First Time Homebuying Tips
Are you really ready to buy a home?
Buying a home is a huge, life-changing event. Not only is home quite likely the largest purchase you’ll probably ever incur, but it could also take you decades to pay off.
If you’re looking to buy a home, it shouldn’t be because your married friends are becoming homeowners, or because it’s “the financially mature adult thing to do.”
In fact, you shouldn’t even be looking to buy a home because market conditions are favorable, interest rates are low and home prices are trending down in your area.
You should become a homeowner because you WANT to be a homeowner. You have to want to take on all the responsibilities of homeownership, and you must be mentally ready to settle down in a single place for at least 5-6 years.
That’s without mentioning the elephant in the room. You must also be financially ready to become a homeowner.
Improve your credit score
While purchasing a home in cash would be the homeownership's best-case scenario, for the vast majority of home buyers, the only way they’ll be able to meet their homeownership goals is by means of a mortgage.
In order to qualify for a mortgage, you must be able to prove your ability to repay your loan. To do so, you need to have a good credit rating, a stable job, a sizable amount of cash to make an initial down payment as well as a number of other requirements.
Out of all of those requirements, your credit score is one of the most important factors that lenders will consider when you apply for a mortgage.
That’s because all mortgages have a minimum credit score needed to qualify. And the higher your score, the better your terms will be.
For reference, according to TheLendersNetwork.com, the typical credit scores by mortgage type are:
FHA Loan - 580+
VA Loan - 620+
USDA Loan - 640 +
FHA 203K Loan - 620+
Conventional Loan - 620+
(Of course, these numbers could change depending on your area. Make sure to consult a trusted mortgage broker or mortgage agent to confirm the credit scores you need to have to qualify.)
Your first step towards improving your credit score is getting a credit report, so you know what your current score is (But be careful how many times you pull your score because checking your credit score too often can actually lower your credit score).
In the USA, you’re entitled to get a free copy of your credit each year from the 3 major credit reporting bureaus (Experian, TransUnion, and Equifax).
To get a free copy of your credit report, go to www.annualcreditreport.com. Although there are a number of websites that offer “free” credit reports, annual credit report.com is the only website authorized by the Federal Trade Commission to provide free credit reports.
As you go through your credit report, analyze it carefully and see if you can spot any mistakes. If you do, you’ll have the option to dispute those mistakes, which would improve your overall score.
At the same time, if you have a late payment or two, it’s possible to get them removed. Call the company that registered them, and ask them to remove those late payments.
If you only have one or two late payments, there probably won’t be any pushback, and the company will most likely remove them. But if you habitually make late payments, they likely won’t.
Pay off your debt and build an emergency fund
Beyond your credit score, mortgage lenders use a metric called the Debt to Income (DTI) ratio. This metric measures your ability to manage your monthly payments, and repay your debts.
As a general rule, lenders prefer a DTI lower than 36%, with no more of that amount going towards housing expenses.
While the maximum DTI varies from lender to lender, the lower it is, the better the chance that you’ll get qualified for a mortgage.
So in order to improve your chances of getting your mortgage approved, pay off as much of your current debt as possible.
Start by paying off your loans with the highest interest rate (typically your credit cards). Then use a debt repayment strategy, such as the waterfall method or the snowball method to get out of debt.
And once you’re debt-free, stay debt-free.
Next, start building an emergency fund. Life is uncertain, and you never know what’s going to happen. From job loss to sickness, it’s always best to be prepared. Build up an emergency fund that’s large enough to support you and your family for at least 3-6 months.
Save up for a downpayment
While it’s possible to get mortgages that require a downpayment in the low single-digits, try to save at least 20% for a downpayment.
By putting down at least 20%, you’ll avoid paying for private mortgage insurance, a better rate, and much more favorable terms.
Of course, it could very much be the case that a 20% downpayment is out of your reach. In that case, your real estate agent could help you find a first-time homebuyer program. Many of these offer single-digit down payments, such as FHA Loans and VA Loans.
Get preapproved for a loan
Once you have a substantial amount of money saved for your downpayment, you may think that now it’s the time to start looking at home listings and hiring a real estate agent.
That’s not entirely correct.
The next thing to do is to get a mortgage pre-approval.
Not only does pre-approval give you peace of mind as you tour properties, but when you make offers, it shows that you’re a serious buyer, and gives you a leg-up when making offers.
To get pre-approved, the financial institution will need to verify your financial information (proof of income, taxes, etc.) and submit your loan for preliminary underwriting.
Find the right realtor
The right realtor will help you find the right loan and the right lender and help you find the home you want. Since the buyer doesn’t pay the buyer’s agent commission, you have no reason why you shouldn’t use a real estate agent as a buyer.
This realtor will also help you find the right loan and lending institution for you. This agent will guide you and help you find first-time homebuyer grants and programs.
This agent will also help you avoid common pitfalls that new home buyers may stumble upon.
Homeownership is always an exciting prospect, especially as you get closer and closer towards making it happen. Keep these tips in mind to ensure your first home purchase is successful! And if you have questions or are ready to take the first steps in making a purchase, reach out! We're always happy to help.