Buying your first home is quite an accomplishment, but it can get overwhelming fast. Not only must you find the perfect house, but you must also finance it. In addition, there are so many factors that go into the process that can easily make first-time buyers overwhelmed.
Use these tips to help make buying your first home easier.
1. Know your Credit Score or Credit History
Don’t apply for a mortgage before you know your credit history. All consumers get free yearly access here. So pull your free reports and look for any negative credit history, including:
· Late payments
· Credit cards with over 30% of the credit line outstanding
· Inaccurate information
Do what you can to fix your credit before applying for a mortgage. The better your credit score, the better your rate and terms.
2. Save as Much Money as you Can
Most borrowers need at least a small down payment and must cover closing costs, prepaid expenses, and moving costs. It’s a lot to take in, and you don’t want to come up short in the final hour.
Start saving money as early as possible and save more than you think you need. Reserves are always good and can even increase your chances of loan approval. Figure 3% - 5% of the loan amount for closing costs and 3% - 20% of the sales price for a down payment.
3. Know How Much you can Afford
Before you get pre-qualified or pre-approved for a mortgage, determine how much you think you can afford. This isn’t how much the lender says you’re approved to borrow but how much you can afford each month.
Play with the numbers in your budget to see what payment you’re most comfortable adding to your expenses. Remember, in addition to the mortgage payment, you must cover the property taxes, home insurance, HOA dues, and home repairs.
4. Get Pre-Qualified Early
When you’re thinking about buying a house, get pre-qualified. This isn’t a formal approval. Instead, it’s an estimate of what you can afford based on the information you provide the loan officer.
You must tell the loan officer about your income, assets, liabilities, and employment history. The loan officer uses this information to determine what you ‘might’ be able to afford. This isn’t a binding approval because no documents go to an underwriter. However, it gives you an idea of what your current financial situation would allow when applying for a mortgage.
5. Consider your Mortgage Options
When you get pre-qualified, your loan officer will discuss different loan options. The most common are conventional and FHA loans.
FHA loans are for borrowers who don’t qualify for conventional loans because they have a low credit score, high debt-to-income ratio, or other factors that prevent them from getting approved.
FHA loans require mortgage insurance for the life of the loan, and conventional loans only require PMI as long as you owe more than 80% of the home’s value. Look at the differences and discuss the total costs to choose the best mortgage.
6. Make a List of Needs and Wants
When shopping for a home, it’s easy to get emotionally attached to a home and forget your budget.
To prevent this, make a list of needs and wants. Your needs are the features the home must have to be feasible for you and your family. Wants are features you can live without but would be nice to have.
Looking at homes while using your list helps keep you within your budget, knowing the home meets your needs versus only looking at homes that cross everything on your list.
7. Get Pre-Approved
Before you look at homes to make an offer, get pre-approved. A pre-approval is a step up from a pre-qualification. To get pre-approved, you must provide your documentation, including paystubs, W-2s, tax returns (if self-employed), and asset documentation.
An underwriter will review the documentation and your loan application to determine how much you can afford. They’ll also pull your credit. Then, if approved, they’ll write a pre-approval letter stating how much you can afford and at what rate and terms.
The pre-approval letter is something sellers rely on, and they often won’t accept offers on their home from a buyer that isn’t pre-approved.
8. Don’t Change your Credit, Income, or Assets after Pre-Approval
Once you’re pre-approved, try to keep the status quo. Don’t miss any payments or open new credit lines. Also, don’t rack up credit card debt. Try to keep the same job, and don’t make any large deposits or withdrawals in the bank account approved for your down payment funds.
Underwriters will double-check your qualifying factors before you close, including pulling your credit, checking recent bank statements, and verifying your employment. If anything changes, you could lose your approval in the final hour.
9. Find Ways to get the Lowest Rate
Providing great qualifying factors is one way to get the lowest interest rate, but you may also get it by buying the rate down or choosing a different loan program.
Talk to your loan officer. Find out your options to save the most money monthly and over the life of the loan.
10. Negotiate your Purchase Contract
When you find your dream home, know that you have options. You can negotiate the sales price and terms of the sale. It helps if you have a licensed real estate agent working with you, as he can help you understand the process and make the most of buying a home.
Buying your first home is exciting! However, these tips can help you make it less stressful and more fun. Most importantly, know how much you can afford, work closely with a mortgage lender to ensure you understand your loan options, and save as much money as possible for the closing and anything unexpected that happens during the process.