It’s finally time: You’re ready to spread your wings and make your way into the exciting, yet daunting housing market. It’s not like anything you will have experienced before, whether you were living at home with mom and dad or you were renting with a couple of roommates. There are a lot of things that you need to know when it comes to buying your first home!
It can get a little bit overwhelming trying to figure out all of the things that you need to know when it comes to buying your first home. Thankfully, we’re here to make it just a little bit less confusing for you! In this guide, we’ll cover all of the things that a beginner will need to know about buying their first home, including the financial elements, actually finding the house and then making that final agreement.
The Financials
Considering the financial elements of buying your first home is the very first step of the journey. There are a lot of things that you need to know, such as your credit score, what your budget is and what mortgages are out there. The very first step before all of that, though, is saving for the down payment on your home.
Saving for a Down Payment
Saving can be a little bit of a difficult task if you aren’t used to it, but with more technology it has become a lot easier in a logistical sense. You may be able to get a mortgage with a down payment as low as 3% of the price of purchase. That’s a huge difference from the 5% minimum that used to be required.
While mortgage down payments this low certainly do exist, the vast majority of lenders will prefer a 20% down payment especially on a conventional loan. With that being said, there are a lot of options as far as loans are concerned. The problem with making a small down payment is that it can ultimately result in extra expenses down the line – especially if you have to pay private mortgage insurance which can add hundreds of dollars onto your overall mortgage. If possible, it’s better to take the time to save.
There are some strategies that you can use to make saving a lot easier. First of all, try to pay off any existing debts that you have. Things such as car loans or credit cards can mean that you have less money to put away towards saving for that mortgage. The more you work on your budgeting, the more that you will be able to save ahead of purchasing your new home.
You can also see if your family members are feeling particularly generous. As it happens, there are a lot of first time home owners that enlist the help of their family members in order to help them to buy their home. Down payment gifts may also be accepted by your lender. It should be noted, however, that it’s not simply a case of putting the check in the bank. You will also need documentation to check that the gift givers meet the lenders requirements. They will need to confirm in writing that they have made the gift and also that they are financially able to donate. They may also be required by your lender to provide bank statements to prove it.
What Can You Afford?
The next question to ask yourself is how much can you realistically afford. You may go to the bank and they will give you a loan that’s a lot higher than you can realistically afford to pay for. Sure, the bank may tell you that you are able to lend $500,000 but that does not mean that you should aim for a number that high. You may end up buying a house worth that much and find yourself struggling to make ends meet with your monthly payments.
When you are trying to figure out how much of a loan you are going to need, you will need to think about the total cost of the house as opposed to only the monthly payment. You should think about how high the property taxes will be, how much the insurance will be, how much it’s going to cost to make adjustments around the house and think about the cost of closing the deal.
What’s Your Credit Score?
According to the Federal Reserve reports, 90% of U.S Mortgages that were taken out in the beginning of 2019 were made by buyers that has a credit score of at least 650. 75% of buyers even had a credit score of at least 700. The median credit score at this point was 759.
Wait, what does that mean? A credit score is essentially something that will indicate to lenders about how worthy you are to be given a large loan. It will consider regular transactions such as credit card payments, your phone bill and any vehicles or gear that you may have on finance. It takes into account things such as your history with repaying loans.
The most commonly used credit score is the FICO credit score, which is short for Fair Isaac Corporation. The vast majority of lenders, up to 90% in fact, use FICO scores in order to determine whether someone is eligible for credit.
There is a minimum amount of information required in order to work out someone’s credit score. Your credit report should have enough recent information to base your score upon. This could mean having a minimum of one account that’s been open for around 6 months or more.
FICO credit scores can range from 300 to 850, and usually any score that sits between 700 and 749 is considered to be good. If the score ranges from 650 to 700 it is considered fair. If you have a score over 750 then it means that your credit score is excellent.
Generally, having a higher credit score translates to having better interest rates and loan options. Of course it is possible to get a home loan if your rate is lower than the median but the chances are it isn’t going to be as good. There are so many different things that can influence whether you get approved for a mortgage or not, such as the down payment size, the cost of your home and your income, so raising your credit score can really go in your favor.
