So you’re wanting to buy your first home, but where do you start? As a first-time homebuyer, the entire home buying process can be rather intimidating. But it really doesn’t have to be.
Below are some tips to make saving for, finding and buying your first home a breeze.
Know Your Credit Score
One of the biggest qualifying factors for a loan is your credit score. If your credit score is low you will have a hard time getting approved and if you do, your interest rate will be high. But if you have good credit then you’ll get approved and have the most favorable terms. There are plenty of ways to obtain free credit reports, such as Credit Karma. Review your report for errors and areas with room for improvement. To find errors check your report and note any accounts that you are unfamiliar with. If there is something on your credit report that doesn’t look familiar or possibly belongs to an ex or someone else in your family, visit the credit bureau website to find out how to dispute it. You should hear back in a month if they found they made a mistake or not. Set a calendar reminder to check back in with them after a month. If you have open credit cards make sure you pay the balances down below 15% of the credit limit to maximize your credit score. Canceling credit accounts isn’t ideal from a credit utilization and length of credit history standpoint.
Get Pre-Approved for a Mortgage
First things first, you need to get a pre-approval letter before you start your home search. Getting pre-approved for a mortgage is a fairly simple and straightforward process. Need a referral? I would be happy to provide a list of excellent lenders I work with locally. This process will also help determine the maximum price you can afford, which obviously will help you focus your search accordingly, and prepare you to make an offer when you find the right home.
You will need to provide the following documents at your first appointment:
- Past 2 years of tax returns
- Paycheck stubs and w2’s
- Last 2-3 months of bank statements
- Proof of down payment
When shopping for a mortgage you shouldn’t just go along with the first lender that gets you approved. Find a lender you can trust and who is responsive. You should compare loan offers from at least 3 different lenders to ensure you’re getting the best deal possible. Mortgage companies are required to give a loan estimate to the borrower within 3 days. This loan estimate will break down all the costs associated with the mortgage loan. I also recommend working with a local lender as our community is unique in pricing and product.
Know Your Budget
There are many costs associated with getting a mortgage besides the loan payment. There’s property taxes, mortgage insurance, homeowners insurance, and HOA fees. You need to make sure you can manage all the costs. Your debt-to-income ratio (DTI ratio) will decide the maximum loan amount you qualify for. Debt to income is the amount of your monthly income compared to your monthly debt obligations, such as credit cards, auto loans, etc. Most mortgage lenders will allow a maximum DTI ratio of 41%. If you find that your DTI is out of balance, you may want to spend a year or 2 working on paying your debt down. I would check out a program like Dave Ramsey’s Financial Peace University.
An additional resource to check out if you are trying to get your financial ducks in a row is Homes Fund. This organization can offer down payment assistance if you qualify. They also offer a very informative class to first time home buyers.
Make a List of Home Features You Want
It’s always a good idea to make a list of key features you want in your new home. This is doubly important if you are purchasing with a partner. Each of you needs to make a list of what is truly important in your new home. How many bedrooms and bathrooms will you need? Do you want an office? Would you like to live in town, in the mountains with the smell of pine trees or up on the Mesa with majestic mountain views? You probably won’t get everything on your wish list for your first home – but picking your top 3 must-haves and top 3 deal-breakers is a great place to start.
It’s already exhausting enough as a first-time home buyer to understand the process and prepare yourselves financially for potentially the largest investment of your life. Thinking through what you want as specific as possible will help with time, efficiency and also making it enjoyable.
Hire Your Own Real Estate Agent
Some first-time buyers make the mistake of not hiring their own realtor and working with the seller’s agent. This is a big no-no. The seller’s agent will be loyal to the sellers and look out for their interests first. This is why you should hire your own real estate agent that will work for you. After more than 15 years in the business, I am still surprised to hear from first-time home buyers that they don’t reach out to an agent when starting their search because they don’t want to pay someone. The reality is that the seller pays the agent, not the buyer. The seller has negotiated the commission long before you even see the house advertised. Also, since so many buyers are searching on websites such as Zillow and Trulia, know that information is not always the most accurate. “Zestimates” are based on computer analysis, not actual appraisals. It is always best to speak with an actual realtor to get the true picture and details.
Get a Home Inspection
You should never skip the home inspection, even on brand new homes, you should get an independent home inspector to ensure there are no problems or potential problems. The average cost for a home inspection is around $300-$400, depending on the square footage of the property. The home inspection is an opportunity for you to learn about your home. It is not a chance to renegotiate the contract or walk away if the seller doesn’t fix every little thing. It educates you about your home, so you can prepare for more likely scenarios in years 1-5. If the home inspection does uncover significant, serious problems, of course, we will apprise the seller of the situation and determine the best path forward.
Don’t Apply for New Credit
Your credit score is the most important factor there is when it comes to getting a mortgage. You should make sure you do not do anything that would cause your credit score to drop or raise red flags to the lender. Avoid applying for any new loans or lines of credit while you are shopping for a new home. When you apply for new credit or extend your limits, your credit score will drop initially and build back up over a few months. Don’t increase debt on your credit cards either as that will drop your credit score as well. You should be working on paying the balances down as much as possible to help increase your score.
In conclusion, shopping online for houses on websites like Zillow and Realtor.com is fun but when you are getting serious about this tremendous purchase you should really use experts to help you make the best and most informed decisions.