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Guide for First-Time Home Buyers

Home Buying Tips
Written by
February 1, 2023
min read

Are you thinking about buying your first home? Perhaps you are tired of the apartment lifestyle, or maybe you are just looking to make a solid investment. Either way, consider the following guide for step-by-step advice on purchasing a home for the first time.

Shopping For a Mortgage

Shopping for your first mortgage loan can feel like a daunting task. With so many lenders and loan options, it is crucial to research and compare a number of loan offers to find the best fit and price range for your individual needs. Working with a qualified mortgage professional can help you understand all the details, as well as the pros and cons of each loan option. Taking the time to understand the mortgage process and make an informed decision can help you make the best choice for your financial future.

Determine If You're Financially Sound

Before exploring interest rates, looking at homes in your area, or considering a lender, examine your personal finances. What's your annual income? How much money do you have in your savings account? What's your credit score? It’s easier to buy a home when you have a realistic view of your personal finances.

The home-buying process is pricey. Make sure you've budgeted enough money for the down payment, closing costs, mortgage insurance, and lender fees. In addition to these, your credit score will influence your lending options. The best mortgage opportunities are granted to buyers with the highest credit scores. Reviewing your credit score before proceeding with a loan application helps you understand the terms you may qualify for.

Furthermore, your debt-to-income (DTI) ratio is a helpful metric. Your DTI ratio demonstrates how much debt you've borrowed in contrast with your income. This helps lenders determine how much additional debt you're able to take on without increasing the risk of default. Calculate your DTI and try to lower it as much as possible before applying for a mortgage. A low DTI can secure much better rates.

Large Costs to Consider

A less obvious expense to consider is the closing costs. This can range anywhere from 2 to 5 percent of a home's purchase price. Also, having funds for a down payment is often necessary. Specific requirements may vary; however, higher down payments can eliminate added expenses such as mortgage insurance. For instance, if someone pays 20% or more on a conventional mortgage loan, they aren't required to pay for private mortgage insurance (PMI). Eliminating PMI can decrease your monthly expenses.

Considering these costs will help you determine what you can afford. Keeping all the expenses in mind, as well as your personal finances, will help you discern a home in your budget.

Understanding the Process

If you conclude that you are financially able and ready to buy a home, you can now begin browsing what mortgage options are available to you. While understanding the mortgage process can feel overwhelming at times, with the proper resources and guidance, it does not have to be.

There are a variety of resources available, such as mortgage calculators, tips for buyers, and advice from experienced professionals, to help make this process easier. Taking the time to learn about all of the available options can help you make an informed decision and save money in the long run.

Consider Your Mortgage Options

Within the world of mortgages, first, determine if you want a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Fixed-rate mortgages tend to have higher interest rates. Still, with fixed-rate mortgages, the interest rate stays the same throughout the life of the loan. Adjustable-rate mortgages have lower rates, but they vary, which could be to your benefit or detriment. Both loans have advantages and disadvantages.

A loan's term is also important. A loan term is how long you have to pay off the loan. The shorter your terms, the lower your interest rates but, the higher the payments. Two common terms are 15 and 30 years. You pay less interest on a loan with shorter terms. However, the payment is higher. Longer-term loans are cheaper month by month but cost more.

Alternative Loan Options

While many homebuyers lean toward a conventional loan option, there are some alternatives that are worth considering. One is a Federal Housing Administration (FHA) loan. FHA loans are a popular option for people who have lower credit scores or smaller savings set aside for a down payment. The lower credit score requirements allow many individuals to purchase their first home.

FHA loans require unique insurance premiums. In paying for these, a buyer has the option to pay it upfront through an Upfront Mortgage Insurance Premium (UFMIP) or annually through an Annual Mortgage Insurance premium (MIP). The UFMIP will save money throughout the life of the loan. The MIP requires no money upfront but costs more.

Last, consider Veteran Affairs (VA) loans and United States Department of Agriculture (USDA) loans. Both have unique requirements and fees.

A Recommended Strategy

A wide margin of first-time homebuyers prefers the conventional 30-year, fixed-rate loan. It offers a low mortgage payment with a consistent interest rate. If you plan to stay in one house for a long time, this loan option may be optimal. However, consider a 30-year adjustable-rate mortgage if you plan to live in a home for a shorter term. You may stand to save some money on interest rates.

Researching Lenders

Working with a knowledgeable mortgage lender can help you to better understand the loan process, navigate the different financing options, and find the best mortgage available for your needs.

When selecting a lender, consider their reputation, the customer service they offer, and the fees associated with their services. Reading reviews and speaking with others who have used the lender can help you make an informed choice. With careful planning and research, you can find the ideal mortgage that meets your budget and long-term financial goals.

