommend them with confidence. Plus, you’ll pay less in closing costs through this program . To learn more about Home Advantage, contact your Branch Manager or IMCU Mortgage Services at 317.817.9700 or 800.869.1877.
HOW DO THEY GET PAID?
Usually, buyers don’t pay an agent directly. In most cases, the agents for the buyer and the seller receive a commission from the sales price of the home. That commission is paid by the seller of the home, and it’s typically about 6 percent. The two agents divide the commission equally. So if you’re buying a $200,000 home, the seller will pay the agents a total of $12,000 in commission. Each agent receives half of that, or $6,000.
While that may seem like a lot of money, remember that the agents have to pay their business costs from those fees, and it may take many weeks or months to make a sale.
MORTGAGES AND OTHER HOME BUYING TERMS
When you buy a home for the first time, you’ll hear all sorts of unfamiliar words and terms. Real estate and home financing have vocabularies all their own, and those words may seem intimidating. Most are just old-fashioned words for describing very simple concepts. We’ll explore some of the most common here.
WHAT IS A MORTGAGE?
Simply put, a mortgage is a loan that’s used to finance the purchase of a house or other type of property. Mortgages are usually long-term loans that allow buyers to take as much as 30 years to pay them off. One thing that makes mortgages different from any other kinds of credit is that they are what are known as “secured” loans. That means the loan is backed by the property itself. If you fail to make your mortgage payments, the lender can use the courts to seize and sell your home to satisfy the loan.
There are two primary types of mortgage loans:
FIXED-RATE LOANS have an interest rate that stays the same throughout the term (length) of the loan. That means the monthly payment remains fairly flat from beginning to end, making it more predictable. Even if market interest rates climb years after you receive your mortgage, your rate won’t change. IMCU offers fixed-rate mortgages in terms of 10, 15, 20, and 30 years.
ADJUSTABLE-RATE LOANS have interest rates that can increase or decrease based on changes in the market. The rates are usually tied to a major financial index, so if that index increases, so will the rate. The advantage of adjustable-rate loans is that they usually have lower initial rates, so they’re easier for many first-time buyers to afford. IMCU’s adjustable-rate mortgages have 15- and 30-year terms.
There are three other types of mortgage loans worth knowing about:
CONSTRUCTION LOANS are a special type of financing that involves two steps for people who are building new homes. First, a short-term loan covers the cost of constructing the home. When it’s complete, that initial loan is refinanced with a traditional mortgage.
GOVERNMENT LOANS, including FHA and VA loans, allow qualified first-time buyers to buy homes with lower down payments and monthly payments that reflect their income.
A HOME EQUITY LINE OF CREDIT is a special kind of loan that lets you borrow against the equity you’ve built up in your home. You can borrow up to your established limit, anytime, for any purpose and at your convenience. Best of all, there are no closing costs, no annual maintenance fees, and no prepayment penalties.
Which type of loan is right for you? The best way to find out is to ask one of IMCU’s mortgage professionals, or call our Mortgage Services at 317.817.9700 or 800.869.1877.
DOWN PAYMENTS AND MONTHLY PAYMENTS
There are two types of payments that are associated with buying a house: down payments and mortgage payments.
When you finance a home purchase, the lender wants to be sure that you have the financial strength to afford it. That’s why (in most cases), the lender is only willing to finance a portion of the purchase price, typically between 80 and 90 percent. As the buyer, you’re expected to come up with the remainder in cash, and that is what’s known as a down payment.T
With most traditional loans, the minimum down payment is 20 percent of the home’s selling price. So if you buy a $200,000 home, you would be expected to come up with a $40,000 down payment, and the lender would provide a mortgage for the remaining $160,000.
Some loan programs for first-time buyers require smaller down payments. In any case, the lender may ask you to identify the source of the down payment, because they want to be sure that you’re not getting the money from a friend or family member, or taking out another loan.
Most mortgage loans require you to pay them back once a month. Typically, the monthly payment includes four components:
- Principal, which is a portion of the loan amount
- Interest, the cost of borrowing
- Taxes, to be escrowed to pay your property taxes when due
- Insurance, also to be escrowed
A sample loan payment might include $732 for principal, $146 for interest, $150 for taxes, and $104 for insurance. Those four amounts would be added together to create a monthly payment of $1,132. The portion for taxes and insurance is stored in what’s known as an escrow account, so the lender will have enough to pay those amounts when they come due.
These are words and phrases you may encounter as you go through the homebuying process.
How house payments are divided between the interest and the principal.
ANNUAL PERCENTAGE RATE (APR)
The combination of the interest rate and any additional finance charges.
An independent market estimate of what a home is worth.
The value of the home for property tax purposes.
A meeting where the transfer of ownership takes place. The buyers, sellers, real estate agents, and a neutral third party review and sign documents for the sale. Payment is made, and the sellers turn over the keys.
Additional costs buyers pay that aren’t included in the purchase price, such as an appraisal fee.
