So, you’re looking to buy a house. This guide offers first-time homebuyer tips to help you get ready for what lies ahead, whether it’s your first foray into the thrilling home-buying process or you’ve been through it before but have forgotten the specifics.
A first-time home buyer is what?
One might think of a first-time homebuyer as someone who has never bought a home before, but in some instances, the definition is much broader. Even if it isn’t their first time buying a home, buyers who lack a sizable down payment may be qualified for down payment assistance through first-time homebuyer grants and loan programmes. Simply put, buyers must not have owned a home in the past three years to be eligible for many of these programmes.
advantages of first-time homebuyers
Being a first-time home buyer has benefits.
One is first-time homebuyer programmes, which can lower the cost of buying a house. Many states and local governments have programmes that provide down payment assistance or other help to people looking to buy their first home, and some lenders offer slightly discounted mortgage rates.
While some of these programmes have additional requirements like income caps, others don’t, Look for first-time homebuyer opportunities in your neighbourhood that you might qualify for.
a step-by-step manual for first-time home buyers
Step 1 is to evaluate your finances.
Check your credit reports and score, consider your spending plan, and decide whether you can afford a down payment and closing costs.
Although you can still get a loan with a score as low as 500 (for an FHA loan) or 620, you can get more favourable loan terms with a higher credit score that will save you a lot of money over the course of your mortgage (for a conventional loan). Typically, a score of 760 or higher is required to be eligible for the best rates and conditions.
ratio of debt to income
Take a look at your debt-to-income (DTI) ratio to see how much debt you have in comparison to your income. Conventional wisdom states that 28 percent of your gross monthly income should be set aside for housing expenses, which include the mortgage payment, property taxes, homeowners insurance, and homeowners association dues. The ideal spend is 36 percent, which includes housing expenses as well as all of your monthly debt payments. Most mortgage lenders aim for a DTI ratio of no more than 43%, though some go as high as 50%. However, because you are viewed as a riskier borrower with a higher DTI ratio, you are more likely to pay a higher interest rate for your mortgage. Your finances may be put under stress if your DTI ratio is higher.
The down payment comes next. Private mortgage insurance (PMI), which protects the lender should you default on the loan, is an expense you can avoid if you’re interested in a conventional loan and have 20 percent available as a down payment. But you don’t have to put 20% down; you could pay as little as 3% or 5% with PMI, depending on the type of conventional loan you obtain. You don’t need to put any money down if you’re getting a VA loan or a USDA loan. In contrast, FHA loans need a minimum down payment of 3.5 percent.
After that, consider your financial capacity to cover closing costs, which can represent 2 to 5 percent of the home’s purchase price. You’ll need to have these funds set aside because you might owe a sizable sum on closing day, depending on how much your lender charges in fees.
The earnest money deposit, a smaller deposit included with your initial offer to purchase a home, is another option. Some states demand a deposit from a buyer equal to 10% of the home’s purchase price, while other states might only permit earnest money deposits of a few hundred dollars.
Don’t forget: You’ll also need money set aside for furniture and moving costs, as well as any updates or repairs you might want to make before moving in. All of this is on top of the money you should ideally have set aside for emergencies.
Gather your pay stubs, bank statements, W-2 forms, federal tax returns from the last two years, and any other information pertaining to other assets and debt you may have after taking these factors into account and determining what you can afford. Your lender will use this information to determine how much credit you qualify for.
Choose the type of mortgage you want in step two.
Mortgages come in a wide variety of forms. Your first decision should be between a fixed-rate and an adjustable-rate mortgage (ARM).
Rate: fixed or variable
Fixed-rate loans typically have slightly higher interest rates, but because the rate is fixed throughout the loan’s term, you always know what your monthly payment will be. An ARM typically has a lower rate for a while (for example, five or seven years), after which it adjusts up or down at predetermined intervals (such as once a year). Your monthly payment will increase if the rate does.
Also take into account the loan’s term, which could be 15 or 30 years. Although you will have less monthly budget flexibility with shorter-term loans due to their lower interest rates and higher monthly payments, you will pay less in interest over the course of the loan. Whether a lower monthly expense or overall savings is more significant is entirely up to you.
Most first-time homebuyers receive a loan with a fixed rate of 30 years. An ARM, however, can be a good way to save some money if you don’t plan to live in a house for a very long time. For borrowers who intend to remain in one location, fixed-rate loans provide more stability.
Additionally, there are a variety of loan programmes available, such as conventional and FHA loans. If you don’t meet certain requirements, you might not be eligible for some programmes, so be sure to read the fine print to see which ones might be a good fit for you.
Get quotes from at least three mortgage lenders in step three.
