There are few things more exciting than exploring the world of homeownership. Perhaps after months of binge watching HGTV and swiping through listings on Zillow, you’re ready to make the leap. But the ins and outs of buying a home can be overwhelming, so it’s important to fully understand the home buying process, especially if it’s your first time. Fear not!
Here’s a list of frequent first-time homebuyer concerns with useful tips to help you through this exciting journey.
1. How much house can I afford?
It’s tempting to begin with house hunting, but a better first step is mortgage pre-approval. Check out lender reviews and then reach out to potential lenders, who will ask you to pull together income records and bank statements. It’s quick, easy and results in a preapproval letter that indicates exactly much money they’re willing to lend you. This letter helps you set a budget, lets homeowners know you are a legitimate buyer and can help you make a competitive offer. You may also hear the term pre-qualified. A pre-qualification letter is still helpful but is more of an informal estimate of the loan you could get (while a pre-approval shows an official loan amount and interest rate). Both can give you an idea of what your monthly payment will be.
Beyond the mortgage pre-approval, you can also use an online home affordability calculator to determine what you can afford with a monthly payment. Keep in mind that you’ll incur expenses beyond the monthly mortgage payment, so plan for other homeownership costs, such as property taxes, homeowners’ association dues, homeowners’ insurance and annual home maintenance costs.
2. What do mortgage lenders care about?
Lenders look at credit scores but they also look at the actual credit report and your debt-to-income ratio. This helps them evaluate your payment habits and overall financial health. A good credit score usually equates to a better rate, so keep making regular payments on your existing lines of credit (don’t close them) and resist the urge to open any new ones. Now is not the time to buy a new car or take out new credit cards. In terms of your rate, you may be able to negotiate lender credits, also known as discount points, which essentially means you can pay an upfront fee to lower your interest rate. Finally, the lender will want to see a steady income history and will want to verify your income sources.
3. Do I have enough money to even buy a home?
You’ll want to ensure you have enough money for your down payment. For conventional loans, you may need as much as 20 percent of the purchase price of the home to avoid Private Mortgage Insurance (PMI). However, there are many home loan programs where down payments may be as low as 3 percent. Find out more in this article about loans that don’t require 20 percent down. The key is to start saving early. You can setup a specific savings account for your down payment and make regular deposits to it (note: keep this separate from your emergency fund). Setting a savings goal to achieve your dream of homeownership is smart money management. And again, if you’re a qualified first-time homebuyer, you may be eligible for certain loan programs with down payment amounts or state-based programs that offer down payment assistance.
4. What kind of mortgage loan should I get?
Your down payment amount, along with other factors such as whether you have a fixed or adjustable rate, is going to depend on the type of loan you choose. An experienced loan officer can help you with the mortgage process, including determining the loan type that is right for you. Here’s quick primer: Conventional loans are the most common type of mortgage loan. There are also other options that are backed by the federal government such as FHA, USDA and VA loans which often come with lower down payment and/or credit score requirements.
- Federal House Authority (FHA) loans are ideal for applicants with imperfect credit scores or those seeking smaller down payments.
- USDA loans, backed by the US Department of Agriculture, are available to borrowers who live in a rural area and meet certain income requirements.
- VA loans, guaranteed by the US Department of Veterans Affairs, are only available to qualified members of the military and their spouses.
5. Should I hire a real estate agent?
A real estate agent can be a valuable resource and trusted partner during the entire home buying process, from showing you prospective properties to negotiating a purchase price to helping you with the closing process. First-time homebuyers can benefit from a real estate agent’s expertise. Ask family, friends and colleagues for real estate agent recommendations and interview them before letting them represent you to ensure they’re a good fit and will have time to personally guide your path to owning a home.
6. What type of home should I buy?
Residential properties come in a wide variety of shapes and sizes, from condominiums and townhouses to traditional single-family houses and multi-family buildings. As such, you should determine what’s most important to you before you start the home search, go to open houses or scheduled showings. By creating a list of requirements and non-negotiable features such as neighborhood, house size, and amenities, you can rank prospective homes based on how closely they match your ideal house. Consider what you must have versus what would be nice to have, and don’t forget to account for how long you plan to be in the home and how your lifestyle needs might evolve during that time. Buying a home as an individual brings one set of needs, while owning a home with a growing family brings a completely different set.
7. How do I make an offer?
After you identify a home, you wish to purchase, you’ll submit an offer to the seller, in conjunction with a good faith deposit, also known as earnest money. This deposit, which is generally one to three percent of the loan value, shows the seller that your offer is a serious one. It’s later applied to the down payment. Hopefully your offer is accepted. If so, you’ll work with your lender to schedule the closing. The owner may also decline your offer or counteroffer, where they modify your conditions or ask for more money. These negotiations usually happen fairly quickly, within a 24-hour window. Having an experienced real estate professional in your corner can be of great advantage if you get into purchase negotiations.
8. How do I get to the closing?
Once your offer is accepted and you’re under contract, you’ll need to schedule a home inspection and home appraisal. The inspection will bring to light any major issues with the safety or condition of the home, while the appraisal is a professional estimate of the home’s value and is required by the lender. Both are critical steps that occur prior to the closing process. You can also consider investing in a home warranty, which gives you extra peace of mind about the home and future repair costs. The homeowner may offer to purchase a warranty on your behalf as a selling point.
Three days before you close, your lender will provide you with a closing disclosure that breaks down your closing costs, including fees beyond just the down payment. Here again, mortgage points can come in handy, as a form of prepaid interest that you’ll pay along with your closing costs. And as a first-time homebuyer, you may be eligible for additional assistance with closing costs in the form of government-backed grants and loans; be sure to ask your lender about these.
For many first-time homebuyers, the prospect of finding and purchasing a home can be a bit overwhelming. But it’s well worth it in the end, and by going through the process with qualified mortgage professionals such as AmeriSave loan originators, you can be sure that the excitement will outweigh any concerns and you’ll experience low-stress outcome.