So, how do you make sure that you have a stellar credit score? To begin with, make sure that you pay all of your bills when they are supposed to be paid. Your credit score is 35% made up out of your payment history, so it’s a big indicator of your worthiness for credit. You can help this to happen by putting your bills on auto pay and making sure that you monitor your payment due date for all of your accounts. Make sure that your payments are made on time, including your rent, utilities, phone bill, student loans and any other payments that you may have. If you do find yourself behind on payments, try to get them paid as soon as possible.
You should also make sure that you always pay off any debt as soon as you are able to, and make sure that you keep balances low on your credit cards. If you find any inaccuracies on your credit report, you should also dispute them as your score could get dragged down by false information.
It should be noted that rebuilding up your credit score is not something that will happen overnight. The amount of time that it will take to build up your credit score, especially if you have had a negative change, can vary depending on a number of different things. Make sure that you pay attention to things that are affecting your credit score and change things as needed.
You should also remember that your credit score may not be the same with every credit bureau. This is because different credit bureaus can have varied information for you. The three main credit bureaus are Equifax, TransUrion and Experion. Usually though these differences in scores shouldn’t be more than a couple of points.
If you aren’t sure what your credit score is, there’s no need to worry! You can check your credit score online for free from the 3 different credit bureaus once a year. All you need to do is visit the official government website at annualcreditreport.com. You may wish to order the reports from the 3 bureaus at once or instead you can order them individually one at a time.
It should be noted though that you need to verify that the website you’ve gone onto is legitimate. Avoid any websites that say they will provide you with ‘free credit reports’ or other similar terms, as they aren’t part of the program.
To get your free credit report, simply provide your name, address, Social Security number and date of birth. You may also be asked some extra information that only you would know in order to verify your identity.
What Mortgages are Out There?
There are a lot of different options out there when it comes to mortgage types. Understanding them and then narrowing your decision down based on what works best for you is the most logical step forward, here.
First of all, you have fixed rate mortgages. These are certainly one of the most common types of mortgages in the US market. These mortgages have a fixed rate, as the name suggests, and it also has a fixed monthly payment. These mortgages are predictable and stable, providing a lot of security for homeowners. They are very popular among homebuyers, even more so in circumstances where the interest rates are lower. These kinds of mortgages are usually 30 years long, but they also tend to have shorter terms of 20, 15 and 10 year options too. Of course, having a shorter term does mean that you will need to pay more from month to month, but it also means that the interest costs are lower overall. Most homeowners will use the 30 year terms though.
The next choice is an Adjustable Rate Mortgage, also known as an ARM. There are a few extra risks that come with ARM mortgages as the monthly payments can vary from month to month. They are a decent choice for certain borrowers but you will need to follow understand what they consist of in order to avoid confusion. Traditional ARMs generally have interest rates that can change every year or so. These mortgages are usually offered at a lower initial rate than what you will find with a fixed rate mortgage. They tend to have payment terms of around 30 years. Of course, not every lender will give you this option.
Alternatively, you could also opt for a Hybrid ARM. These kinds of mortgages will give you a fixed interest rate to start with, and this is available in periods of three, five, seven or ten years. Following this, they will become your standard 1 year ARM so the interest rates will change in the following years. True, they also offer lower rates, but they can again also be quite risky as the low fixed rate could jump and your monthly payments will become more expensive. If you know how long you intend to stay in your home this may be a good choice for you.
There are a bunch of other options out there too, so it’s important that you thoroughly research your options before you make your final decision.
If you are uncertain about what option will be best for you, it may be worth investing in a mortgage consultant. They can help you to assess all of your options and it can save you a lot of stress in the long run, as they will help you to be able to find all of the ideal rates and loans for you. They will also help to answer any questions that you may have.
Get a Mortgage Quote from Your Lender
Once you have assessed all of your options, you will need to then get a quote from your lender. With this quote, you can figure out all of your mortgage expenses. You should make sure that you ask your lender questions about the interest rates for the different options to make sure that the quote works for you. You may also wish to shop around with different lenders, or use a mortgage consultant to help you to get the best deal for you.