Comparing loan offers is best done by first obtaining a rate quote. Get rate quotes from at least three lenders because mortgage rates fluctuate frequently and can differ significantly from one lender to the next. If you provide some basic information, such as the loan amount you’re looking for, your down payment, and credit score range, you can frequently get a quote for free through the lender’s website. In general, you should choose the loan with the lowest interest rate because it will result in lower monthly and yearly expenses.
If you’re buying a home for the first time, you might also want to get a sense of how rates change over time and the rate environment right now so you’ll know what to anticipate when you request quotes. By creating a Bankrate account, you can use our daily rate trends to decide when to apply for a mortgage.
You might also think about hiring a mortgage broker so they can shop around for you. In most cases, brokers don’t charge borrowers for their services.
Although quotes can be a useful tool for comparison shopping, your rate won’t be set until you lock it in with the lender.
Step 4: Obtain a mortgage preapproval.
You’re prepared to get preapproved for a mortgage once you’ve received quotes from a few lenders.
A preapproval is not a finalised offer; rather, it is a lender’s preliminary promise to lend you a certain amount of money. Obtaining one is essential before you begin looking for a home because sellers won’t take into account your offer unless they are aware that you have the financing arranged. Typically, the preapproval letter outlines your borrowing capacity, the loan programme you’re using, and the anticipated down payment you can afford.
Be ready for your mortgage lender to examine every aspect of your financial situation when you ask for a preapproval. The paperwork you prepared in advance will be useful in this situation.
Make sure the preapproval you receive is not merely a prequalification. A prequalification is more useful for determining how much you might be able to afford than it is for indicating that you might be approved for a mortgage. When you make an offer on a house, it won’t be accepted.
Find a real estate agent in step five.
A real estate agent can be of great assistance in the home-buying process because they are familiar with the area and the housing market there and can offer insightful information about neighbourhoods, school systems, and other factors.
Asking for recommendations for a buyer’s agent is a good place to start if you’re unsure how to find an agent. Many agents get their clients through recommendations. Additionally, you can look up top-rated agents online and read client reviews.
Try to speak with three or more buyer’s agents. Inquire about their background, performance history, and any areas of expertise they may have, such as condos. Additionally, get references to confirm whether the client had a good experience working with the agent.
You may be up against multiple offers in today’s market, so you’ll also want an agent who can act quickly on a property you’re interested in and guide you through a bidding war, if that occurs. Ask your agent how they prefer to communicate and how they have assisted other buyers in navigating the current market.
When you’re prepared to look at houses, hire a real estate agent to guide you in choosing the best one and negotiating the best deal. Although you will probably need to sign a contract with the agent, you won’t be responsible for paying the commission because the seller pays the agent who is working on their behalf.
Step 6: Purchase a home.
The enjoyable part is now. So that you don’t waste time looking at homes that don’t suit your needs, discuss your budget and top priorities with your agent. Even if it seems like the ideal fit based on an online description and photos, try to visit homes in person before making a decision.
Visit the house and the surrounding area when it is being shown. How would you feel if you learned that your neighbourhood had too much traffic, was close to an airport, or had poor performing schools? Frequently, the location is just as crucial as the actual house. Obtain a copy of the HOA documents for a home if it is part of one so you are aware of the fees and rules.
Step 7: Be ready to submit an offer quickly.
Be prepared to submit an offer quickly if you visit a home in your ideal neighbourhood and price range and like what you see. To assist you in making a competitive offer, your agent can perform an analysis of similar listings (referred to as “comps”) that have recently sold in the neighbourhood.
The offer should specify the asking price, the seller’s response deadline (typically within 24 to 48 hours), and any conditions you want to include. The offer should at the very least have appraisal and home inspection conditions. This means that you can back out of the deal without losing your deposit if the home appraises for less than the price you offered or if an inspection reveals serious problems. The offer should also contain an escalation clause with your top offer limit if a bidding war appears likely.
It’s common for buyers to waive contingencies in order to have their offer accepted, but you should try to avoid doing this if you can. You don’t want to buy a house only to discover later that it has problems that would cost a lot of money to fix. Talk to your realtor about what’s reasonable because in some extremely hot markets it can be difficult to purchase a home with certain contingencies.
Prepare to bargain on a price
Your offer can be accepted, rejected, or countered with a different price once the seller has been presented with a purchase agreement. Utilize the expertise of your agent to bargain with the seller for the best result.
Write a letter to the seller outlining why you adore the house if you find yourself in a bidding war with multiple offers. However, don’t let losing to another buyer demoralise you. You might not get the first home you make an offer on in today’s market because many homes sell quickly and for more than their asking price.
Step 8: Agree on the cost of closing.
