It's a big year for Ashley Weller and Anthony Laubenthal. Like millions of other Americans, the 24-year-olds just bought their first home.
The high school sweethearts were engaged last July and hadn't given much thought to buying. Then Weller's dad mentioned the $8,000 tax credit available to first-time homebuyers.
"We thought we could have more space, invest some sweat equity; not just pay somebody else and not get anything out of it," she said.
The couple, who work at Scheels, a regional sporting goods store in Des Moines, understood little about the home-buying process. Over the next couple of months, they learned about mortgages and not to jump too fast to buy the first house they liked. It paid off. In March they moved into a four-bedroom home with a backyard and a deck in Norwalk, a small suburb south of Des Moines.
A combination of government incentives and near record-low mortgage rates has prompted legions of first-time homebuyers to take the plunge. Buying a home can be exciting, yet daunting because it's a complicated process with potential pitfalls at every step. But, it doesn't have to cause anxiety if you plan and find the right professional help.
Set a budget
Weller and Laubenthal were paying $800 a month in rent. They concluded that for a little more, they could buy a home, build equity and gain tax advantages.
When weighing affordability, it's critical to factor in the tax advantages that homeownership provides. Namely real estate taxes, mortgage interest expenses and at least some mortgage insurance costs are deductible.
The IRS outlines home tax deductions .
Although tax deductions are a plus, ultimately you have to make sure you can still make your monthly payment and have money left over to live on. It's helpful to use calculators like those available at the Federal Housing Authority .
One rule of thumb: Your house payment including taxes, homeowner's insurance and mortgage insurance shouldn't exceed one-third of your gross income. So if your gross pay per month is $4,000, your house payment shouldn't exceed $1,300.
Weller and Laubenthal figured they could afford a house between $130,000 and $150,000. That's in line with the median price tag of $149,300 for a home in the Des Moines market. In the end their house payment was about $1,100 a month.
Qualify for a loan
Know what's in your credit report before you meet with a banker. You are entitled to a free copy of your report each year from the major credit reporting agencies, Equifax, Experian and TransUnion. Copies can be obtained by visiting www.annualcreditreport.com.
You'll have to pay an extra fee of about $8-$10 to obtain a credit score. Most commonly used by banks are FICO scores, which range between 300 and 850. Most people score in the 600s and 700s.
A FICO credit score above 700 generally will get you a more favorable interest rate. A score below 600 could mean you'll pay 2 or 3 percent more, which over the life of a mortgage could cost thousands of dollars a year more.
The Federal Trade Commission has a website outlining how to build better credit .
You should review your reports months in advance to correct any errors and try to boost the score. If you need help, find a banker or mortgage broker you can trust.
Linda Turner, a mortgage broker at Independent Mortgage in Urbandale, Iowa, was recommended to Weller and Laubenthal and helped them obtain a loan.
The couple hoped Turner could get them approved for at least their target price range. They were pleasantly surprised to find their credit allowed them to be prequalified. Prequalification outlines how much the bank estimates it can lend you. With this in hand, the couple started looking.
Shop for a home
Hire a real estate agent to set up visits, provide listings and who knows about homes that might soon be for sale. The agent also will draw up an offer and help negotiate a deal with the sellers. Be aware that not all real estate agents are Realtors, which means they are a member of the National Association of Realtors and are held to a code of ethics.
Seek recommendations and choose an agent you trust and who communicates well with you. The agent is paid a commission out of the closing costs. The current national average commission is about 5 percent, but it can vary significantly from market to market and it is negotiable.
The same day their loan preapproval came through the couple contacted Jerry Aldrich, a real estate agent recommended by Weller's dad.
It's wise to narrow your search by checking the Internet or driving through neighborhoods of interest. Look at more than just the homes. You'll want to research quality of life matters, such as shopping, schools, nightlife and crime.
Weller and Laubenthal zeroed in on three small communities. They wanted their home to have at least three bedrooms, a two-car garage and a yard. Aldrich began sending them e-mail listings.
They liked the first house they toured. "I knew it fit their criteria, but I wouldn't let them buy the first home they looked at without looking at a half dozen," Aldrich said.
When looking for a home it's important to ask lots of questions and try to look beyond the decor. Focus on the permanent features of the home and look beyond things you can easily change such as window treatments, carpeting and paint colors.