Hire a Skilled Real Estate Agent

You don't need a real estate agent to buy a house. Still, they are often experts within their local housing markets and can provide custom insight. An excellent way to find an agent is through referrals. Talk to your co-workers, family, and friends. You can also find agents online. However, before you work with one, ask how long they've been in business, and check their track record and references. Talk to at least three candidates before choosing one.

Homebuyers do not have to stress about an agent being another expense, as real estate commissions are traditionally paid by the seller instead. So, when you are ready, enlist a real estate agent to help you find a suitable home. Not to mention, they can also help you negotiate the best possible price.

Negotiating Rates

The negotiation of mortgage rates is an essential part of the home-buying process. Researching the current market and understanding your financial options can help you get the best rate for your mortgage. Talking to multiple lenders and comparing their various offers will give you the leverage to negotiate a better rate. Finally, having a good credit score can also give you an edge in negotiating a lower interest rate.

If negotiating is not a strong suit of yours, consider a real estate agent to represent you. Many homebuyers find their real estate agents to be most helpful during this particular step of the process.

Mortgage Quotes and Pre-Approvals

When you've determined the loan that works best, compare loan offers. Interest rates change and can vary. Even if you get a great offer from a potential creditor, get at least three.

Once you got the quotes, move forward with getting pre-approved. A mortgage pre-approval is not a finalized offer. Nonetheless, it helps sellers know which buyers have the necessary finances. A pre-approval letter contains information like how much someone is qualified to borrow, the terms they'd use, and a lender’s preliminary commitment to provide the necessary funds.

Mortgage pre-approval requires lenders to investigate your finances. They'll explore your credit history, income, savings, and debt obligations. Examine this information yourself before requesting pre-approval.

Making the Offer

Making a well-informed mortgage offer is vital when purchasing a new home. The offer should take into account the current market conditions and your individual financial status. Research the present interest rates and compare different lenders to ensure you get the best deal. Make sure you read through all the paperwork associated with the loan. In addition, ask your lender and realtor questions to make sure you comprehend the terms of the offer.

With careful consideration, you can make an informed decision and secure a mortgage that best fulfills your needs.

Finding the Perfect Home

When considering homes, stick to a budget. Also, weigh external factors such as a property’s location, school district, respective traffic, and neighborhood. Your real estate agent can help you navigate these factors. Once you’re ready to make an offer, include the price you're willing to pay for the house, a deadline for the seller to respond, and additional requests you may have. In the case of a bidding war, detail the highest price you're willing to pay.

Buyers will often include contingencies. These are specific criteria a buyer requires. For example, a typical contingency you could request is that your offer includes a home inspection and appraisal. Within those inspections, the contingency states that if the price of the house is appraised for less than the offer or a major inspection issue arises, the buyer can leave the offer without losing their deposit.

These contingencies protect buyers. However, buyers also have the option to wavier their contingencies. While this strategy can help an offer get accepted, it’s not recommended.

Home Inspections

The home inspection process for a mortgage is a key step to ensuring the safety and structural integrity of a new home. A certified home inspector will check for any potential problems in the home, such as structural damage or water damage, that could affect the value of the property or pose a risk to the future homeowner. The inspection report is then used by the mortgage lender to determine if the property is suitable for the loan terms. Be sure to take the time to thoroughly review the inspection report to ensure no major issues are present.

Closing the Deal

Closing a mortgage deal is an important milestone in the home-buying process. It is the final step in acquiring the property and allowing the new homeowner to take possession. To ensure a successful closing, it is important to have all the paperwork in order and to follow the lender's instructions. A closing agent or attorney should be consulted to ensure that all documents are properly prepared and executed. With suitable preparation and assistance, closing a mortgage deal can be an exciting and rewarding experience.

Navigating the Closing Costs

Once your offer is accepted, you're ready to apply for a mortgage. Within several days of your application, you'll get estimates, which include loan terms, closing costs, and other fee information.

However, some of the closing costs are negotiable. For example, particular fees can be waivered. Furthermore, you may be able to request a no-closing cost option. This rolls the closing cost fees into the loan. For high closing costs, this method can be great for paying these fees. Still, it'll increase the monthly payments.

Since closing costs and down payments can be expensive for many first-time homebuyers, look into assistance programs. These programs are offered by housing organizations or your state's housing finance agency. If you meet a program’s requirements, they may offer you assistance.

Get Homeowners Insurance and Move-In!

Lenders require homeowners insurance. Get quotes from multiple companies. You need coverage that meets the lender's requirements. This cost, in addition to others like property taxes, often flies under the radar.

If everything clears with the seller, you can buy your new house. The final closing will involve the transfer of the home's deed, other documentation, and the last verification of your income. If everything checks out, you'll do a final walk-through and sign the deed.

Final Thoughts

Buying a home is one of the largest purchases people make. There's a lot to keep in mind as you prepare your finances, consider homes, evaluate lenders, and close on a house. Take your time throughout the process.

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