July 9th, 2019 10:54 AM by Jackie A. Graves, President
So you’re in
the market to buy a home. Whether it’s your first foray into the exciting
home-buying process or you’ve been through it before and have forgotten the
details, this guide will provide first-time homebuyer tips to prepare you for
is a first-time homebuyer?
Logically, a first-time
homebuyer might refer to someone who has never purchased a home
before. But in some contexts, the definition is actually much broader than
homebuyers who can’t scrape together a substantial down payment may be eligible
for assistance through first-time
homebuyer grants and loan programs. To qualify for many of these
programs, prospective buyers generally must not have owned a home for at
least the previous three years.
In other words,
you don’t have to be a complete novice to qualify as a first-time homebuyer.
Lenders and government agencies have loan programs in place to help people
realize the American dream of homeownership, even if they’ve experienced it
to qualify for a home
Qualifying for a
home can be a challenge. Home prices have shot up since the
housing crisis and are now at all-time highs. Meanwhile, wages continue to
stagnate and consumer debt levels have surpassed $4 trillion – not including
mortgage debt – increasing 22 percent over the past five years.
these general economic conditions may not apply to your personal financial
situation. Before looking at housing options, take stock of your finances by
answering these questions.
much home can you afford?
First look at
how much debt you have relative to your income, called the debt-to-income
ratio. When determining how much of your gross income you should spend on a
home, most financial advisers say it should be capped at 36 percent.
ratio for housing costs, including the mortgage payment, real estate taxes,
homeowners insurance and homeowners association dues, should be 28 percent,
while 36 percent should represent all your monthly debt, including housing.
Some lenders even allow a DTI ratio up to 50 percent, however, the higher your
DTI ratio, the more likely you are to pay a higher interest rate because you’re
considered a riskier borrower. You don’t want to become house poor and stretch
your monthly budget to its limit, so proceed with caution.
you need a down payment?
With a 20
percent down payment, you can avoid paying private mortgage
insurance, which actually covers the lender (not you) should you
default on the loan. But first-time homebuyers can get away with paying less
than 5 percent with certain types of loans. USDA or VA loans require
no down payment at all, while FHA loans require a minimum of 3.5 percent down.
Conventional loans backed by Fannie Mae and Freddie Mac require as little as 3
there a minimum credit score?
With a high
credit score, you can get favorable loan terms that will save you gobs of money
over the life of your mortgage loan. But you can still get a loan with a score
as low as 500 (for FHA loans)
or 620 (for conventional
of owning a home
Owning a home
can be a great way to build wealth, because you are putting relatively little
down upfront. Meanwhile, you’re leveraging your investment and reaping the
benefit of building equity as you pay down your loan. Of course, the real
estate market doesn’t always go up, as we learned during the housing crisis. So
it’s important to consider your budget and lifestyle in your buying decision.
Mortgage rates remain
attractively low on a historical basis. If you choose a 15- or 30-year fixed-rate
mortgage, your monthly payment will be predictable for the duration
of the term, whereas rental prices tend to rise each year. Even if you get an adjustable-rate
mortgage, the cap is fixed so you know what to expect in the future.
Buying in a
nice neighborhood in a good school district tends to hold up the value of a
home, and a homeowner can develop good friendships and strong bonds in the
community. Owning a home also affords autonomy – you can make improvements as
you see fit without having to answer to a landlord.
rent to-own a good idea?
lease-purchase agreement with the idea of owning a home in the future can work
for people who currently have financial constraints or a problematic credit
score. Rent-to-own gives you time to build savings and pay down debt to get
more favorable mortgage terms in the future. But rent-to-own transactions can
be complicated, and you might be better off simply waiting until you can
purchase in the future. Getting legal advice is a wise step if you’re
considering this route.
arrangement requires both landlord/seller and tenant/buyer to make upfront
decisions about the purchase date, how the home’s purchase price will be
determined and who will assume responsibility for paying for maintenance and
repairs as well as property taxes.
portion of the rent payment is allocated toward the down payment, so this can
be a good way to build your investment gradually. However, depending on the
laws in your state, you could lose your investment entirely if you fail to make
a payment due to job loss or other misfortune.
first-time homebuyer guide
1: Assess your personal finances.
homebuyers navigate open houses and the home-buying process without first evaluating
their personal finances. A smarter approach is to first check your
credit reports and score, examine your budget and assess your ability to make a
down payment and pay closing costs. There’s also an earnest money deposit,
which is a smaller deposit submitted with your initial offer. Some states
require a deposit of 10 percent of a home’s purchase price from a buyer, while
other states might allow earnest money of just a few hundred dollars.
paperwork to show lenders proof of your income and financial stability. This
means gathering your pay stubs or W-2 forms, federal tax returns, bank
statements and lists of all assets and debts. A lender will check your credit
score and report and verify your income.
