Monday, January 7, 2019 / by George Burdell
You’ve been renting for what seems like an eternity, all the while pinching pennies and crossing your fingers. As the numbers on your savings account slowly climb, you begin sneaking side glances of homes for sale that you dream you could buy. You may even decide it’s finally time to call it and start actively looking for your new home.
If this sounds like you, you need to pause the process and pump the breaks! Here are 12 things every first-time homebuyer needs to do before purchasing a home.
The Financial Side of Buying a Home
Save for a Down Payment
Many renters save for so long because they believe they need a 20% down payment before they can buy a house. While a 20% payment ensures that you won’t be paying for mortgage insurance, you aren’t disqualified from purchasing a home if you don’t have that much saved. There are several loans that allow you to put a lesser amount down. There are even programs that offer down payment assistance or grants specifically for first-time homebuyers. If you find yourself in a pickle with your down payment, know that you’ve got options.
Rather than looking at homes that are outside of your budget, it’s best to get a pre-approval letter from your mortgage lender. Your lender will take a look at your debt to income ratio and determine the amount they believe the bank will lend you. This number isn’t a promissory note, though, which means they could lend you more or less after they do a more thorough check of your finances, but it will give you a good starting point.
Your pre-approval letter will also hold more weight with a seller when you put in an offer. If the seller has several offers for the house you are looking to purchase but you are the only one with a pre-approval letter, it gives the seller the peace of mind (and could bump you up in line!) knowing that you have the means to buy the house.
Assess Your Credit
Your credit score will determine the loan amount you can receive as well as play a part in the interest rate you will get. You want to aim for good credit, which is a 700 or above on the credit score scale. For credit between 580 and 699, there are still options available to you, but they will come at a higher price.
When assessing your credit, you first need to take a look at your credit score to see if there’s any work that needs to be done on it. There are several places online where you can get a peek at your credit score without it showing up on the report.
From there, take a look at any outstanding balances that are damaging your credit, or any charges reporting that were resolved or you don’t recognize. Pay off the outstanding balances and contact the ones reporting the questionable charges. You can often dispute the claims to get your credit score raised a few points.
Pro Tip: If you’re planning on buying a home shortly, do NOT take out another loan, even if the house is under contract. Doing so will affect your debt to income ratio and will alter the entire playing field for buying a home. If you must take out a loan, do it after you close on your house to avoid damaging your chances of getting the house.
Explore Loan Options
As a first-time home buyer, there are many financing options available to you. Ask your lender which one would be best for you. A few of them are:
Federal Housing Administration (FHA) Loan:
The FHA Loan is a loan provided through an FHA certified lender. This loan is only for those looking to buy a home for the first time and allows lower credit scores and a smaller down payment. Down payments below 20%, however, do require mortgage insurance to be attached. There are conditions on the types of homes allowed through this loan, so pay attention to those guidelines when looking into your options.
Veterans Affairs (VA) Loan:
The VA Loan is funded through the Department of Veterans Affairs and provides service members and their families with more affordable housing. With variable insurance rates and lower credit scores accepted, VA loans are fantastic for those who have served or continue to serve in the armed forces.
Conventional loans are funded through Fannie Mae and Freddie Mac which are federally insured. These are great loans for many homebuyers, and they recently changed their conditions to allow those with lower credit scores to qualify. If you pay less than 20% as a down payment, you are required to pay mortgage insurance, although you can find your own private mortgage insurance (PMI) plan.
Save for Closing Costs
One of the BIG mistakes first-time homebuyers make is not saving for closing costs. They’ve worked so hard saving for the big down payment, that they are surprised when they get to closing and find out they have a few thousand dollars left to shell out. Usually, when this happens to unsuspecting homebuyers, they dig into their savings or Little Jimmy’s college fund. Don’t be like them!
Putting 20% down to save on mortgage insurance will help you save on your monthly payment, but doing it at the expense of a rainy-day fund is not the way to go, especially if you plan on buying a used home. Used homes almost always have something that needs to be repaired in the near future. You want that money available to repair the roof, fix the plumbing, or repair the sink. If closing costs are casting a large shadow on your funds, see if your real estate agent can broker a deal with the seller to cover some of the costs. It doesn’t work in every situation, but it’s worth a shot.
Finding a Home
Choose the Right Lender
Choosing your real estate dream team is crucial to the type of buying experience you’ll have. The first team member is your mortgage broker. While you’re the one choosing the house, the mortgage lender is going to have the last say in what you purchase, and your broker is the intermediary between the two. Your mortgage broker will help you with the pre-approval and approval processes, gathering up all the necessary documents and helping you jump through the hoops.
Pro Tip: You don’t have to go with the first lender you find. You can shop around for interest rates and find the one that will save you the most money on the life of your loan.
Choose the Right Real Estate Agent
Your real estate agent is the second member of your home buying dream team. Your real estate agent is in charge of listening to your needs and finding a house that fills them. Think of them as a real estate matchmaker.
In addition to helping you find the home that makes you want to boogie, they’ll negotiate with the seller to get the best price and draw up much of the paperwork involved in making an offer and negotiating a sale.
Sure, you could forego a real estate agent, but why would you want to? With their insider market knowledge, experience helping others in similar transactions, using a pro is probably in your best interest.
Walk Through Several Houses
You may fall in love with the first house you walk through, but continue to walk through a few more—just to make sure. If the original home you walked through is really as phenomenal as it seemed that first time, the other houses will pale in comparison.
Additionally, if you aren’t sold on a property, buying it won’t make it better. It’s better to save your money and keep looking rather than to settle with the hope of learning to love it.
Decide on A Home
Many homebuyers fall in love with a home and neglect the rest of the issues, hoping they’ll resolve themselves after they purchase the home. Sometimes there are hidden costs involved in a house, such as a high water bill from a private water company, HOA dues, or high property taxes. Beyond that, the commute may be easy to look over now, but imagine taking it every day for weeks on end, and you may be wishing you bought a place closer to work.
Pro Tip: Because you want to make sure the home you buy is really the best one for you, find a few neighborhoods or areas that you would be happy living in and find a home within there.
Stick To Your Budget
If you are pre-approved for a $200,000 house, it’s probably not a good idea to look at those in the $285,000-$300,000 range. While you may have some negotiating power in the transaction, chances are they aren’t going to drop down that much. Stick to your price range and lower when looking for a house, and keep in mind the 28/36 rule, which says “that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 365 on total debt service, including housing and other debt such as car loans” (Source).
Get a Pre-Sale Inspection
This isn’t a plug for your local inspector.
Many homeowners forego the inspection, seeing it as an added unnecessary cost. The reality is that an inspection protects you against otherwise unforeseen repairs, such as termite damage, add-ons that weren’t permitted through the city, or a crack in the chimney. Rather than cross your fingers and have a friend who has two years of construction under his belt “take a look,” hire a pro who knows what to look for.
Don’t Be Afraid to Negotiate
Many homebuyers feel timid at the idea of negotiating with the seller, for fear of the deal falling through. If you want to negotiate that the seller replaces the roof or cleans the mold off the bathroom ceiling—you are well within your rights to do so. The worst that can really happen is the seller rejecting your terms, and you are still back where you were at. If they do decide to accommodate your terms, however, hooray!
It’s safe to say that buying a home is an involved process with many moving pieces. By preparing financially, finding the right support, and taking your time to find the right house, the process will run more smoothly, and you’ll end up with results you love.
If you need help getting started with your home buying process, talk to a Home Buying Expert today!