10 Tips for First Time Home Buyers
That first home purchase can be so scary. How to buy a house is a question we frequently get asked. The whole process scares some people to the point that they don’t even want to try. But owning a home can be a wonderful experience and we don’t want to see fear stop you.
The truth is, home ownership isn’t for everyone. Like so many things in life, you have to consider what’s best for you and your circumstances before you sign on the mortgage line. The whole process may seem difficult and daunting but with a little planning and a little help, you can do it!
Here are our 10 tips for first time home buyers.
1. Make sure you are ready.
· Ask yourself why you are buying?
· Are you looking for more space?
· Is it an investment that you will rent or maybe flip it and resell it?
· Are you just tired of renting?
Once you’ve answered that, then consider how your finances look.
· Is your income stable?
· Do you have an emergency fund? A good suggestion for an emergency fund is at least 3 months of your monthly expenses in savings.
· What can you afford? When you look at your budget, what fits?
One word of advice: Don’t plan to have a mortgage for the full amount you can fit in your budget. Leave some wiggle room. Many things can change in your budget at any time. We’ve seen it recently. There has been an increase in basic necessities like groceries and gas. That effects your budget. Illness, injury, changes in car insurance, a change in pay all can effect your bottom line. So you never want to max out your budget.
2. Check your credit. You can do this by checking your credit report which you can free once a year at annualcreditreport.com. Here you can see if any areas need work.
· Check your credit score. If it needs work, create a plan to raise it.
· Look for any liens or collections and if you can, get those paid before you apply. These things can make a difference not only in getting a loan but your interest rate.
Now once you know what’s going on with your credit, if it’s good, keep it that way! Make your payments and don’t open any new lines of credit if you can.
3. Gather the info you need for your application. Some of this may be available digitally versus actual printed paperwork.
Most likely you will need
· 2 years of income tax returns,
· pay stubs for at least 30 days
· 3 months of bank statements. If you have multiple accounts you will want statements for all of them.
· If you are buying with someone else, need this for information for both of you.
It can be helpful to have your down payment in your account before the application process, and it will therefore show on the statement you are providing. Also, try to avoid any large deposits and withdrawals through this process so that your account looks like it would on a normal day. This helps your lender assess what your finances really look like.
As you get ready to go through this process, find a mortgage lender you trust to work with.
Now that you’ve figured out your budget and what your credit looks like, its time to figure out how much you actually qualify for.
4. Tip 4 – Pre-approval. Many people get tripped up here understanding the difference in pre-qualification and pre-approval.
Pre-Qualification is where a lender can estimate how much you would likely qualify for and determine what your basic loan terms would look like. They do this by considering your credit score, price of the home, your down payment, your monthly debt and how you will structure your loan. For this, there is not what’s called a hard hit to your credit.
Pre-approval means actually filling out the application and then the lender will pull your credit report and offer you a loan at a specified interest rate. A pre-approval is good for 90 days and is needed in order to place an offer. If you don’t buy within that 90 days you will likely have to go through the approval process again. So, keep that in mind and think about the timing of when you do these steps.
This will let you know the amount you can qualify for so you know what price range to shop in. Remember, just because you qualify for a certain amount, doesn’t mean that’s what you should spend. You buy what you can afford and you don’t max out your budget!
5. Determine what kind of home you want! Go beyond price and think about things like size and location. Consider if you want to buy in an area based on schools or where you work. Look at bedrooms, bathrooms and any other amenities you may need for your home like an office or fenced in yard. Once you can answer some of these questions, you can start looking for a home that’s a match for you!
6. Look for a real estate agent. This can be someone you know or if you don’t have anyone in mind, perhaps ask those you trust for a recommendation. The knowledge and information at the fingertips of an agent can be invaluable in finding the home of your dreams.
7. Down payments. This seems to be the thing that scares people most. They think a down payment is some crazy out of reach number that they can’t afford. And that’s just not true in most cases. The down payment required depends on the type of loan you get and can be as low as 3% of the loan amount.
There are also loan assistance programs that can offer help or even some loan types that allow you to finance 100% of your purchase, meaning you wouldn’t need a down payment.
Your lender can help you with the different types of loans available. Its just a matter of finding the right one for you.
8. Closing costs that are paid at the time of purchase. These are fees for attorney’s, pest inspection, appraisal, and escrow.
These costs are usually between 2-5% of your total loan amount. And there are ways to get help with these. In some cases the seller may pay or it could be included in the loan amount. This is all determined by the type of loan you qualify for.
Note on escrow: the definition of escrow is a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met (such as the fulfillment of a purchase agreement, like a mortgage).
Shorter version? It’s used in real estate transactions, throughout the term of the mortgage. So as long as you have the mortgage on your home, there will be an escrow account set up for you that holds the funds for taxes and homeowner’s insurance. Those funds are held out of the amount you pay each month for your mortgage and those bills are then paid on your behalf.
Keep in mind, if you are using a mortgage calculator to figure out your monthly bill, it generally won’t count the escrow that has to be held. So don’t rely solely on those calculators for a total mortgage amount.
A few other things to consider when it comes to costs.
· Any repairs or renovations that your home needs
· Home owners association. Those often come with fees and rules that need to be followed. Your real estate agent should know this or be able to find out.
· Basic upkeep and repairs on a home. If you are coming from an apartment there may be things that your landlord took care of for you. Same if you lived with your parents. There were probably things that they handled that you weren’t even aware of. That will be your responsibility now!
9. Hire an inspector! These are people that come take a look at the home and help you know if there are any issues to consider. Have the home you have chosen inspected by a licensed professional before you buy.
If there are items that need repair, this can be a point of negotiation on the asking price of the home. Or the seller may be willing to make the repairs which saves you headaches before moving in.
10. Go get that loan! As we said before there are several types of loans and they all have pros and cons. You want a mortgage lender that you can trust, that will guide through this process and who will find you the very best financial situation they can for you. ASK QUESTIONS. Ask what you don’t understand and if you are working with someone that’s not willing to explain and help you, then find someone else who will.
Bonus Tip - keep physical copies of your paperwork!
So many things are cloud based these days, but it’s a good idea to have copies of your deed, closing disclosure and other important documents. We recommend keeping them in a fireproof box or cabinet that is locked. Anyone on the loan should know where these documents are and how to access them in the case of an emergency.
I know in this day and age of technology, this may sound crazy, but you never know what may happen where your documents are being stored, so having a copy yourself can be helpful.
This process can be confusing and overwhelming if you let it. But it doesn’t have to be. Make a list of your questions and come talk with us. We are happy to help you through the process.