How this affects you: Determining how much
home you can afford, as well as how much you can put down on a home,
helps you set reasonable goals. Assess your ability to pay closing costs, which
can range from 2 percent to 5 percent of the home’s purchase price. See if you
might qualify for first-time
homebuyer grants and programs that help with down payment or
closing costs. Become familiar with the different types of mortgage loans
available and their down payment requirements.
Takeaway: Don’t make decisions based solely on emotions. Do your
2: Get mortgage quotes from three lenders
Apply for a
mortgage with at least three lenders so you can compare interest rates and
terms. You want to pay the lowest interest rate because less money spent on a
mortgage payment means more money in your budget for inevitable maintenance and
repairs that come with homeownership.
your loan options. Different loan programs have different requirements. If you
have trouble finding a bank that will lend to you because you have poor credit
or a lot of debt, you might need to take time to work on your finances before
moving forward with a home purchase.
How this affects you: FHA loans are available to low- and
moderate-income borrowers with a checkered credit history and a score as low as
500. You’ll still have to prove you have the means to make the mortgage payment
in a timely manner.
Takeaway: You want to pay the lowest rate on a mortgage and get the best
terms possible. Your financial history will impact the offers you get. Don’t
forget to check mortgage
rates online, too.
3: Get preapproved for a mortgage
gotten quotes from a few lenders, you’re ready to get preapproved for a
mortgage. You’re in a stronger position to make an offer on a home in your
price range with a preapproval letter in hand. The preapproval letter typically
spells out how much you’re qualified to borrow, what loan program you’re using
and the expected down payment you can make. Final approval for a loan will take
place after the information you provided is verified by the underwriter and
other conditions are met, such as an appraisal that supports the home’s sales
How this affects you: A preapproval letter is a must in a
competitive market, and sellers will take your offer more seriously.
Takeaway: Be prepared for a lender to dig into all aspects of your
4: Find a good real estate agent
A real estate
agent can help enormously in the home-buying process. Agents who work in a
particular market know the area well and can provide valuable insights about
school districts and neighborhoods. When you’re ready to look at homes,
interview agents and hire one to help you find the right one. Consider a
buyer’s agent who will help you find the right home, negotiate the best offer
and recommend other professionals whose interests are aligned with yours.
How this affects you: Listing agents generally represent the
seller and their main goal is to get the best price on a home. The seller pays
the commission to the listing brokerage, who disburses funds to all parties
involved. If a buyer’s agent is involved, the listing brokerage pays the
buyer’s brokerage, who in turn pays the buyer’s agent.
Takeaway: It’s best to work with someone who represents your interests.
5: Shop for your home
This is the fun
part. Provide your agent with a list of your top requirements so that you don’t
waste your time looking at homes that don’t meet your needs. When you view
homes, take notes or photos because otherwise you might forget the unique
features of each home after looking at several properties.
neighborhood to see how traffic flows and to get a sense of its character.
Check crime statistics and talk to neighbors, too. For a home you’re strongly
considering, get a copy of the homeowner’s association documents so you know
what the rules and fees are, if applicable.
How this affects you: You want to avoid making mistakes in
the home-buying process by doing your due diligence upfront. How would you feel
if you discovered the neighborhood was too congested with traffic or the nearby
schools are underperforming?
Takeaway: Investigate as much as you can to avoid unpleasant surprises
later. Never buy a home sight unseen.
