Buying your first home is an exciting time, but it can also be overwhelming. There's more to it than shopping for the perfect home. Before you even get to that step, you need to figure out your financing options. As a first-time homebuyer, though, there are many options available.
Using the five steps below, we show you how to make the process go smoothly. You'll learn how to get the right amount of financing, understand your loan program, and finally find the perfect home.
Before you shop for a home, get in touch with one of our qualified loan officers. You'll work with this person over the course of the home buying process.
The right loan officer will answer your questions and explain the loan process. Since this is your first home, the loan officer should provide a complete rundown of what to expect. This should include the processing timeline and the underwriting requirements.
Ask your loan officer for information on the loan programs available for first-time home buyers. For example, you may qualify for a conventional loan, government-backed loan like FHA, VA, or USDA, or subprime loan. The right loan program depends on your credit score, income, assets, and current debts.
If you are self-employed, make sure to mention this fact as it can effect your approval.
Each loan type has different requirements and benefits.
The loan officer will walk you through each program, comparing your qualifying factors to the program's requirements.
He or she should also explain each loan and how they work. Remember, this is one of the largest investments you'll make in your lifetime, so choose carefully.
Next, discuss your finances and financial goals. Don't focus only on what you can afford now.
Remember, you'll have this loan for the next 15 to 30 years. Think of your future financial goals too. Do you plan to stay in the home for a while? How quickly do you want to be mortgage free?
For example, do you have your heart set on being mortgage free in 15 years? Would you rather have a smaller mortgage payment over a 30-year term? Your loan officer will use these goals to choose the right loan and term, going over the options with you.
Finally, the loan officer should help you determine if you qualify for the chosen loan program. After you complete a loan application, you'll provide proof of your income and assets. At this point, the loan officer will have pulled your credit too.
Once this is all done, you'll be provided with a mortgage pre-approval. This letter states the amount you may borrow as long as you meet any stated conditions.
Once the loan officer decides how much you may borrow, it's time to create your own budget. For example, if you are qualified to borrow $300,000, it doesn't mean you have to borrow that much. This is the maximum amount the lender will give you, but you can borrow any amount up to that loan amount.
Create a budget regarding how much you want to spend on housing each month. Keep in mind that this number includes more than the principal and interest payment. That's just the basis of your mortgage payment.
You'll be responsible for the real estate taxes, homeowners insurance, and possibly mortgage insurance too. Your payment may also adjust based on the interest rates at the time that you close on your loan.
A full mortgage payment includes principal and interest plus property real estate taxes and homeowner's insurance. If you borrow more than 80 percent of the home's price, you'll also pay mortgage insurance.
This also applies if you use FHA or USDA financing. Adding all these figures together provides the full mortgage payment. Your loan officer can help you determine this amount.
Before you start looking at homes, have a realistic number in mind. Plug the number into your monthly budget and see how it feels.
If you currently pay rent, compare the potential mortgage payment to your rent payment. Is there a big difference? You should try to keep your payment shock to a minimum when buying your first home.
A high payment can overwhelm you financially. This can put you at risk of missing a mortgage payment. If you miss more than three payments, you run the risk of foreclosure.
Knowing how much you are willing to pay each month also helps you learn how much house you can afford.
Letting your loan officer know that you want your mortgage payment to be around $1,000, for example, will help him come up with a realistic loan amount based on today's rates.
If you add the loan amount to the amount you have saved for a down payment, you'll know how much home you can afford.
While it seems like you are working backward when you focus on the monthly payment, it helps prevent you from going over budget.
It's easy to get caught up in the fact that a loan officer will qualify you for a certain amount. When you look at the monthly payment, though, it may not be realistic or comfortable for you.
Keep in mind, though, your monthly payment should be a realistic amount as well. Know the average price of homes in the area and ask your loan officer what the typical mortgage payment is on a home of that price. You can figure in your down payment as well to help figure out the answer.
Once you have the finances figured out, it's time to choose a loan program. Your loan officer can help you determine which option works best based on the amount of your down payment and your qualifying factors.
The most common loan options include:
Each loan program has different requirements including the down payment. For example, conventional loans require a 3 percent down payment, but FHA loans require 3.5 percent down. Yet, VA and USDA loans don't require any money down.
Each loan program has different credit score and debt-to-income requirements too. Your loan officer can go over the requirements and match you with the right program. FHA loans, for example, are best suited for first-time home buyers that don't have a lot of credit or maybe don't have a great credit score. It's also a good option for buyers that don't have a large down payment. The tradeoff, however, is the mortgage insurance borrowers pay for the life of the FHA loan.
Your loan officer can go over each option, showing you how it affects your monthly payment as well as the total you pay for the loan. Go over each option, ask questions, and compare them to one another to help you decide.
Once you choose a program and confirm with the loan officer that you'll qualify for it, formally apply for the loan, and get a pre-approval letter.
Realtors and sellers look for this letter when showing a home. The pre-approval letter lets realtors and sellers know that you are serious about buying the home. It also shows them whether you can secure enough financing to purchase the home.
Sellers don't like to accept bids from borrowers without a pre-approval. There's nothing to show the seller that these borrowers can borrow the money. If the seller accepts a bid and wastes time under contract only to find out the buyer can't get funding, it puts the seller behind.
The pre-approval letter is typically good for 120 days. That should give you enough time to shop for a home. If you don't find a home within that time, though, you can re-apply for the pre-approval. The lender needs you to update your information, such as your credit score and income, to ensure that you still qualify for the loan.
Once you make it through the four steps above, it's time to shop for a home! Hire a knowledgeable real estate agent to help. Real estate agents have early access to the hottest listings. They also know the area, and can provide unbiased advice regarding the available homes.
Let your real estate agent know the areas that interest you, your budget, and share your pre-approval letter. An agent with experience and knowledge of the area should be able to point you in the right direction. He or she can show you homes within your budget and that meet your criteria for a home.
Doing the preliminary work helps prepare you for home ownership. You'll know how much a bank will approve you for as well as how much you can comfortably afford.
Looking at houses as the last step helps you narrow down your options and stay within your budget as a first-time home buyer.