An 8-Step Guide for First-Time Homebuyers
Everything You Need to Know to Get Into Your First Home
If you’re in the beginning stages of buying your first home, you may fit the bill of a lot of first-timers: wide-eyed and overwhelmed.
Maybe you’re starting to think that renting isn’t all that bad, or that tents have this homey charm you could probably learn to love (as long as you plug your nose to the smell).
We are here to get you out of the figurative tent by making the process of buying a home as easy as it can be. In this post, we’ve synthesized the basics of buying a home so that all the information you need is one place, with as little drudgery as possible.
Follow our simple step-by-step guidelines to become savvy with the homebuying process before you even start it.
1. Take Inventory of Your Finances
Buying a home can be extremely rewarding, but without the right preparation, you can end up feeling like your head is barely above water. This is a big purchase, so it’s important to plan accordingly.
Questions that every first-timer should ask themselves include the following:
- Is it a good idea financially for me to get a home right now?
- If not, what exactly should I save up for?
- Would I be okay on my payments for a few months if there was an emergency?
If you’re in a lot of debt or are struggling with credit, this may not be the time to buy a home. That being said, there are so many options, you may be surprised at the affordability of certain homes. You just want to make sure that your situation will allow you to keep up on your payments before you make such a significant purchase.
And the monthly mortgage payment isn’t the only cost associated with buying a house. Some of the other things you’ll want to save for before making the purchase include:
- Down Payment – Making a down payment that is 20% or more will get you out of paying PMI (assuming you’re getting a mortgage), so if you can save up the money, it could be worth it. You don’t have to pay 20%, however. Different loan types require different down payment amounts.
- Closing Costs and Fees – Generally, you’ll want to save around 2-5% of the purchase price of the home to be prepared for these expenses.
- Other Anticipated Costs – If you know you’ll be buying new furniture, renovating the home, having to pay a moving company, etc., make sure you have money saved for these things.
- Cash Reserves – Having some extra cash reserves—at least two or three months’ worth of mortgage payments—is a good idea so that you have a backup in the case of emergencies like job loss or illness. It also shows lenders that you’re less of a risk, and might even be able to get you better rates on a mortgage.
If you need further help figuring out your own unique financial situation and homebuying readiness, don’t hesitate to call us to speak with one of our mortgage professionals.
Once you’re aware of the costs associated with home buying, you can start looking at your qualifications.
2. Consider Mortgage Qualifications
Though a lucky handful of first-time homebuyers pay for a home with cash, the majority take out a mortgage. Before you set your sights on that mansion on the bench, though, you’ll want to have a grasp of the qualifications that are required for buying a home as well as what loans you qualify for.
First, know that when you go looking for a mortgage, there are two sides of a loan deal. Not only are you looking to borrow money, but the lenders are looking to make an investment. They want to be sure that they won’t lose money on this deal, and that you’re a safe bet for them.
This is where qualifications come in. Folks with things like higher credit scores, lower debt-to-income ratios (DTI), and the ability to make a larger down payment are likely a safer bet for mortgage lenders. They’re less likely to default on the loan, so they often get lower rates.
Some of the general qualifications for a mortgage are the following (but keep in mind that qualifications will vary between lenders and based on your unique situation):
- Down Payment – Most lenders will require something between 5% and 20% for you to qualify for a loan. And there are some loans, like a VA loan, that require no down payment at all.
Debt-to-Income Ratio – A DTI is a measure of how much of your gross income you spend on debts each month. Many loans require that yours is less than 35-45% to be approved, but this number will vary between lenders and based on your other qualifications.
Credit Score – A credit score is an essential part of your qualifications. It is basically a report that shows how responsible you’ve been with money, gathered from your history of handling credit and loans. For many loans, you’ll want at least a 640 score, but it depends on the lender and other factors.
You can request a free credit report from the three major credit reporting companies once a year via AnnualCreditReport.com. This can give you an idea of where you’re sitting and whether you should proceed with buying a house or take some time to build credit first.
Income – You’ll need to be able to prove to lenders that you have a steady income. Two years of dependable work will allow you to qualify for many loans.
Even if you don’t have the best qualifications in the world, that doesn’t mean you won’t be able to qualify for a good mortgage. You may get higher rates, as a kind of insurance for the lender against the risk of taking you on as a client.
There are also FHA loans and other loans that are perfect for first-time homebuyers. Some of these are more lenient than conventional loans when it comes to qualifications.
3. Get Pre-Approved or Pre-Qualified
Before heading out to look for a home, it’s a good idea to get pre-qualified or pre-approved. A pre-qualification is a quick letter from a lender basically saying that you’ll likely qualify for a loan.
A pre-approval letter shows that you are almost sure to get approved, using more detail and energy in its analysis; it also gives a loan amount commitment from the lender. It will show your real estate agent and the home seller that you’re very serious about buying. It will also give you a good idea of how much home you can afford.
If you want to get pre-approved or pre-qualified now, contact us at Elevate Mortgage Group.
4. Find the Right Real Estate Agent
Once you’ve gotten pre-approved or pre-qualified, it’s time to start looking for a real estate agent. Most agents are paid through the seller, so you usually won’t have to worry about negotiating the commission. Look for someone who is receptive to what you’re looking for, familiar with the area you’re looking in, and experienced.