Get Preapproved for a Mortgage
Once you have had your quotes and followed the steps above, you can then work towards getting preapproved for your mortgage. What is preapproval, you ask? Essentially, preapproval will get you close to confirming your creditworthiness, but you don’t need to have the contracts ready to sign! To do this, you will need to complete a mortgage application. Your lender will then confirm any of the information that you give them. From here, they will also do a credit check. Once you have been preapproved, you will be able to get a preapproval letter. This is basically an offer to provide you with a certain amount of money to buy your first home. This letter is then effective for 90 days following receipt.
Of course, you should also expect the unexpected too. Your lender is going to look at every minute detail of your finances when they are looking to give you preapproval. You may end up being asked about various questions, about things such as certain payments that you may have made on a credit card. It is important that you have answers to these questions.
Preapproval is pretty important, because having preapproval will show sellers that you are serious about buying your home and that you are able to pay for it. This means that completing the purchase is a lot easier.
Preapproval can vary in the amount of time that it takes to do, but some lenders may be able to give you preapproval within 10 business days. This can take a little longer than prequalification as you are going to need to provide the lender with more information.
House Hunting
So, you have all of the key financial elements in place. Congratulations, it’s now time to start looking for the house of your dreams! Of course, it’s not as simple as just pointing at a house, paying for it and then getting it in an instant. House hunting and all of the legalities that come with it can take some time to do. There are also a lot of things that you should know ahead of your house buying journey that can give you leverage in the housing market.
What Kind of Home Will Fit Your Requirements?
There are a number of different options available to you when it comes to buying your first home. Some options include standard single family homes, duplexes, townhouses, condos, co-operatives or multi family buildings that have two to four units.
As you may imagine, each option has its own advantages and disadvantages. As a result of this, you are going to need to make a decision based on your personal home ownership goals and family plans.
You can also choose between buying a home that’s already furnished and is practically brand new, or you may opt for a fixer upper. Again, there are also pros and cons to this, price is perhaps the biggest differentiator between the two. You should be aware, however, that fixer uppers require a lot of time and effort to become the home that you want, and you may end up biting off more than you can chew if you aren’t careful.
Consider the different features that you are going to want your home to have. Of course, when looking for a house you should always have some degree of flexibility but the fact remains that this is a huge purchase to make and it’s important that the choice you make is able to fit with your desires and requirements as much as possible. You should consider things like neighborhood, size and number of bedrooms. You can also consider smaller details such as the layout of the bathroom and whether the kitchen has already been fitted with the right appliances that you need.
Finding a Good Realtor
You may think that finding a decent realtor is as simple as searching for realtors in the area that you are planning on buying, but it’s actually a little more difficult than that. It’s important that the realtor that you choose is someone that you are able to trust, and someone that knows the area that you are buying in well.
To begin with, a realtor isn’t just any real estate agent. A realtor is a licensed real estate agent that is part of the National Association of Realtors. Realtors need to complete a bunch of different exams and ethics courses, and need to meet ethics standards set out by the association.
You should try to meet with your realtor and interview them to see if they are the right fit for you. Try to contact any realtors that you know from recommendations and any that you may know from advertisements. Ultimately you need a realtor that you can get along well with. Ask them how many properties they own personally – it’s usually not a good sign if your realtor doesn’t have a property of their own because they may not have the right insights into buying a home. Check the amount of experience that the realtor has, and check the property types and locations that they specialize in. It may be worth meeting them in person to check whether they are the right fit for you.
You should ensure that your realtor knows exactly what you are looking for so that you aren’t left disappointed. If you do find that you are torn between two different realtors, you may wish to make a pros and cons list to find out what you liked about each one of them.
After you have chosen a realtor, you are going to need to sign an agency contract that declares that the realtor is working for you in order to help you to find a house that meets the requirements you have.
Getting a top realtor can help to keep you protected from any issues that may arise during the house buying process, which is why it’s so important to make sure that you make the right choice for you. A top realtor is like a great coach, there to help you get the best result in your search for your perfect home!
Research Homeowner’s Insurance
Buying a home is a massive investment, so it’s important that you protect this huge asset in the event of a disaster. Home insurance is absolutely essential and something that you should give great consideration to. Home owners insurance will give you coverage so that you can replace or repair your home in the event that it is damaged by things such as smoke, fire, water, vandalism and more. They will usually cover the structure of the building but will also cover the repair of any systems in the home such as the AC. It will also cover you in the event that your property gets stolen.