6: Make an offer
Once you find
the home of your dreams, it’s time to make an offer. This is arguably the most
exciting and nail-biting part of the home-buying process. Your agent can run an
analysis of comparable listings (or “comps” in industry speak) that have
recently sold in the area to help you make a competitive offer.
should include an offer price, deadline for the seller to respond (usually
within 24 to 48 hours) and any contingencies you want to request. Contingencies
for financing, appraisal or home inspection, for example, give you the ability
to walk away from the deal without penalty under certain conditions.
How this affects you: A good agent will provide an analysis of
comparable closed sales in the neighborhood to help you arrive at a reasonable
offer price. Once a contract is presented to the seller, your offer can be
accepted, rejected or countered with a different price.
Takeaway: Tap your agent’s experience to negotiate with the seller. It
may even help to write a flattering letter to the seller describing why you
love the home.
7: Negotiate closing costs
days of applying for a mortgage, you’ll get a loan estimate form that will
detail the loan terms and estimated closing costs, among other pertinent information.
Some closing costs are
negotiable. Your lender may charge origination and underwriting fees that could
be waived or discounted if you ask. Or the seller may be willing to pick up
some of the costs.
How this affects you: Closing costs can also be rolled into
your mortgage, but you’ll typically pay a higher interest rate to go this
route. Understand where there’s wiggle room to negotiate on certain services.
If you follow the advice in Step 1, you might find a grant in your city, county
or state that helps you cover closing costs.
Takeaway: Ask your lender to clarify any fees you don’t understand in
your loan estimate so you’re not asking these questions at the closing table.
8: Hire a home inspector
takes about two or three hours and can range from $300 to $1,000, depending on
the home’s size and the extent of the inspection. Home inspectors generally
check the home’s structure, roof, heating, plumbing and electrical systems, but
they typically don’t check for the presence of lead paint or mold.
can recommend a good inspector, or you can check the websites of a professional
inspector association for a list of qualified inspectors. Three prominent
associations are the American Society of Home Inspectors, International
Association of Certified Home Inspectors and the National Academy of Building
Inspection Engineers. Consult HomeAdvisor and Angie’s List. Also, check for
complaints with the Better Business Bureau and online Yelp reviews.
How this affects you: Put a contingency clause in place that
allows you to cancel the deal without penalty if the home inspection uncovers
major problems and the seller is unwilling to address them. You and/or your
agent should be present during the inspection so you can ask questions. You may
also want to hire someone to check for mold or other potential problems.
Takeaway: You can ask the seller to purchase a one-year home warranty at
closing, which can range in price from $300 to $650 and up, depending on the
size and features of the property. This can be very reassuring for first-time
homebuyers with tight budgets.
9: Get homeowners insurance and finalize move-in details
insurance is required by the lender and helps to protect your investment.
Premiums vary, so get quotes from several companies or work with an insurance
broker who can shop rates for you. Assess your needs and ensure that you buy
adequate coverage to completely rebuild your home if it’s destroyed or
seriously damaged. If your home is located in a federally-designated flood zone,
you’ll need to buy flood insurance, too.
prepare for move-in day, contact your local utility, cable and internet
providers to arrange new service for your move-in date. Another task: hire a
reputable mover and start packing.
How this affects you: Buying a home involves a lot of expected
upfront costs – and possibly unpredictable ones after move-in day. Have an
emergency fund on hand for surprise repairs and maintenance.
Takeaway: Planning is essential for a smooth transition to your new
10: Seal the deal at closing
to get updated pay stubs and other financial paperwork just before closing to
prove your employment status hasn’t changed and that you’ll be able to make
your mortgage payments. Within 24 hours of closing, buyers do a final
walk-through of the property to make sure repairs, if any, were made and that
the home is vacant.
closing table, you’ll sign a lot of paperwork to finalize the loan and transfer
ownership of the home from the seller’s name to yours. And you’ll be required
to bring a cashier’s check made out to the escrow company, or wire closing
funds to the company. Don’t forget to bring your identification, too.
How this affects you: Your real estate agent and lender will
walk you through the closing
process and explain everything you’re signing, but take your
time as you review documents. After all, you’re committing to the largest
financial transaction of your life. Three business days before closing, you’ll
receive a form called a closing disclosure that outlines your loan details and
fees. Compare it to the initial loan estimate to ensure you’re not being
charged unexpected fees and that your personal information is accurate.
Takeaway: You now have a new title: homeowner. Congratulations!
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