Thinking about buying your first home? The process can be exciting–and a bit daunting for first time home buyers. These expert tips can help you prepare ahead of time, and be a savvy buyer when you’re ready to make your move.
It’s good to start prepping your finances about six months before you begin house shopping. This gives you time to address any issues ahead of time, rather than be surprised during the mortgage application/underwriting process.
First Time Home Buyers: Before You Start Shopping
Check your credit. Your credit score will determine your interest rate. It may also preclude you from being approved if the score is too low. Scrutinize your credit reports from all three credit reporting agencies. If there are errors, contact the agency through its error reporting system. Thanks to a federal law, you can get a free copy of each report every 12 months at www.annualcreditreport.com.
Even if you pay all of your bills on time, your credit score may be low based on your credit utilization. If your credit cards are maxed out, your score will be significantly lowered. Ideally, you should be using no more than a third of your available credit. If your utilization is higher, devise a plan to pay down your credit cards, and your score should come up accordingly.
Determine how much you will need for a down payment. This will be at least 3 percent of the total purchase price. These funds cannot just appear in your bank account, either, so a last-minute loan from Mom is not going to fly with the mortgage underwriter. You’ll need these funds to be “seasoned,” or at least, have a well-documented trail of where they came from. It’s not wise to move your money around three to six months before buying a home.
Also keep in mind that you will need cash for closing costs and reserves, which can run about 3 percent of the purchase price, unless the home seller agrees to pay these for you.
Evaluate your assets and liabilities and pre-qualify yourself. Know how much money is going in and out each month. This will help you determine how much of a monthly mortgage payment you’re comfortable with.
Many lenders want no more than 28 percent of your gross monthly income to be devoted to housing costs. This percentage is called the front-end ratio.
The back-end ratio is the portion of income for all monthly debt obligations. Many lenders prefer a back-end ratio of 36 percent or less, but some borrowers get approved with back-end ratios of 45 percent or higher.
If your cash flow is tight every month as it is, you may still qualify for a mortgage with payments similar to your rent amount, but do you want to continue to be cash strapped?
Don’t forget, you’ll also need to pay property taxes, utilities, and homeowner-association dues, as well as repairs, maintenance, and potential property-tax increases. Taking a good look at your finances will help you determine where you want to be in terms of monthly housing expenses, including all of these factors.
Research down-payment assistance programs and grants. There are several legitimate programs out there that you may qualify for. Do your homework–it could save you thousands if you’re eligible. Your lender may be able to point you in the right direction for applying for these programs.
Gather your documentation. Lenders will typically request two recent pay stubs, the previous two years’ W-2s, tax returns, and the past two months of bank statements.
Ready to Start Shopping?
Get pre-approved for your loan. There’s a difference between being pre-qualified and pre-approved. A pre-approved buyer’s financial documentation has been thoroughly reviewed by a lender, and the lender has indicated how much they will lend. Pre-approval will save you time and energy by knowing before you shop exactly how much you have to work with when negotiating a purchase price.
Don’t look for the biggest house. When it’s time to resell, your buyer pool will be limited if you’ve got the largest house in the neighborhood. In fact, if you’re handy, keep an eye out for the house that needs a bit of TLC. If you can give it, you’re likely to earn some sweat equity in the long run.
Check out the neighborhood at various times of the day and week. A quiet neighborhood in the morning may be overrun with wild parties on Sunday nights. Make sure you’re comfortable with the activity level around you at any time.
Don’t let emotion rule your decisions. Don’t fall in love with the paint color or the built-in bookshelves. Look at the house as a whole and make your purchase offer decision based on overall factors. In addition, a house that’s been staged to sell may show like a dream home with designer furniture and accessories. Picture the home without the accessories, and make sure it’s the home you like, not the way it’s staged.
Do some research on the surrounding area. Future developments can affect views and traffic. Find out what’s planned. An easy commute can become a nightmare if a huge new shopping center pops up nearby. If the house has a wide-open view, make sure future development won’t sully your view down the road.
Make your offer a smart offer. Your offer should be based on what you can afford and what you think the property is worth. Your real estate agent can provide you with the neighborhood sales statistics to help you arrive at a fair price for you and the seller.
Read your contract thoroughly before you sign. Ensure that you have an out if the home doesn’t appraise at or above purchase price, or if a home inspection turns up items that may prove costly to fix. Your contract should also be contingent on your final loan qualification. You want to make sure any money you put down as a deposit is fully refundable if any of these factors arise.
Follow these tips and your first time home buyers experience will be a source of happy memories, not regrets. Preparation and a cool, calm approach to issues like finances and the state of the home you want to buy will help you make smart decisions.