First-Time Homebuyer Guide

A first home purchase can be stressful and overwhelming.

While it’s fun to tour homes and imagine the dream house you’d like to have, overcoming the financial hurdles is a different story. But don’t fret.

This comprehensive guide for homebuyers who are first-time buyers will guide through the entire buying process from beginning to end.

Benefits of Being a First-Time Homebuyer

As a first-time homeowner, you may experience a mix of excitement and fear. Although the process of buying a house can be overwhelming but it’s important to consider the many advantages that accompany this major milestone.

Financial Assistance

First-time homebuyers are eligible for various financial aid programs that could help to make homeownership less expensive. They include down payment assistance programs as well as low-interest mortgage loans and grants specifically geared towards first-time buyers. Certain of these programs are provided by local and state government agencies, while others are offered by private lenders or non-profit organizations.

Lower Down Payments

Many loan programs offer lower down requirements for homebuyers who are first-time buyers. For instance, the FHA loan, as an instance is available with just 3.5 percent down when your credit score is 580 or more. The USDA and VA loans also offer no down payment option in certain instances.

Access to Educational Resources

There’s a lot to be learned when you’re buying a house to the first time. However, luckily there are numerous resources available. Many organizations offer courses for homebuyers that will help you comprehend how to proceed and make informed choices. Some assistance programs and lenders require you to complete one of these classes although it’s not required but it’s an important source.

Before Starting Your Home Search

Check Your Credit

Not just your credit score is an important role in determining the decision of whether you’re eligible for a mortgage and also determine the interest rate you pay.

A slight decrease or increase in interest rates might seem like a small deal. However mortgage loans are an enormous amount and are for a long amount of time. So, even a small increase or decrease could mean many thousands of dollars being spent or saved throughout the duration of the loan.

To stand the greatest chance of getting granted a mortgage you should have an credit score of at minimum 620. It is possible to be approved for some mortgage programs with scores as low as 580, however there may be limited lenders to select from.

Run the Numbers

It’s tempting for people who are buying their first home to begin looking for homes after they’ve established that their credit scores are to at. But it’s likely not the best option until you know the amount of home is within your budget. Sure, the loan representative will provide you with a figure when you receive an approval however, that figure isn’t always a good indication of the amount you can afford.

Why is that? The reason is that they are focusing on the debt-to-income (DTI) ratio to give you an idea of how much loan you can qualify for. Based on the Consumer Financial Protection Bureau, the majority of lenders will prefer to have a DTI ratio of at least 43% or less in your mortgage repayment. To illustrate:

CURRENT MONTHLY DEBT	GROSS INCOME	DEBT-TO-INCOME RATIO	MAXIMUM MORTGAGE PAYMENT (USING 43% RECOMMENDATION)
$1,000	$4,000	25%	$720
$2,000	$6,000	33%	$580
$3,000	$10,000	30%	$1,300

Note: Debt-to-Income Ratio = Aggregate Amount of Monthly Debt / Gross Income

The issue is that it doesn’t look at any expenses that aren’t related to debt. If you’re facing a large amount of insurance or childcare expenses or even food costs this could be a huge worry.

The best option is to review your budget and figure out an achievable figure for your mortgage payments. Make sure you be aware of the suggested DTI ratio in your mind.

Explore Mortgage Options

There are many mortgage options available for first-time homebuyers. However, the most popular ones are:

Conventional Loans

A conventional mortgage is a form of home loan that’s not backed by insurance or the government. It is typically provided by a private lending institution, like a bank or credit union and is the most popular kind of mortgage used for buying homes.

Conventional mortgages usually require an initial down minimum of 3percent of the cost of buying the house. Borrowers generally need an average credit score of 620 or more as well as an DTI ratio of 36% or less to be able to qualify. If you have poor credit or are unable to pay a substantial down payment, you might be a challenge to qualify for a conventional loan.

If the total amount exceeds $726,200, it’s a jumbo loan, and requires a greater down amount.

FHA Loans

A FHA loan is a kind of home loan that is insured by the Federal Housing Administration (FHA) which is a federal agency that is part of the U.S. Department of Housing and Urban Development (HUD).

FHA loans were created to assist buyers to purchase houses, especially for first-time buyers. They provide low down payment requirements and offer more flexible credit guidelines than conventional mortgages.

The minimum credit score needed to be eligible for the FHA loan is 500. If your credit score falls between 500-579, the down amount is 10%. However, if you have a credit score of 580 or above, the down payment is 3.5% of the purchase price.

VA Loans

VA Loans are backed by the Department of Veterans Affairs. They do not require a down payment and are more attainable for than traditional loan products. However you must be a active duty soldier in the military. Spouses who are survivors also qualify.

USDA Loans

The USDA loan is a kind of mortgage provided by the U.S. Department of Agriculture (USDA) to people with low or moderate incomes who are seeking to purchase an apartment in a suburban or rural region.

The majority of mortgages come with a 30 or 15-year contract. The latter will cost more per month however, you’ll save money on interest.