When looking for homeowners insurance, it is vital that you thoroughly research the options available to you. Think about the things that you need to cover. You may find that standard homeowners insurance may not be enough for you to replace or repair your home and possessions in the event of a disaster. You may wish to buy extra coverage, and a lot of insurers will allow you to customize your policy in line with your individual requirements. You may find that your normal homeowners insurance doesn’t cover certain things such as valuable jewelry, artwork or any other collectible items, so if these or things you want to save then you will want to purchase add ons to your insurance.
Not only that, but not all insurance covers certain things like coverage for flood damage, so if your area is often hit by floods then you will need to check if that’s something you can add onto your insurance.
From there, you will also need to figure out just how much homeowners insurance you are going to need. Try to figure out how much it will cost to replace your house, in addition to any extra structures and buildings such as fences or garages. It is also important to inventory all of your belonginsts, any outdoor furniture and linens. Consider anything that you have in your attic too.
This process may seem like a lot to consider but thankfully it’s not as scary as it initially appears to be. You can ask your insurance agent to walk you through everything to help you to figure it out.
In order to figure out roughly how much it will cost to replace your home, multiply the square feet by the general building costs in your area. You should consider a homeowners insurance company that is able to provide you with coverage in your location, a company that will provide you with competitive rates and decent discounts and somewhere that has a bunch of great reviews from customers and other professional sources. It’s also handy to choose a homeowners insurance company that is able to give you assistance throughout the week – somewhere with decent customer service.
Make an Offer
So you’ve found the perfect home for you, you’ve figured out all of the costs and you’ve figured out the insurance costs. Now what? Well, now it’s time to put in an offer on what will hopefully become your new home! Of course, nothing is ever as simple as just listing a number and going from there. It’s something that requires a little strategy.
To start with, hopefully if you’ve been reading our guide so far you’ll know how important it is to be looking at houses that are in your price range. You may find the perfect home but it’s about $10,000 more expensive than you were planning for. You may think that you can just low ball it and try to get it cheaper, but the chances are that the seller simply isn’t going to be interested. With that being said, you also need to have some degree of flexibility if you want to secure the home as your own.
If you want to buy the home, don’t wait – put an offer in as soon as you’ve decided that you want to buy it. The sooner you move, the less likely there are to be more buyers also vying for the home – though, there is always a risk that you will have some competition. Your realtor should be able to tell you whether there are many other offers on the home so you can figure out how much competition you are up against.
You may be wondering just how much you should offer for the house that you are looking for. Generally the asking price will show you roughly what the seller is looking for, but it’s vital that you consider the true value of the property when making your decision. You should try to check out the sale history of other properties in the area to figure out roughly how much you should be paying. You will also need to consider how many boxes this house ticks for you.
Once you have figured out all of the different things that factor into your decision, you will need to come up with a number. If you have a number of competitors, you will also need to figure out how to make yourself stand out to the seller. It’s easy to get caught up in a bidding war if you’re not careful, so if you find that the numbers that your competitors are offering simply aren’t feasible for you, it may be time to say goodbye to the home. Don’t be discouraged though, as there are sure to be plenty more options out there that may be even better than your initial house!
Before you make a decision on the house though and submit your offer, think again about your budget. You should try to think about the closing costs, any costs for commuting and any potential repair costs. Make sure you think ahead before you buy – you may even wish to see copies of utility bills or other payments to see what you are getting yourself in for.
Get the Home Appraised and Inspected
You may feel like you’ve found the perfect home for you, and it looks ideal – it has everything you could possibly want. Of course, we all know that looks can be deceiving, and that may be the place with your home-to-be. Getting the house appraised and inspected is thus the next step in your buying journey.
An appraisal will essentially tell you the value of the house. This is based on a number of factors such as the price of other homes in the area that have been sold recently, the amenities included in the home and the general market value. It also helps your lender to know how much to give you so you can buy the house. Ideally you will want to have a lower appraisal if you are buying the house, as this will give you more room to negotiate.
Appraisers will usually look at a few different things. They may look at how large the property is, the condition of your home’s exterior, the home’s interior condition and any home improvements and renovations that may have been carried out.