Legal rules established by some communities or neighborhoods about property mainte- nance and other issues, such as whether cars can be parked on the street.
A legal document that specifies who owns a property.
Your ownership in the home, computed by subtracting the current mortgage balance from the home’s market value.
The account the lender uses to pay homeowners’ insurance and property taxes for the homeowner. Part of each mortgage payment goes to this account.
If your home is located in an area that experiences flooding, you may be required to buy this insurance coverage, because regular homeowner’s insurance doesn’t cover flood damage.
The percentage of a home’s value that a lender will finance through a mortgage
Buyers who have a high LTV and make a small down payment may be required to buy insurance that will cover the mortgage if they don’t make payments.
Fees paid to the lender for a mortgage or to qualify for a lower interest rate. One point is the same as one percent of the loan.
The loan amount before interest and fees.
PITI (PRINCIPAL, INTEREST, TAXES, INSURANCE)
The four elements of a monthly mortgage payment.
Insurance that guarantees that the property’s ownership information is accurate.
A review of county records to ensure that ownership information is correct
OTHER THINGS YOU’LL WANT TO KNOW
PROTECTING YOUR INVESTMENT
A home is one of the biggest investments you’ll ever make, so you want to approach the purchase carefully. Fortunately, there are ways you can protect yourself and reduce the risk, including having a professional home inspection and buying a home warranty.
A HOME INSPECTION is exactly what the name suggests. After your purchase offer has been accepted and before you close on the sale, an independent inspection professional will spend several hours going through every part of the home, inside and outside, to detect potential problems and call attention to issues you may want to address. The inspector will test all of the home’s major systems, including heating, cooling, water, sewer, and electrical, and look for signs of potentially dangerous conditions such as mold or termite damage. Often, the inspector will also give you a rough estimate of what it would cost to repair the condition.
Home buying contracts often include provisions through which the seller must either make repairs for issues found by the inspector, or lower the sales price so you can make the repairs after you buy.
A HOME WARRANTY is a contract, usually renewable annually, that covers the cost of repairing or replacing key components of your home, such as appliances, your furnace, plumbing, and electrical components. A warranty may cost you a few hundred dollars, but that can be a small cost when compared to the thousands of dollars you might spend to replace your furnace and air conditioner.
Your agent should be able to recommend a reputable home warranty company. In many cases, the seller may be willing to pay the cost of a warranty for the first year or two as a way of reassuring the buyer that there won’t be any major problems.
MINIMIZE YOUR TAXES
As a homeowner, you’ll have to pay property taxes, which help to fund local schools, libraries, parks, and government agencies such as the fire and police departments. In Indiana, property tax payments are made twice a year, but your lender will likely handle those payments for you through your escrow account.
The amount you’ll pay for property taxes depends upon the assessed value of your home. That’s what your County Assessor decides your home should be worth (and if you disagree with the Assessor’s decision, you can appeal).
To ensure that homeowners aren’t overburdened by property taxes, the state of Indiana has created a variety of exemptions and deductions that you can use to lower the assessed value of your home. Among the largest are the Homestead Deduction and the Mortgage Deduction.
If your home will be your primary place of residence, you qualify for the Homestead Deduction, which reduces the assessed value of your home by 60 percent, up to a maximum of $45,000. In addition, Indiana currently allows a Supplemental Homestead Deduction that further reduces the assessed valuation, depending upon how much your home is worth. You can file the application for the deduction at the County Auditor’s office. In addition, most counties will allow you to file it online.
Since you will have a mortgage on your house, you qualify for a Mortgage Deduction. For most Indiana homeowners, that deduction will reduce the assessed value of your home by $3,000. You can file the application for the deduction at the County Auditor’s office or online.
OTHER DEDUCTIONS & EXEMPTIONS
Other deductions and exemptions may apply if, for example, you are legally disabled, over age 65, a veteran, or use certain types of renewable energy. Your real estate agent or County Auditor should be able to provide additional information about deductions and exemptions that are available to you.
If you need more information about any aspect of the homebuying process, or about obtaining a mortgage, there are plenty of resources that can help. We’ve included several here.
Find a realtor, search for homes and get pre-approved with IMCU
DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Practical guidance from a federal agency
Information from the largest organization of real estate agents
INDIANAPOLIS NEIGHBORHOOD HOUSING PARTNERSHIP
A local resource geared to first-time homebuyers
Wondering what homes you’ve seen are worth?
Find the right locations for your preferences and tastes
Take a photo of a house you like, and up pops all sorts of details about it
Information about homes for sale, neighborhoods, finances, and more
Instant access to home values across town and the nation
The First-Time Homeowner’s Handbook: A Complete Guide and Workbook for the First-Time Home Buyer by Joe Adamaitis
Home Buying For Dummies by Eric Tyson and Ray Brown
The Home Owner’s Journal by Colleen Jenkins
100 Questions Every First-Time Home Buyer Should Ask by Ilyce R. Glink