Regarding major milestones, buying your first home is one of the most exciting. While the idea of investing in a property that you’ll own free and clear (as opposed to renting and pouring money into a landlord’s pocket), is appealing for numerous reasons, you might feel some concern about the process and what all it involves. Therefore, we’ve done our homework to provide some information for the first-time homebuyer.
Start Saving Early
Before you start house-hunting, you will need to be mindful of your savings account. Ideally, your savings account should have the minimum amount of money to cover three to six months’ worth of living expenses in the event of an emergency or job loss. In addition to this emergency fund, you will also need to save for the down payment, closing costs, and possibly a home inspection. If you have accumulated enough savings to cover emergencies plus the up-front costs of buying a home, you won’t have to worry about your bank account being depleted once the transactions go through. Furthermore, lenders require that you provide evidence of a sufficient savings account even if you are a candidate for any of the first-time home buyer programs.
Use the 25% Rule to Know How Much House You Can Afford
You may have heard of using the 25% Rule when figuring out what you can afford. Following this rule will tell you exactly where to set your limit regarding how much of a mortgage payment you can afford. In other words, the monthly payment for your home should not exceed 25% of your monthly take-home pay after taxes. This percentage also includes the add-ons that many first-time home buyers tend to forget about, which include:
● Property tax
● Homeowner’s insurance
● HOA fees (if applicable)
● Private mortgage insurance
And that doesn’t include the principal and interest. Nonetheless, by staying within the 25% (or less) range, you have a better chance of finding the best house while adhering to your budget.
Check and Strengthen Your Credit
Another important aspect of this process is checking your credit score once or twice a year through the credit reporting bureaus, like Experian. Or you can utilize an app like Credit Karma that allows you to check more frequently without setting off a hard inquiry. You would just need to remember that the information on credit apps could be three to six months behind that of the credit reporting bureaus. Nevertheless, you should have a clear picture of your financial health before walking into a mortgage broker’s office.
As part of stable credit history, you’ll also need to have proof of monthly income, a history of paying bills on time, and a low debt-to-income ratio—preferably less than 30%.
Don’t Skip the Preapproval
One other major consideration that benefits any first-time home buyer relates to getting preapproved for a mortgage loan before looking for a house. First off, if you can secure a loan, you are prepared to make an offer when the time comes. Secondly, you have an actual, set dollar amount that sets the limit on how much house you can afford. However, you’ll have other factors to ponder. When shopping around for a mortgage loan, you’ll want to find the lowest interest rate and fees.
Also, you might inquire about first-time home buyer programs and programs for veterans or active military personnel since they tend to offer the best rates and terms upon qualification. Plus, if you’re looking to get preapproved, you might refrain from big purchases that require a loan such as a new vehicle. The hard inquiries will impact your credit score, and a bank can back out of a deal if they think the client poses a credit risk. Finally, you might consider finding a backup lender to fill the gap in case the first loan falls through due to changes in risk assessment.
Understand Your Loan Options
While the process appears complex and having a small credit history seems to pose an obstacle for first-time home buyers, banks and the government offer first-time home buyer programs. Here are a few options to consider:
● FHA Loan– insured mortgage loans that require only 3.5% as the down payment
● VA Loan – loans that don’t require a down payment for active-duty military, vets, and their dependents
● USDA Loan – programs focused on rural properties with no down payment
● Home Renovation Loan – allows for the purchase of the home and renovations
● Fannie May and Freddie Mac – conventional loans with a 3% down payment for individuals with at least a 620-credit score
● State first-time home buyer programs – assistance programs based on each state’s regulations
Even if you’re not sure if you would qualify for any of these programs, you should still inquire if not apply for any of these options
Don’t Forget to Save for Closing Costs
As mentioned about savings, you would need to set aside an amount to cover closing costs. Though it rarely happens, even the most motivated sellers would agree to split or cover the closing costs. These expenses include title insurance, loan origination fees, surveys, taxes, and credit report charges. The charges can take from 3% to 6% of your total loan amount, which means that if your mortgage is worth $200,000, then the closing costs would range from $6,000 to $12,000. So, preparation is vital.
Pick the Right Type of House and Neighborhood
As you’re saving money and researching mortgage options, you’re probably looking at various locations. Some qualities that will factor into your search would include high-performing schools and stellar daycare centers. Also, proximity to hospitals and other medical facilities proves to be highly important as well as access to transport links, parks, and other amenities. Other significant attributes include community involvement. Does the area have opportunities for neighbors to gather like a gardening coop? Most places that have relatively interactive neighborhoods tend to have lower crime rates along with more activities for youth and seniors.
Choose a Real Estate Agent Carefully
Finally, one of the most important pieces of the mortgage puzzle involves finding the right real estate agent who will keep your best interests and budget in mind. In fact, you might employ the services of an agent who is also a licensed mortgage broker before you start your search. Considering how important this person’s role is in such a life-changing situation as homeownership, you should take the time to interview at least three candidates. Also, ask family and friends for their recommendations and peruse client reviews online. Some qualities to look for include:
● Licensure and professional affiliations
● Familiarity with your targeted area
● Commission rates
You can start your search for an experienced, dependable mortgage broker at Right Key. Our goal is to help our clients on their way toward homeownership by securing the lowest rates from our lending partners. For first-time home buyers, we take the guesswork out of searching for mortgage programs and the right home for their families.