You don’t have to go with the first agent you find. Interview a few before deciding who will be the best fit. They’ll be helping you find the home you’ll be living in for the next while, after all!
5. Find a Home and Make an Offer
Before you go searching for the dream home, make sure you know just how much house you can afford. You don’t want to get caught closing on a home that you later find to be barely affordable.
Here are some tips to make your home search all the more enjoyable:
- Know What You’re Looking For – If you’re buying a house with someone such as a spouse or housemate, make sure you’re on the same page when it comes to what you want in a house. This might require some give and take, but it’s a good idea to have the conversation before you go looking rather than in the middle of being shown a home.
Be Open with Your Real Estate Agent – Make sure to communicate both the details of what you want and your price range with your agent. This is a huge decision, so open communication will only serve you.
Consider the Investment – Buying a home is a major investment. Location, school district, neighboring homes, the home’s condition, and other details will affect resale value and should be kept at the forefront of your mind.
Enjoy It – Take your time making the decision—this big of a decision shouldn’t be made frantically. And before you let the details overwhelm you, remember that choosing a home can be fun.
When you’ve found the right home, it’s time to make an offer. Agreeing on a deal is not always easy or fast, but your real estate agent can help you with the process. Know that you’ll probably find a home or two you like but that won’t end up working out.
After your offer is accepted, get a home inspection. If there are needed repairs or issues with the house, you can negotiate the price or have the sellers agree to fix it before closing.
6. Find a Mortgage
After finding the right home, you’ll need to get a good mortgage. There are a lot of options out there, but we’ll help you know what to look for.
Choosing Your Mortgage Type
There are a number of different types of mortgages to choose from, all with their own benefits and disadvantages. There are some, however, that are more common for first-time homebuyers and may offer some benefits that fit your situation specifically.
The following are some of the most common mortgage types:
- Conventional Loans – Conventional loans are loans that are not government-backed. You’ll find a wide variety of options under the conventional loan umbrella. They may not be realistic for every first-time homebuyer, but some will offer good rates.
FHA Loans – FHA loans are loans that are backed by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development. FHA loans will often allow a lower down payment as well as less strict requirements for qualification, though you may have a higher rate and insurance costs.
VA Loans – VA loans are backed by the US Department of Veterans Affairs (VA) and are offered to many veterans and, in some cases, their surviving spouses. They require no down payment and are often more lenient with qualifications than other loans. They are a benefit offered to veterans, so you should consider one if you are a veteran.
There are also specific grants for first-time homebuyers that may be helpful to you. Check out the U.S. Department of Housing and Urban Development website or talk to a mortgage professional to find one in your area.
Things to Ask Your Mortgage Broker as a First-Time Homebuyer
The loan type that is right for you depends on your qualifications and specific circumstances. Some things to keep in mind and ask your mortgage broker about include the following:
- The Loan Term – The term of your loan refers to how long you’ll be paying off your mortgage. If you can afford it, it’s usually better to go with a 15-year loan, since you’ll pay off your mortgage sooner and will save a good deal of money on interest. However, there are terms as long as 30 and 40 years.
Fixed or Adjustable Rates – Interest rates on your mortgage can either be fixed or adjustable. Fixed rates means that the rate will stay the same, no matter how the market or anything else changes. Adjustable-rate mortgages (ARMs), on the other hand, may change (up or down) with the market. A fixed-rate mortgage is a more secure choice.
Finding the Right Lender
Rates, customer service, and loan terms can vary widely between lenders. This is true even with government-backed loans.
Because of the variation between loans, it is crucial that you shop around. You do not need to go with the first lender you come across. Get quotes from multiple lenders, look at their customer reviews, and compare rates, terms, and other costs to find the best lender for you.
And, again, don’t hesitate to ask each lender questions about every detail of the loan. In addition to what was mentioned above, you’ll want to ask about fees, closing costs, appraisal costs, and other additional costs and details that may not be apparent upfront.
7. Get an Appraisal
Lenders require that your home is appraised.
Appraisers are from third party groups and will determine what they think the value of your home is. This helps the mortgage company ensure that you’re not paying more than you should be.
Since your home is collateral if you end up defaulting on the loan, lenders want to make sure you’re buying it at a price at or below its value.
8. Close the Deal
Finally, you can close on your home! This is an exciting part of the process. Make sure you look at the closing documents before the day comes around, however, so you’re not shocked at the last minute.
You’ll have to pay closing costs and do some more paperwork. Look over the forms carefully and if you have any questions or something doesn’t look like what you agreed to, do not hesitate to bring it up.
Bonus: Enjoy and Celebrate Getting into Your First Home!
If at any point during the process, you feel about ready to give up, just remember that this is a major investment and milestone and will be good in the long run.
The newness and detail of it all can get a little overwhelming at times, but it can also be a lot of fun. Keep the big picture in mind and remember that soon, you and your loved ones will have your own lovely little nest.
And when you’re finally moved in and cozy, don’t forget to celebrate!
Who We Are
At Elevate Mortgage Group, we strive to get every client the right mortgage for their situation. If you have questions on your process or want to get started on a loan, call us at 888-935-3828 or visit our website.