Buying a home is one of the most important decisions you will ever make. It affects your lifestyle, financial security, and future. The process can be intimidating for first-time buyers, but with these 11 things to remember, you’ll have an easier time!
#1 – Don’t Change Jobs
Lenders want to know that you’ve held the same job for at least two years before you apply for your home mortgage loan. This lets them know that you’re financially secure, reliable, and able to make your payments on time.
They will also check your employment status again on the day you’re supposed to close on your house. If you’ve changed or lost your job between your pre-approval and closing day, the lender has the right to withdraw their offer.
#2 – Don’t Finance Anything or Make Big Purchases
The bank you choose to work with is going to check your spending history for at least the past two years. It’s important that you don’t have extensive debts, which will affect your debt-to-income ratio, and demonstrate to the bank that you might be financially over-extended.
A debt-to-income ratio is the percentage of your monthly income that goes toward debt payments. To qualify for a mortgage, your DTI has to be no higher than 47 percent, but it’s best at 36 percent or lower.
As with employment, the bank will verify your bank records on closing day. If there have been significant withdrawals or purchases, they can retract their offer, and you could lose the house.
#3 – Check Your Credit Report
Your credit score is one of the most important factors in getting a mortgage. The higher your score, the better interest rate you’ll get on your loan.
If you find any errors on your report, dispute them immediately with the credit bureau. If you have any outstanding accounts in collections, pay them off and get proof of payment or settlement.
It’s a good idea to pay down any credit cards or loan payments (including auto) as much as you can, but don’t close the accounts completely. It boosts your credit score to show that you have significant available credit with little to none of it used.
For best results, 740 or higher is the best score and can get you lower interest rates, and 620 is the lowest.
#4 – Save Money
When you buy a house with a conventional loan, you’ll need a down payment that’s 20 percent of the loan amount. On a $300,000 house, that’s $60,000 in cash.
You’ll also have to pay closing costs, which can range from 2 to 5 percent of the loan amount. Closing costs are the costs associated with the purchase of your home, including the loan origination fee, title search, appraisal, inspection, homeowner’s insurance, property taxes, and more.
If you don’t have enough cash saved up to cover these costs, you can ask the seller to pay them for you. But be prepared that they might not agree to it.
Another cash-out-of-pocket expense is an earnest money deposit, which is between 1 and 3 percent of your offer price. That money isn’t paid to the seller but will be held in an escrow account and applied to your down payment or closing costs.
Don’t forget to save for moving expenses, which may include moving boxes, packing supplies, a moving truck, movers, utility deposits, household supplies, and more.
You may want an emergency fund as well. Homeownership comes with maintenance responsibilities. You never know when you may need to repair or replace something like a water heater, dishwasher, or plumbing.
#5 – Choose a Mortgage
There are three main types of mortgages, and it’s important to know the difference. The two most common ones for first-time buyers are FHA loans and conventional loans.
FHA loans have lower credit requirements but higher closing costs than conventional home loans. They don’t require as much money upfront for a down payment, but you’ll pay mortgage insurance for the life of the loan.
Conventional home loans have higher credit requirements than FHA loans but offer a lower interest rate and don’t require mortgage insurance. You’ll need to put 20 percent down on a conventional loan, however.
The third type is a VA Loan, which is a mortgage for veterans. For rural properties, there’s a USDA loan.
#6 – Decide on a Fixed or Variable Rate
Mortgages come with two types of interest rates: fixed or variable. A fixed rate means your mortgage payment will never change, while a variable rate means it could go up or down.
Most first-time buyers choose a fixed-rate mortgage, even though it can be higher. This is because it’s more predictable and offers security against rising interest rates. But others choose a variable rate because it starts out lower and fluctuates over time.
#7 – Choose 15- or 30-Year Loan
Mortgages also come with two types of terms: 15 or 30 years. The shorter the term, the higher your monthly payment will be, but you’ll pay less interest over the life of the loan. The longer the terms, the lower your monthly payment will be, but you’ll pay more in interest.
Most first-time buyers choose a 30-year term because it’s more affordable. But if your budget can afford the higher monthly payment, go with a 15-year mortgage instead. You’ll pay off your loan earlier and save money on interest.
#8 – Determine if You’ll Purchase Points
When you get a mortgage, you have the option to purchase points. A point is 1 percent of the loan amount, and purchasing points can lower your interest rate. In short, when you buy a point, you’re pre-paying interest.
It’s important to do the math to see if buying points is worth it. If you plan on staying in your home for less than seven years, you probably won’t recoup the costs. But if you plan on staying longer, it may be worth your while to purchase points.
#9 – Get Pre-Approved
It’s important to get pre-approved for a mortgage before you start house hunting. This will let you know how much money you can afford to spend and will save you time since you’ll be narrowing your search to homes that are within your price range.
Pre-approval also shows sellers that you’re serious about buying a house and can help speed up the sale.
#10 – Get a Real Estate Agent
It’s important to have the right professional agent on your side to inform you, show you homes, negotiate for you, help you with contracts, and see you through the closing process of appraisals, inspections, and more.
To find the right real estate agent, ask friends and family for recommendations, interview them on the phone to see if they’re a good fit, ask about their experience and credentials, set up times to meet with potential agents in person before you decide.
#11 – Offers, Negotiations, and Closing
Once you’ve found the home you want and have made an offer, the process of negotiation begins. This can feel like a long and drawn-out process, but your agent will be there to help guide you through it.
If your offer is accepted, you’ll go into contract and will have to undergo a series of inspections of the property and the title before you can close on the house. Once everything is approved, you’ll sign the final papers and will become a homeowner!
If you’re ready to become a homeowner, keep these things in mind as you start your search. The process can be overwhelming but is worth it when all of the hard work pays off. Contact your local real estate agent for more information about the steps to buying your first house.