Buying your first home is an exciting, and a little scary, time in your life. There are a lot moving parts that go into the home-buying process. Most of us follow the lead of the realtor until we have keys. This doesn’t give you much leverage when it comes to negotiating price and terms.
However, if you know what to expect and do your research, you will feel more confident and in control as a buyer. So without further ado, here are some things you need to know before buying your first home.
Know what you can afford
Before you begin looking for a house, you need to set some standards to find out what you’re comfortable with paying. If you are committed to a certain price range, you will have much more discipline and won’t be easily persuaded by realtors giving you “other options” that might be out of your budget.
You should also consider your debt-to-income ratio. This is the amount of debt you currently have compared to your overall income. This ratio is going to help mortgage lenders decide how much additional debt you can handle and if they can approve a home loan for you. Ideally, your debt-to income ratio should be 36 percent or lower.
It’s important to know what’s on your credit report and be prepared to explain any discrepancies that might come up. Clearing up judgments or liens will only help you when applying for a mortgage loan. Also, it never hurts to continue building your credit and keep current debt in check.
Prepare for the down payment
Once you have an idea of what you want to pay, the next step is start looking towards the down payment. There are a couple of questions you need to ask yourself. Have you started saving up? Do you know how much you’re going to put down?
While most lenders require a down payment of at least 3%, you probably want to have a down payment of at least 20% to avoid having to buy mortgage insurance. This is a contract that insures the lender against loss in the chance that you default on your loan.
Your credit is also a big factor when it comes to talking mortgages. Having a good credit score, usually 740 or higher, can qualify for the best interest rates. There’s a reason we didn’t name this section “saving for the down payment.”
Then comes the “fun” part of getting the money for your down payment. While we always suggest save and budget, there are other options of saving up. You can always earn extra money by getting a side job, working on other projects, and utilizing other skills you have.
For example, if you’re a gifted photographer, you can start up a photography business. The possibilities are endless!
Be aware of the “hidden costs”
You most likely know the costs when it comes to moving: boxes, travel, moving services, hotel stays. However, there are some other costs that some first-time buyers might not be aware of. You’ve probably heard the term “closing costs,” but what do they mean?
- Origination fee—Fee paid to a lender for processing a loan application.
- Escrow costs (property taxes)—The tax based on the value of the property.
- Appraisal fees—A payment made to someone to evaluate how much a home is worth.
- Prepaid interest—Interest paid in advance by the borrower.
- Title policy fees
- Charges for title insurance
While you usually are responsible for these costs, it’s not uncommon for the buyer to try and negotiate for the seller to pay for part, sometimes all, of the closing costs.
Talk with a mortgage lender
Now it’s time to sit down with a loan officer and talk numbers. Even though you already have an idea of what you want to pay, you need to get pre-approved before you apply so you can see how much you’ll be able to borrow.
Just so you have an idea, here’s how the process goes at Neighborhood Credit Union.
After we receive a completed application and all required documentation, we will have the property appraised, verify your employment, verify your deposits, and order your title commitment. This an insurance policy that protects the insured against loss and damage due to defects in the property’s title.
Once we receive these items, your loan officer will review your loan.
If everything checks out, we will submit your file to an underwriter for final approval. Once you’re approved, accept the commitment, and all the conditions have been met, we will schedule a closing.
Pick the right time to buy
Believe it or not, strategically picking when you want to buy can go a long way. Normally people like to wait until the summer months to house hunt because they have more time and their kids are out of school. While there are more houses to choose from, the summer usually brings more competition.
According to a study by the real estate brokerage Redfin, the winter season (Dec. 21-March 20) is the best time to make a move on a new home. Even though there aren’t many houses on the market, sellers might be more flexible about negotiating prices than they would in the spring. We’re in prime time right now!
Find the house you love
This is the fun part: getting out to look at houses. Just like when you go to dealerships to test drive a car, you want to make sure you get the most out the time you have to better compare down the road.
When looking, do an initial walkthrough without focusing on any specific room to get an impression of the house as a whole. If the house gives you a good first impression, start focusing on the specifics you want in a new home. Take photos and videos so you have something to compare afterwards.
Speaking of specifics, don’t go look at houses empty handed. Take measurements of your furniture so you can see if your bed or couch will be able to comfortably fit in the house you may move into. The last thing you want is to have to buy all new furniture because you assumed everything would fit.
Finally, we’ll leave you with one last tip. As you narrow your list of finalists, go look at those houses multiple times so you can see them at different times of the day. You may learn something new just by being in the house after the sun goes down.
Bonus Tip: We have a mortgage glossary where you can find the additional definitions you need to help you better understand the language you’ll hear during the mortgage process.
Before you know it you will be on your way to buying and owning your very first home! If you have any questions or want to get started, give us a call at (877) 502-4223.