You can also pick between either a fixed-rate or an adjustable-rate mortgage (ARM). Fixed-rate mortgages are the same rate of interest for the length of the loan. However, ARMs usually begin with a lower rate for a specific duration. In reality, they generally last between five and 10 years, and then change in accordance with the market conditions.

Many first-time homebuyers opt for ARMs instead of fixed-rate mortgages as they can choose to pay a lower monthly payment for the initial few years. It could also mean you could be eligible for a higher-priced home. However, be cautious not to overextend yourself since market fluctuations could cause rates to increase.

Get Preapproved

This is among the most time-consuming aspects of the mortgage process for first-time home buyers. The good thing is that you don’t have to take the first mortgage offer that is offered to you due to worry that your credit score could be impacted.

“FICO Scores ignore [mortgage] inquiries made in the 30 days prior to scoring,” according to myFICO. Therefore, you aren’t penalized for making multiple inquiries.

Therefore, you should begin by researching mortgage lenders you could consider working with. You can also ask for the assistance from an mortgage broker If you’re pressed for time or need someone to take care of the research for you.

Once you’ve decided on some lenders be ready to provide the following information to be preapproved:

• Financial statements to confirm your assets, including retirement accounts and real estate
• Recent bank statements
• Last two pay stubs
• W-2s from the last two years

They’ll also look up your credit score and credit report. If you’re approved for the loan, the mortgage lender will then send you an authorization letter valid for a specified time period, which will specify the amount you’re eligible for.

Save Up for a Down Payment and Closing Costs

During the preapproval process the lender must have discussed loan options that might be an ideal fit for you. They should also have explained the amount you’ll require to pay for the down payment and closing costs.

Although some sellers might offer to cover closing costs, you must be prepared to deposit earnest money in order to ensure the validity of your offer. Also, you might need an enormous down amount if you’re taking out the jumbo loan or aren’t eligible to take advantage of the FHA or VA loan programs. If this is the case, now is the time to work out a strategy for it.

If the seller isn’t making closing expenses, be prepared to pay between 2and 5 percent of the price. If a large down payment isn’t necessary it’s a good idea to bring some cash on the table. By doing this, you can lower the ratio of Loan-to-Value that makes you less of a risk to lenders.

You might also be able of avoiding PMI, also known as private mortgage insurance, that is mandatory until you have reached 20% equity and may be eligible for a lower interest rate.

How to Find the Perfect Home

Go Home Shopping

All set with a preapproval, and you’ve planned to save the cash you’ll require? Now it’s time to shop at home. However, before you do so you must decide if you’d like engage the help of an agent for real estate.

It is possible to find numerous listings that are within your budget on the internet with minimal effort. However real estate agents are able to access a platform that can extend your options. They could also assist you to select a property that is an excellent buy and negotiate the purchase price.

The seller’s agent also is the one who pays the commission, so there’s no need to fret about handing over additional cash. Make sure you hire an agent who is experienced and reliable.

Now comes the exciting part: home shopping. Be cautious not to evaluate a property only by its appearance. Other important things to be aware of:

• Taxes: are the property taxes reasonable or more than you are able to be able to afford? (You can roll your property taxes as well as homeowners insurance into an escrow, however, they could easily break or ruin your budget if they are high).
• Location: is the home in an area that has always maintained its value? Is the location ideal for the commute you take to work and home?
• Crime: is it a high-crime area or is it a relatively safe area?
• Condition: how old is the property? Do you think it needs a lot of repair work, or is it getting close to being ready for a move?
• Floor plan: is the floor plan feasible or appropriate for your particular situation? Would it be attractive to buyers from other countries in the event that you had to sell?
• School district: how are the schools? Have they received a high score or do they struggle to keep their heads above water?

Each of these elements could affect the worth of the house over the course of time.

Submit an Offer

You’ve found the perfect house and are ready to sign the cross. Before you can finish the documents and move into the property, you must complete one more crucial step. That’s putting together the offer. Even if the price seems reasonable however, you might need to offer more or less to get the property.

Why is that? There could be an intense or a little bidding war taking place and the only way to succeed is to beat the other bidders. Perhaps your real estate agent conducted some research and found that the cost was excessive based on comparable properties within the region or in the house’s present condition.

The Mortgage Process

Even after your offer has been accepted, there’s more work to be done. It’s not over yet! It’s time to start the mortgage application process.

Remember that preapproval form? The lender will ensure that the information you initially provided is correct through an underwriting process.

Depending on the length of time since you were approved and if you’ve been preapproved, you could be asked to submit updated statement of accounts or pay stubs.

The quicker you provide the required information, the sooner you’ll receive a response. So, don’t delay your feet if you’re looking for an end date that’s earlier than later.

Home Inspections and Appraisals

Before closing on your home, you’ll require an appraisal and inspection of the home completed.

The home inspection should not cost less than $500. It will provide you with an overall view of the property and will identify any possible issues.

The appraisal is also an important role since it can give you a good idea of the property’s fair market value. The lender will require it, but it’s an ideal idea to have an appraisal from an independent source to give you an alternative opinion.

