FIRST TIME HOME BUYER
Buying a house for the first time can be challenging and time-consuming. To help you navigate the twists and turns involved in buying your first home, I compiled 11 first-time homebuyer tips to demystify the process.
1. Determine how much house you can afford
One of the first steps in the home buying is figuring out how much house you can reasonably afford based on your annual salary and expected down payment amount. Use an online home affordability calculator to get a solid estimate of the home price that aligns with your budget.
2. Start saving for a down payment
Mortgage lenders prefer homebuyers to have some skin in the game, which is why your downpayment is important. You can put as little as 3% down on a home, but the more you put down, the better interest rate and terms you’ll get. Plus, you’ll shrink the size of the mortgage payment and have more equity in your home.
Additionally, set aside money for your closing cost, which can range from 2% to 6% of your loan amount. Closing costs include lender fees and third-party charges such as an appraisal, recording and title insurance fees. Don’t completely drain your savings to cover your down payment and closing costs. Keep a cushion available for repairs and emergencies.
3. Improve your finances
Your credit score is a key factor to qualify you for a mortgage, and it helps determine your mortgage interest rate. Buyers with credit scores of 740 or higher typically get the best mortgage rates, so improve your credit score as much as possible before applying for a mortgage.
To qualify for a conventional loan, you’ll need at least a 620 credit score. A government-backed mortgage from the Federal Housing Administration (FHA), has a minimum required credit score of 500, but the required minimum down payment jumps to 10%. If your credit score is at least 580, you can get an FHA loan with only 3.5% down.
Lenders also care about the relationship between your outstanding debt and income. The ideal debt to income ratio (DTI), which is the percentage of your gross monthly income used to repay debt, is 43% or lower. Another helpful first-time buyer tip: Work on paying debt down before applying for a mortgage, if possible.
4. Understand the importance of PITI
Your mortgage payments include more than just the principal and interest portion you’ll owe on your loan each month. There are four components to PITI:
Use a mortgage calculator to give you an estimate of what your monthly mortgage payment would look like with all of these elements included.
If you put down less than 20% toward your home purchase, you’ll also be responsible for private mortgage insurance (PMI), which is added to your mortgage payments.
5. Get preapproved
Before falling in love with a home you can’t afford, get a pre-approval. A preapproval involves a lender reviewing your overall financial picture, pulling your credit and providing you with an estimated loan amount and interest rate. However, getting preapproved for a certain loan amount doesn’t mean you should borrow to the max. Instead, decide if the monthly mortgage payment comfortably fits your budget given other bills when considering a home’s price tag.
Once you have a preapproval, one of the most important first-time homebuyer tips to heed is to shop around for multiple lenders. Comparison shopping for the best mortgage rate alone can save you thousands over the life of your loan. Also, compare lender fees and the overall cost of borrowing listed on the loan estimate to ensure you’re getting the best deal. Consider banks both large and small, in addition to mortgage brokers and nonbank lenders.
6. Consider your mortgage options
Besides conventional and FHA loans, there are several mortgage types, including loans from the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA), neither of which requires a down payment. VA loans are reserved for military service members, veterans and eligible spouses, while USDA cater to low- and moderate-income homebuyers looking for a property in a designated rural area.
There are also first time home buyer assistance available, as well downpayment assistance and closing cost assistance. Check with your state’s housing finance agency for more information about the programs it offers.
7. Find a great real estate agent
A real estate agent’s role is to guide you through the process of purchasing a home. Get real estate recommendations from family members, friends and colleagues. Ask questions to gauge each agent’s knowledge of your local housing market, and don’t be afraid to negotiate their commission fee. Check online reviews to see what past clients have to say about their experiences, and interview at least three different agents.
8. Choose the right home
Many first-time homebuyers opt for a starter home that’s older, less expensive than newer homes and may even require some work. Keep in mind the homes that tick off the items on your wish list may not fall within your budget. It’s important to stick to your budget to avoid buying more house than you can afford.
A solid first-time homebuyer tip: Think beyond the features of the property (you can always remodel later) and focus on the neighborhood’s amenities, school quality, crime, commute time to work and local attractions. Your agent can set you up to receive email alerts from the local MLS platform for homes that fit your criteria. You can also use an online real estate search portal to narrow down your home search.
9. Make a strong offer
Once you’ve found “the one,” it’s time to make an offer. In competitive markets, you might consider offering more than the asking price (if you can afford it) or limiting contingencies. If homes are staying on the market longer than usual, you may have more negotiating power. Here are other ways to make your offer stand out:
· Offer a competitive price.
· Include any contingencies that will give you the option to walk away later.
· Spell out your closing date in writing.
· Include your mortgage preapproval letter and earnest money deposit.
· Write a personalized buyer letter explaining why you love the house.
· Act quickly and communicate often.
10. Keep up your finances
One of the worst things you can do as a first-time homebuyer is adding more debt or changing your income before closing day. During the under writing process, lenders will check these items again before closing, and notable changes could potentially delay or derail your final loan approval. To keep your loan approval on track:
· Don’t apply for a new credit card, loan or line of credit.
· Don’t cancel or close any accounts (even if you’ve paid them off).
· Don’t change jobs or quit your current job until after closing.
· Respond immediately to your lender’s documentation requests.
11. Prepare for closing day
After you’ve signed a purchase agreement, you can schedule a home inspection, which provides a full evaluation of the home’s condition. Your lender will also order a home appraisal, which determines the home’s current market value. If the appraisal is too low, you’ll need to negotiate with the seller on a lower price or come up with the difference out of pocket. You’re good to go if the appraisal comes in at or above the sales price. Here are some final first-time homebuyer tips to follow before closing day:
· Compare the loan estimate to the closing disclosure to check for any errors or closing cost changes.
· Participate in a final walk-through of the property and point out issues that need immediate attention.
· Confirm with the closing agent how you’ll pay the down payment and closing costs.
· Show up on closing day to sign paperwork, pay the money you owe and get your keys.