You don’t necessarily need to get an inspection but it can certainly be helpful to get one. For example, getting a pest inspection will let you know whether the home has nasty pests such as termites. You may also wish to check if the home has had issues with damp. It will cover structural problems, so the inspector will check the roof, the internal heating systems, the electrics and the plumbing. They may also check the chimneys, foundations, and more.
Unfortunately you have no real way of knowing whether your home is going to be over or under appraised, but you should try to have a degree of confidence in the comparable sales as they will give you some indication of what you should be paying.
If the inspector or appraiser finds that there are some big issues, you can look at renegotiating on repairs and cash credits between your realtor and seller. Inspections can take quite some time to be completed, with an average home taking around two to two and a half hours on average to complete. A larger home may take more time than this to appraise.
Home inspections can cost a few hundred dollars, but on average they cost roughly $500. Smaller homes may cost less for an inspection. It’s important that you do your research and thoroughly check for all different inspectors in your area to compare quotes.
If you’re so keen on buying a certain house, you may be wondering what exactly the point is in getting an appraisal or inspection of the home. As it happens, appraisals and inspections are a good idea both for a buyer and a seller. As a buyer, making sure you have all of the information you need about the house that you are thinking of buying can help you to make a more informed decision. It’s also a good thing for the seller too, as they can actually boost the minimum offer they are willing to accept should all go well. With an appraisal and inspection, all of the cards are on the table so both parties know exactly what they’re bargaining for.
Review the Contract and Submit the Mortgage Application
Once you and the seller have made an agreement and you have decided you are definitely buying the house, you will then need to venture into legal territory. You will need to provide the seller with a good faith deposit and the house will go into escrow. This essentially means that the seller will take the house off the market for a certain duration of time – normally no more than around 30 days – with a contractual agreement that you are going to buy it.
During this phase, you will both have a contract written up by a lawyer outlining the terms of the sale. All parties will meet together in order to seal the deal. Make sure that you thoroughly read through the contract to check that you are happy with everything in it. You can always ask questions if there is anything that you are uncertain of. You should also be prepared for lots of paperwork!
Once you have found your home, you will need to submit a mortgage application. With this, you will need to provide various documents that relate to how much you earn, any debts you have any any assets you have. Your lender may give you conditional approval, at which point your lender may ask you for more documentation going forward. It is important that you respond in a timely manner to ensure that the process keeps running smoothly. Once the mortgage loan has been approved and all of the necessary checks have been completed, your lender will then give you a date on which you will close, and they will tell you the amount that you will need to take to your closing.
Sealing the Deal
After that, it’s the moment you’ve been waiting for – it’s time to officially make that house yours! Once the mortgage loan has been approved and all legal and mortgage documents have been assessed, you are going to need to work out how to pay your down payment and the costs of closing. You can do this by agreeing to wire money over, or you could get a cashier’s check. If you’ve been following this guide closely, you’ll have made sure that you know what your closing costs are to ensure that you don’t get any nasty monetary surprises at the last second.
Some of the costs of closing can include the loan origination fees, the surveys, title insurance, taxes and any credit report charges that you may have.
When you are closing, make sure you know exactly what you are agreeing to. After all of the documents have been signed, you will then get the keys to your new home!
After this, it’s time to arrange the movers, and make sure you have all of the furniture that you need to make your new house a home. Of course, buying a house isn’t the end of the game, it’s simply the beginning. For that reason, you should make sure that you prepare for life in your new home. First of all, owning your own home can be pretty expensive, so even once you’re in your home you should still keep some savings, even if it’s just for in the event of an emergency.
You should also make sure that you’re keeping your home well maintained to avoid any issues that could have otherwise been avoided further down the line. Keep on top of your payments and make sure that you stay aware of what’s going on in the housing market – you never know, you may find another house down the line that suits you better!
Conclusion
So now it’s time to celebrate! You’ve got your keys in hand, and you’ve sent your thank you cards to everyone that helped you to get here – maybe it’s even time for a housewarming party? You may even want to leave some reviews on the websites of those that helped you along the way!
Congratulations, homeowner – It’s time to enjoy having a place of your own! You’ve achieved the american dream!