An appraisal and inspection could aid you in deciding if you should reduce your offer or leave the property.

Purchase Homeowners Insurance

Your mortgage lender may require that you purchase homeowners insurance. Therefore, you should begin looking for quotes and pick an insurance policy before closing.

Close on Your Loan

At last! You’ve made it to the end of the road and now it’s time to close your loan. When you close, anticipate:

• Sign a load of paperwork.
• Pay any amount owed to make the down payment.
• Pay closing costs. These could include taxes on the property, premiums for homeowner’s insurance, association fees, title insurance and any other costs that are associated in closing the loan.
• Pay discount points or prepaid interest that can reduce the interest rate.

But prior to showing up at the closing table it’s best to contact the lender, so you be aware of what you can expect. Also, you can request a copy the final closing document or Closing Disclosure to view the full breakdown of expenses.

A Few More Tips

Here are some additional ideas for first time homeowners to help be approved for the first home loan:

• Avoid applying for credit that you do not close. This could affect the DTI ratio, decrease the credit score of yours, and eventually stop you from closing the loan.
• Local and state programs could provide assistance with the cost of downpayments. If you’re struggling to come up with funds make sure you look into options at your disposal.
• Several builders offer buyer incentives, like allowances for upgrades and closing costs.  If you’ve never thought about new construction, it might not be a bad idea to check at the prices if they are within your budget.

Rent, Instead?

Perhaps you’ve done some research, run through the numbers and you’re now on the fence about purchasing a home. It’s likely that it’s less expensive to pay mortgage payments monthly rather than paying rent.

You can also avail of tax benefits and build equity while making monthly payments. This equity could be repaid to get a loan or put some extra cash into your account should you decide to make a sale your house before the end of the repayment period.

But, renting a house allows you to relocate to a different location when the house isn’t what you expected, you don’t feel comfortable in the neighborhood, or need something less expensive.

Additionally, renting permits you to pass on the costs of maintaining your home to the homeowner. As a homeowner, you’ll have to pay for expenses related to repairs and maintenance.

Another reason for people to rent instead of buying is the initial cost. The majority of landlords require an initial security deposit. But, it could be significantly less than the amount you need to pay to pay the down payment and closing costs.

In the end, you must determine which is the best choice whether it’s investing in a property that will increase wealth or pay rent until you decide it’s time to make a change. There is no one right or wrong answer, it’s all about your personal preferences and your financial situation.

Bottom Line

If you take the time to study the process of buying a house you’ll be prepared and will save yourself time and stress. Most importantly, you’ll increase your odds of securing your dream home using the most competitive mortgage on the market.

FAQs

What is the process for buying a home?

The process for buying a home typically involves the following steps:

1. Determine your budget and get preapproved for a mortgage.
2. Find a real estate agent and start looking for homes.
3. Make an offer on a home and negotiate the terms.
4. Get a home inspection and address any issues that are found.
5. Get a mortgage and close on the home.

How much house can I afford?

There are several factors to consider when deciding how much house you can afford. Before making a decision, you should consider your income, expenses, down payment, credit score and mortgage type.

A higher down payment can help you get a lower mortgage rate, and a higher credit score can qualify you for better rates and loan terms. Shopping around for mortgage rates and considering different types of mortgages, such as fixed or adjustable rates, can also help you find the best deal.

Remember that owning a home is more than just a monthly payment. You also need to consider property taxes, insurance and maintenance costs. You should create a budget that includes all of these costs and leaves room for unexpected expenses.

How much money do I need for a down payment?

The amount of down payment you need will depend on the type of mortgage you get and the price of the home you are buying.

Some mortgage programs, such as Federal Housing Administration loans, allow down payments as low as 3.5 percent, while others may require a higher down payment. It’s best to talk to a mortgage lender to determine how much you’ll need.

Can I buy a house if I have a low credit score?

People with low credit scores can also buy a house. However, it can be more difficult to get approved for a mortgage and you may have to pay a higher interest rate. Work on improving your credit score before applying for a mortgage, as this will help you qualify for a better loan and save you money over time.

How much will closing costs be?

Closing costs are fees paid at the end of a real estate transaction. These costs vary widely and may include mortgage origination fees, title insurance and appraisal fees. On average, closing costs can range from 2% to 5% of a home’s purchase price.

What is a mortgage preapproval?

A mortgage pre-approval is a letter from a lender indicating how much you are eligible to borrow for a mortgage. The pre-approval letter is based on a review of your financial information, including your credit score, monthly income and debts. A mortgage pre-approval can help you understand how much you can borrow and can make you more competitive with buyers in the real estate market.

What is a mortgage rate?

The mortgage rate is the interest rate you will pay for your mortgage. The mortgage rate will determine your monthly payments and the total cost of the loan. Interest rates will vary depending on your loan type and credit score.

What is PMI?

PMI, or private mortgage insurance, is an insurance policy required by lenders for certain types of mortgages when the borrower’s down payment is less than 20 percent.PMI protects the lender in the event that the borrower defaults on his or her mortgage.The cost of PMI is usually added to the borrower’s monthly mortgage payment.