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Cover story: Realtors’ advice for first-time homebuyers
Question of the Day
Rising rents and rock-bottom mortgage rates have combined in the Washington area to push some young renters into considering homeownership. In some cases, these prospective buyers haven't even thought about owning a home -- except as a future dream -- until a Realtor points out that buying often will cost the same as or less than renting.
"A lot of young renters assume they can't afford to buy a home," said Jules Cole, a Realtor with Re/Max Realty Group in Gaithersburg. "Recently a young couple contacted me to ask if they could rent one of my listings. I put them in touch with a lender who specializes in working with first-time buyers to find out if they could qualify for a mortgage and for some special programs that are available for buyers."
Ms. Cole pointed out that many financial institutions have loan programs that can provide down-payment assistance. State and local government programs also are available. She said that even though those programs are limited to buyers within a certain income range, the upper income limits are relatively high.
Realtors suggest prospective buyers begin by learning about their financing options for a home, particularly if they have not been preparing for a home purchase.
"We always start with the money," said Lindsay Dreyer, broker-owner of City Chic Real Estate in the District. "It's a myth that you need a 20 percent down payment. We work with lenders who have low-down-payment options that aren't FHA-insured loans, so they don't have high mortgage insurance premiums. Many lenders now offer conventional loans with a 5 percent down payment."
Ms. Dreyer said many young buyers receive their down-payment funds from their parents as a gift.
"Sometimes the parents will cut an investment deal with their kids and ask for a certain percentage of the profit when the home sells in exchange for the down-payment gift," Ms. Dreyer said.
Buyers also need cash for closing costs, which Brooke Schara, a Realtor with Arbour Realty in Arlington, said costs between 3 percent and 3.5 percent of the sales price.
"Even though we're now in more of a seller's market, many sellers will agree to pay closing costs," Ms. Schara said. "Sellers are mostly concerned about the net profit, so one way to handle this is to offer $210,000 when they are asking $200,000 and then ask the sellers to pay the closing costs."
Ms. Schara said she provides a broad overview of the home-buying process at her initial meeting with prospective buyers and gives them a mortgage guide from the U.S. Department of Housing and Urban Development that explains how to compare loan products and what questions buyers should ask a lender.
"I never take buyers out looking at homes until they have a lender preapproval letter because otherwise they not only don't know if they can qualify for a loan, but they also don't know their price range," Ms. Cole said.
While financing usually is the biggest obstacle for prospective buyers, particularly those who have been working for just a few years since graduating from college, these novice buyers also need guidance in determining what to buy.
"I try to get an idea of what someone's five-year plan is," Ms. Dreyer said. "If they plan to stay in D.C., in this property for at least five years, then it probably makes sense to buy. If not, I need to know what their exit strategy will be. One option that works well for a lot of buyers is to keep their first home as an investment property for rental income."
Ms. Cole said buyers who sell their home within two or three years are not likely to get the money back on their investment.
"While no one knows exactly what's happening with the housing market, you'll be in better shape if you keep your home for five or six years or longer," Ms. Cole said.
Ms. Schara said extremely low interest rates are making homeownership more affordable than renting, particularly when factoring in the mortgage-interest deduction homeowners can take on their income taxes.
"Buyers need to think of this as a long-term investment, though, because you won't see any huge profit unless you hold onto the home for five to 10 years or longer," she said. "Most of the young buyers I see are buying condos, and they tend to stay in them for three to five years and then move because of a job or because they are having children.
"In this area, because so many people come and go, a condo can be a good investment because you'll always be able to find a renter."
Once the financing and the long-range plan are in place, buyers need to decide what to buy and where.
"Most of the buyers I work with know where they want to live, but then they have to reconcile their budget with their neighborhood," Ms. Dreyer said. "Most people tend to compromise on size rather than the neighborhood."
Ms. Dreyer discusses priorities with her buyers in the context of their budget to determine what matters most to them. She covers topics such as whether they want to be close to public transportation, whether they need parking or whether they want to have a pet, because many condo buildings don't allow them.
"One of the biggest challenges is that most people want to buy right next to a Metro station, but those homes are more expensive," Ms. Schara said. "I ask them if it's worth it to pay $700 more every month on their mortgage payment to live on top of a Metro station or to pay to take a cab to Metro occasionally and pay that much less on their mortgage."
Some first-time buyers assume they should buy a fixer-upper because it will be more affordable, but Ms. Schara said inexperienced homeowners are better off if they stick to a place that just needs new paint or at least has a bathroom they can live with for a few years.
"I always have my clients have a home inspection so they really understand not only the condition of the home they are buying, but also the life expectancy for their appliances," Ms. Cole said. "They get a book at the end of the home inspection with home maintenance tips, too."
Ms. Dreyer suggests that her buyers get a home warranty for the first year to help them make the transition from renter to homeowner.
Preparing buyers for homeownership includes establishing their price range, firming up their financing, helping them set priorities and getting them ready for home maintenance tasks. Today's market requires a little extra emotional preparation in case the buyers face competition.
"Right now, we're in a sellers' market, and there's very low inventory," Ms. Dreyer said. "Buyers need to have their financing in place, know what they want and be ready to act quickly because they may be competing with other buyers for the same property."
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