First-time Home Buyers vs Old Hands

First-time homebuyers often approach the buying process with wide-eyed enthusiasm and then miss the details. Seasoned buyers know to ask for inspections and contingencies because you never know what is lurking - or leaking - in the attic.

But there are many areas where both first-timers and old hands run into the same issues. For example, you may have heard this real estate advice: Buy the cheapest house on the nicest block. This is sage advice - if you don't have to remodel the house for the next five years to make it livable!

Finding the Gem

Old hands at the real estate game know there is a big difference between a fixer-upper and a cosmetic fixer. Major repairs and remodels that include structural engineering are not for the faint of heart.

A Seattle couple with a small child planned to move from a condo to a house and found a 1910 Craftsman with good "bones" in a gentrifying neighborhood, but it lacked appeal on the inside. In other words, it hadn't been staged at all:

• Drapes: What century?
• Paint: Tired and chipped
• Carpet: Gawd-awful brown-and-gold shag from 1977

They got the good advice that first-time and experienced homebuyers all need: Don't miss the gem underneath. The major systems, foundation, and structural integrity were like new. They purchased the house below market, sacrificing cosmetic bliss for a lower price. After ripping up the carpet, stripping the fir floors of stains, and giving the walls a fresh coat of paint, they were ready to move in.

Buyers should beware however - if you aren't able to judge what constitutes a major issue, and what is a minor cosmetic issue, you should either consult someone who does or steer clear.  Most buyers lack the knowledge to adequately assess which is which.

(The lesson for the seller: Make the house sparkle before you sell it - your hard work may pay off in a higher sales price.)

Loans for First-Timers

That 20 percent down payment can be pretty daunting to a new homebuyer. But now zero-down loans are the growing trend, according to the National Association of Realtors, which says that over 40 percent of Americans are buying homes with no money down.

Not all mortgage brokers like to see buyers 100 percent leveraged by their home purchase. Citing recent downturns in some markets, one Dallas broker says, "Borrowers are at greater risk today because they are over-extended."

There are extra costs associated with little or no money down loans, namely mortgage insurance and a higher interest rate. Twenty percent down is still the threshold for avoiding mortgage insurance that you pay on top of your monthly mortgage payment to insure the lender against risk. However, buyers can take advantage of lending programs that get around mortgage insurance including the 80-10-10 (or 80-20) loan.  With the 80-10-10 loan, you are required to put 10 percent down, borrow 80 percent of the loan in the first mortgage, and the remaining 10 percent as a second loan - also known as a "piggy-back" loan. These loans are often offered at a higher interest rate than conventional loans, and it pays to calculate many types of loans, as the higher rates on the second loan may cost you more than mortgage insurance.

Government Loans

First-time homebuyers also have Uncle Sam on their side:
Many states and municipalities offer first-time home buying grants that can be used for down payments and other closing costs; these are made possible by HUD, and are administered at the local level. Currently, federally-insured FHA loans require 3 percent down, but a proposed zero-down loan program is in the federal budget blueprint for 2007. These loans are aimed at first-time homebuyers with excellent credit.

Bridging the Gap

For those old hands in the real estate market, trading up means preparing your home for sale and finding a new home at the same time. It can also mean two mortgages. Allowing yourself enough time to execute on both transactions will make the process go smoothly. A bridge loan gives you the breathing room you need during the two transactions since, depending on your market, you may need some time to sell your first home. You use the bridge loan to borrow enough for the down payment for a new home, and then pay it back once your existing home sells.

One thing to keep in mind: The lender must be the same for the new home loan and the bridge loan. If after six months you haven't sold your home, you pay interest-only payments to the lender. Once the sale is complete, your bridge loan is paid in full. The term of a bridge loan is one year.

Escalator Clauses

In a competitive, fast-paced market, seasoned home owners also know you may have to pay a lot more than the asking price to get your ideal home. If you and other prospective buyers get into a bidding war, contingent-free offers are common and an "escalator clause" allows for a specific increase in the agreed-upon price if the competing party increases their offer. You, of course, stipulate how high you are willing to go.

For first-time buyers, this can be pretty stressful. One recent buyer said they felt like they had more time to pick out a car than they did their first home. You can dicker all day with the car dealer and never lose the chance to buy the car you want, but if you ask for repairs before closing on your dream home, you risk losing the bidding war.

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Related Links

• Basic Mortgage Questions
• Credit Reports Explained
• The Home Remodeling Decision