Over the next month, Weller and Laubenthal looked at 10 homes. Then one e-mail grabbed their attention.
It was a 4 bedroom, 2 bath home with a fenced backyard and 2½-car garage on a street with mature trees in a quiet neighborhood. It was listed for $151,900.
Aldrich arranged a visit. And they soon were convinced they'd found their home.
Strike a deal
Weller and Laubenthal made an offer at 6 p.m. They were both at work, but talked with Aldrich who submitted the paperwork that night. Within 90 minutes he had a counter offer. The couple countered again.
"Within two hours we had a house that night," Laubenthal said. "It was crazy."
It was easy in this case. But negotiating can often be stressful. Your agent will help you make an offer based on the home's value and one that's realistic for the market. The offer should be contingent on approval of your financing and a home inspection.
Once you've found you're dream home, it's time to figure out how you'll pay for it. If you've been prequalified for a loan, some of the initial gathering of your financial background has been done. However, it's time now to finalize the loan.
Weller and Laubenthal were surprised by the amount of information needed by the loan officer. Lenders are exercising extra caution due to the continuing high foreclosure rate.
Be prepared to provide pay stubs, past tax returns, checking and savings account bank statements for several months, 401(k) and IRA statements, and your drivers license.
It's also wise to know the types of mortgages available. A fixed-rate mortgage is frequently chosen by buyers who know they'll stay in the home for many years. It's typically set for long terms such as 30 years, and your payments remain stable.
The average interest rate on a 30-year fixed-rate mortgage is 5.14 percent, according to Bankrate.com. That's higher than a few months ago, but a decade ago, buyers were paying more than 8 percent. In October 1981 rates peaked at 18.5 percent.
An adjustable rate mortgage, one in which the monthly payment increases according to a preset schedule, is often selected by buyers who don't plan to stay in their home past five years.
Weller and Laubenthal obtained a 30-year loan with an interest rate of 5 percent. They needed just 3.5 percent for a down payment because they qualified for a loan guaranteed by the Federal Housing Administration. Such loans are easier to qualify for, making them a popular choice for first-time buyers. Make sure your mortgage lender is qualified to make FHA loans if you're considering this option.
Inspect the home
An inspector will check the roof, walls and foundation, the heating, air conditioning and electrical systems.
You'll receive a list of potential repairs and must decide which should be paid for by the seller. Major repairs could lead to renegotiating the price of the home. A serious problem will permit you to back out of the deal. That's why it's essential to make an offer contingent upon the inspection.
Before you close the deal, you'll have a final walk-through of the home. This is an opportunity to make sure inspection issues were fixed.
Weller and Laubenthal were excited as they arrived at their home for the final inspection.
The couple reviewed a few issues mentioned in the inspection report — concerns about the circuit breakers and the refrigerator's ice maker. Aldrich said he'd make sure a certified electrician made the required electrical repair and it was documented.
They went from room to room, checking out doors and windows. The couple looked over the kitchen appliances, looked through a garden shed in the backyard and checked the garage door opener to make sure it worked.
Ultimately they were happy and looked forward to their closing, set for the following week.
Close the deal
Be prepared to sign a slew of paperwork to close the transaction. Also, find out from your mortgage banker how much the closing costs will be so you're not surprised. The costs include loan processing fees, the appraisal of the home, attorney fees and inspections. It's common for buyers to negotiate closing costs as part of their offer, which means they ask the sellers to pay some or all of the costs.
On a typical mortgage, the bank will charge around 1 percent of the purchase price to do the loan. In addition to that, most borrowers will pay between $2,000 to $3,500 in costs. On a $200,000 home, generally expect origination and closing fees of $4,000 to $5,500.
This is the final step, though, once completed you'll get the keys and the satisfaction of knowing you're a homeowner.
For Weller and Laubenthal, the process was smooth. The sellers wanted to move closing up several weeks, so there was a rush to get the inspections, paperwork and moving arrangement done. There may be hiccups along the way, but your real estate agent, banker and lawyer should all be able to help steer around potential problems.
All told, the homebuying process took two months for Weller and Laubenthal. Now they're enjoying their home and have set their sights on the next big step — a June 26 wedding.