Once your offer has been accepted, you should submit your mortgage application. You will receive a loan estimate three days after submitting your application, which will include information such as the loan terms and anticipated closing costs. A lender may offer a no-closing-cost option in which the origination and underwriting fees are rolled into your loan or charge an origination and underwriting fee that may be waived or reduced if requested. (You’ll typically pay more in interest if you choose this option.) Any fees you are unclear about, ask your lender to explain.
You might also inquire about down payment and closing cost assistance programmes with your state’s housing finance office or local housing organisations if you require assistance with closing costs. You might be eligible for a few thousand dollars to help with expenses if you meet the program’s requirements. On Bankrate, you can look up first-time homebuyer programmes by state.
paying points on a mortgage
Whether you should pay points to lower your mortgage rate is another thing to think about. By paying points, you are essentially prepaying a portion of your loan’s interest. Typically, each point costs 1% of the total loan amount, so purchasing one point on a mortgage for $250,000 will cost $2,500. Typically, each point you pay lowers the rate by 0.25 percent.
In general, it is better to pay points the longer you intend to own a home because you will recoup the cost of the points through the lower monthly payment on your loan. Divide the cost of a point by the monthly amount that your mortgage payment will be reduced to arrive at the breakeven point.
To break even, you would need to own the property for about 84 months ($2,500/$30), or roughly seven years, if you paid $2,500 for one point and your monthly payment was reduced by $30 as a result.
Hire a home inspector in step nine.
After the seller accepts your offer, hire a home inspector to assess the property. You can find a home inspector through the American Society of Home Inspectors, International Association of Certified Home Inspectors, or National Academy of Building Inspection Engineers, or you can ask your agent for a recommendation. Consult the Better Business Bureau, HomeAdvisor, Yelp, or other online resources to look for complaints and read reviews, just as you did when looking into agents.
An inspector will examine the building’s framework, roof, heating, plumbing, and electrical systems, but they won’t typically look for mould or lead paint. Depending on the size of the home and the scope of the inspection, the inspection can take two to three hours and cost between $300 and $1,000.
You should be present during the inspection with your agent so you can get clarification on any problems.
As soon as you have the inspection report, discuss your options with your agent. The seller might not agree to make repairs if there are other offers that won’t require them to pay for repairs if the inspection reveals significant issues. If the seller won’t fix the problems and your purchase agreement includes an inspection contingency, you might decide to walk away.
Step 10: Complete your move, purchase homeowners insurance, and (at long last!) close
Homeowners insurance is a requirement of mortgage lenders, protecting both your investment and theirs. Get quotes from various insurance providers or work with an insurance broker who can compare prices for you because insurance premiums vary. Consider your needs and make sure you purchase enough insurance to rebuild your house in its entirety if it is completely destroyed or severely damaged. You must also purchase flood insurance if your home is situated in a flood plain that has been identified by the government.
Prepare your move.
You should probably start preparing for the move before the closing, depending on how quickly you intend to relocate. Make arrangements for new service with your utility, cable, and internet providers as you get ready for move-in day. Then begin packing after hiring a dependable mover.
Arrive at your closing
It’s time to sign the agreement and put pen to paper at last. At the closing, the purchase agreement is completed and you are formally welcomed into your new home. Obtain updated pay stubs and other financial documentation just before the closing to demonstrate that your employment situation hasn’t changed and that you’ll be able to make your mortgage payments. Get a cashier’s or certified check made out to the escrow company in advance if you need to pay closing costs on closing day. Also remember to bring your identification.
You’ll conduct a final walkthrough of the home within 24 hours of closing to confirm that any necessary repairs have been made and that it is empty. You’ll sign a tonne of documents at the closing table to seal the loan and change the seller’s name from the property’s owner to yours.
What will happen after new homeowners?
Although the process of purchasing a home can be drawn out, there is still work to be done after you move in.
Assess your house first, then consider any changes or repairs you might want to make. (The inspection report will be extremely useful in this.) Start accumulating a fund for home improvements if you haven’t already, and set aside additional funds for unforeseen repairs.
Watch the real estate market, particularly mortgage rates, as time goes on. If home values are increasing, you might think about using a cash-out refinance, a home equity line of credit (HELOC), or a home equity loan to access the equity in your home. Refinancing to a lower rate may be more cost-effective if interest rates have decreased. Of course, consider the benefits and drawbacks of each of these choices. Even in a lower-rate environment, a refinance’s math doesn’t always add up favourably.
You might also want to reevaluate your mortgage payment schedule, perhaps adding extra payments or paying off your mortgage sooner, depending on the terms of your loan and how your finances change. Before concentrating on a payoff, think about your objectives and whether there are any other financial moves you could be making. If you do decide to prepay, make sure the extra payments are going to the loan principal and not interest by speaking with your lender in advance.