First-time homebuyers are in a great situation. They have access to many different financing options and abilities to purchase a home. They are also at a disadvantage simply because they never went through the process of purchasing a home. What if you do something wrong? This is the largest investment you will make in your lifetime and it could seriously harm you if you are not careful. In order to avoid becoming a victim rather than a successful homeowner, here are 10 tips to help you with the process.
Research is the Key to Success
Research everything before you start the process! Look up the different types of loans available to you, such as FHA, VA, USDA, and conventional loans. Know what each loan offers and how they differ. You should also know which programs apply to you. For example, if you or your spouse are not a veteran of the military or reserves, a VA loan is not a viable option. This way you can whittle down your choices. If you will not have a large down payment, the FHA loan might be a good option because they only require a 3.5% down payment and have low-interest rates and costs. Knowing what circumstances you bring to the table can help you narrow down your choices.
First-time Homebuyers Must Prepare Early
If you know you wish to purchase a home in the future, start acting like that time is now. This means taking some or all of the following actions essential for first-time homebuyers:
- Saving money now for a down payment – the more you have the better
- Saving money now for an emergency fund – you never know what can happen down the road
- Paying your bills on time to enhance your credit score
- Pay off any collections or judgments
- Pay off any debts that you can afford to eliminate to lower your debt ratio
The more time you have to prepare for your upcoming home purchase, the more successful it will be in the long run.
Determine your Priorities
When you start shopping for a home, you can easily feel overwhelmed. With many buyers in the market at the same time, bidding wars can start, forcing you to feel compelled to bid right away. What if you bid on the home that you were not 100% certain about yet? This is why before you start shopping, you need to determine your priorities. Do you need a specific type of location? Do you need a specific layout? What is more important to you? These priorities will help you determine if you should place a bid or not while your wits are still about you. One the bidding wars start, it is easy to feel roped in and ready to win the war.
Research the Property Taxes
First-time homebuyers have many considerations they have to make in regards to the mortgage payment than they had to make as renters. When you rent from someone, you strictly pay the rent and sometimes the utilities. The landlord handles everything else. As a homeowner, however, you have more responsibilities that include not only the principal and interest on the loan but also the property taxes and homeowner’s insurance. The property taxes often put homeowners in sticker shock. Before you even start bidding on homes in a specific area, do your research on the taxes. What have they done in recent years? Do you see large increases or decreases? What is the average cost for the size home you wish to purchase? Is it something you can afford? Remember that most lenders will add 1/12th of the cost to each mortgage payment as a part of an escrow account to ensure that you make these payments on time.
Know the School District Ratings
Even if you do not have children right now or never plan to have any, you need to know how the school district in the area rates. The resale value of your home depends greatly on the school district. If the district rates high, resale values often stay high and even increase. On the other hand, if the school district rates poorly, the values in your area could drop. If you plan on moving in the future, understanding the values of the homes can help you ensure a profit rather than a loss or being forced to remain in the home.
Enlist the Advice of a Third Party
It is so easy to fall in love with a home so hard that you overlook its downsides. Once you know you love a home, consider bringing in a neutral third party. This does not have to be a professional, such as a home inspector just yet, although that will be important before you purchase the home. It could be a parent, sibling, or good friend – anyone that will look at the home with a keener eye than you will because they are not head-over-heels in love with it. They can point out things you might overlook because you love the house so much. Knowing the negatives the house poses can help you make a sound decision rather than regretting your decision down the road.
Secure a Preapproval for your Mortgage
Before you start shopping for a home, secure a preapproval for a mortgage. This will help you understand what you truly can afford without getting in over your head. When you apply for a mortgage with different lenders, make sure you ask for a preapproval and not just a prequalification. A prequalification just says that you “might be” qualified to receive a loan. A preapproval takes the process a step further by going over your income, assets, debts, and credit scores. The lender then provides you with a letter stating the amount of a loan you qualify to receive based on the information you provided them at the time. A preapproval is not a definite statement that you will receive financing, but it is a better chance at approval and it gives you more access to viewing homes that are for sale. Many sellers and realtors do not talk to potential buyers that do not have a preapproval letter.
Ask for a Financing Contingency
Even with a mortgage preapproval letter first-time homebuyers should always ask for a financing contingency on the purchase contract. This gives you the opportunity to opt out of the purchase without a penalty if you were unable to secure financing on your home. The final mortgage approval depends on a variety of factors including the value of the home, the condition of the home, and your final documents to verify your income, assets, and employment. If something were to fall through during financing, you could stand to lose your earnest money if you do not have a contingency on the contract that gives you a specific amount of time to secure final approval on your financing.
Look at your Budget Realistically
When a lender provides you with a pre-approval or lets you know how much money you qualify to borrow for a mortgage, you should look at your budget closely. How would this new payment affect you, not just on paper, but also in real life? How much money will you have left each month after you pay the mortgage, utilities, credit cards, installment loans, and daily living expenses? Remember that a mortgage approval only considers the costs reporting on your credit report, such as credit card debt, installment loans, and student loans. They do not consider utility payments, groceries, clothing, household items, and any other miscellaneous expenses you have each month. It is up to you to be realistic about what you can afford.
Know how Much you can Change on the Home
When you look for homes, it might be hard to find the “perfect” layout for you. Did you know there are ways to make changes and include them in your mortgage? The FHA 203K loan enables you to do just that, but you have to qualify for the loan and make sure an official approves the changes. If you find it difficult to find a home that is just right for you, explore this option. If you make any structural changes, you will need to use a loan consultant and possible architect to get the work done. Understanding your options for this can really help facilitate your search for the perfect home.
First-time homebuyers have just as many advantages as subsequent homebuyers have. Understanding what is at your disposal and how to obtain it is the key to success. Talk to several lenders and real estate professionals to see what you can secure and then start the process of purchasing your first home!