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August 15, 2023
Buying your first home is an exciting — and slightly intimidating — experience for anyone. The process can be overwhelming for a first timer who may not even know where to begin. Before you embark on your journey as a first-time homebuyer, it's important to do your homework so you can get the most out of your purchase.
With this article, I hope to help demystify the process for first time homebuyers with a rundown of what you should consider before you start home shopping.
How Much Home Can You Afford?
Before you ever start looking, it's important to pin down how much you can afford to pay each month for your home. The price of a home is more than just your monthly mortgage payments; it includes things like utilities, maintenance, property taxes, and homeowner's insurance. It's easy to end up “house poor” by borrowing more than you can afford for your first home, leaving little for you to spend on clothing, vacations, entertainment, and especially food. New Tripoli Bank's mortgage lenders can help you determine the amount you can afford.
In a competitive housing market, it can be to your benefit to shop on a smaller budget. If you shop at a lower price than what you can afford, it provides you with wiggle room to outbid other buyers when you find the house you really want.
Start Saving Early
When calculating how much money you need to buy a house, there are one-time expenses to consider in addition to the monthly mortgage payment. The down payment on a conventional first-time mortgage can range from as little as 5% to 20% of the purchase price or more, and closing costs typically range from 2% to 6%. Depending on how competitive the market is, you can sometimes ask the seller to pay a portion of your closing costs as part of the agreement, or even forego some expenses like home inspection to make your offer more competitive. You should also consider move-in expenses, which can run up to $2,500 depending on your area.
The best way to save for these upfront costs is select a target amount you are willing to spend, open a savings account, and schedule automatic transfers from your checking to this account. The earlier you start, the more you'll be able to take advantage of compound interest to grow your savings, helping you reach your goal in less time.
Clean Up & Monitor Your Credit
The higher your credit score, the easier it will be to lock in a lower interest rate on your mortgage. If you aren't currently using credit, consider opening a credit card or other line of credit and make regular use of it to build your credit score. Be sure to spend within your means and pay down your credit balances on time. It's not enough to have access to credit; banks want to see that you are able to make regular payments!
It's best to avoid opening new credit accounts or loans, racking up additional debt, or making large deposits into your accounts within two months of applying for financing. Many lenders have requirements to confirm that credit you've borrowed and funds you've deposited have been in your possession for at least 60 days, so they can verify it's legitimately yours and have proof of where the funds originated.
A popular rule of thumb is to keep your credit usage to 30% of your total credit or less. If you already have open lines of credit and your balance is over that 30% threshold, you should focus on paying down your debts to improve your creditworthiness.
Organize Your Paperwork
Before you're approved for a mortgage, your lender will need your financial records to verify your income, assets, and debts. You should have the following documentation ready before you apply for your loan:
- Proof of income and employment. This includes tax returns, W-2s, 1099s, and recent pay stubs.
- Statements for any bank, retirement, or brokerage accounts.
- Records of other debt obligations, such as student or car loans.
Explore Your Options
There are a variety of mortgages available, each with its own down payment and eligibility requirements to suit the needs of different consumers.
Conventional mortgages are the most common type of home loan. Many banks offer first-time homebuyer loans with more affordable down payment requirements and waived fees.
FHA loans are insured by the Federal Housing Administration. They are intended to assist buyers with limited savings or lower credit scores to secure housing by offering down payments in exchange for more stringent requirements for the borrower.
USDA loans are guaranteed by the U.S. Department of Agriculture and are meant for suburban and rural home buyers. VA Loans are guaranteed by the Department of Veterans Affairs and intended for active and veteran military service members. Both of these loans usually require little or no down payment.
You also have options when it comes to mortgage terms and interest rates. Most homebuyers opt for a 30-year fixed-rate mortgage, which is paid off over 30 years with an interest rate that stays the same for the life of the loan, but loan terms can be as low as 15 years, which typically comes with a lower interest rate but higher monthly payments. Conversely, an adjustable-rate mortgage often begins at a lower introductory rate compared to fixed-rate mortgages, but that rate will increase (or decrease) over time, meaning your monthly payments can fluctuate.
You should also spend some time comparing different mortgage lenders, even if you only qualify for one type of loan. Pay special attention to each lender's interest rates and fees, and request quotes from different lenders to find the offer that's best for you.
Apply for Prequalification
Once you've done the preparation and selected your lender, you should apply for a mortgage prequalification. This is the lender's offer to loan you a certain amount under specific terms. The lender will confirm the documentation you provide by pulling your credit report, verifying your employment information, and calculating your debt-to-income ratio to determine the loan amount they are willing to offer.
Prequalifications are typically good for 30 to 90 days; you should verify with your lender how long their offer remains valid. If you have concerns about your debt or credit score, getting prequalified early can help you identify problem areas that you need to fix before home shopping. Once you receive a prequalification, avoid making any big purchases or opening any new lines of credit while you are shopping for a home.
Even after you've taken all these steps, there's still a long road between you and buying your first home. However, by preparing yourself properly for the adventure ahead, you'll be home shopping with the confidence of knowing your financial situation, what you can afford, and what kind of home you should be looking for. In future articles, I will go over what to expect during the home shopping process and after you've purchased your first home.
If you are interested in getting prequalified for a loan or have further questions about the mortgage lending process, you can always contact me or the rest of the mortgage lending team at New Tripoli Bank and we would be happy to assist you!
Gail Post is a Vice President and Mortgage Loan Officer for New Tripoli Bank who has been working in finance for more than four decades.