First Time Home Buyer Basic Tips

First-Time Home Buyer Tips: What You Need to Know Before You Buy

Buying your first home can feel complicated, but it becomes much easier when you understand the basics and have an experienced Realtor and mortgage professional helping you through the process.

You don't need to become a mortgage expert. You simply need to understand the major factors that determine how much home you can afford, which loan programs may work for you, and how much money you may need to complete the purchase.

Here are some of the most important things every first-time home buyer should know.

Start With a Mortgage Pre-Approval

Before you spend too much time looking at homes, get pre-approved for your mortgage.

A good pre-approval gives you a much clearer idea of:

• How much home you may qualify to purchase
• Your estimated monthly payment
• How much down payment you may need
• Your estimated closing costs
• Which loan programs may fit your situation
• Potential credit, income or documentation issues that should be addressed before you make an offer

For a complete pre-approval, your lender will generally review your credit, income, employment, assets and monthly financial obligations.

The objective is simple: know your numbers before you start shopping for a home.

Your Credit Is Important — But It Isn't Everything

Your credit score can affect both your ability to qualify and the interest rate and loan terms available to you.

But don't assume that less-than-perfect credit means you can't buy a home.

Different mortgage programs have different credit requirements, and an experienced loan officer can help determine which program makes the most sense based on your overall financial situation.

Your lender will also look beyond the credit score itself. Your credit history, monthly debt obligations, income, assets and the type of property you're purchasing can all affect your loan approval.

How Much Will Your Monthly Mortgage Payment Be?

One of the biggest mistakes first-time buyers make is looking only at the principal and interest payment.

Your actual monthly housing expense may include:

• Principal and interest
• Property taxes
• Homeowners insurance
• Mortgage insurance, when applicable
• HOA dues, if applicable

This is sometimes referred to as PITIA — principal, interest, taxes, insurance and association dues.

Property taxes and homeowners insurance can vary considerably from one property to another, so estimates should be updated once you've identified a specific home.

That's why it's better to have your lender calculate the payment for the property you're considering rather than relying on a generic online mortgage calculator.

How Much Income Do You Need to Qualify?

Mortgage lenders compare your qualifying monthly income with your monthly financial obligations. This calculation is commonly called your debt-to-income ratio, or DTI.

Your debts may include items such as:

• Car payments
• Credit card minimum payments
• Student loans
• Personal loans
• Child support or other qualifying obligations
• Your proposed new mortgage payment

Two buyers earning exactly the same income may qualify for very different loan amounts if one has significant monthly debt and the other has very little debt.

This is why simple income multiples aren't particularly accurate.

An experienced loan officer can calculate your actual qualifying income and debt ratios based on the loan program you're considering.

You May Not Need a Large Down Payment

One of the biggest misconceptions about buying a home is that you need a 20% down payment.

You don't.

Depending on your qualifications and the property, several low- or no-down-payment programs may be available.

Conventional Loans

Some conventional loan programs allow qualified buyers to purchase a home with as little as 3% down.

Putting less than 20% down will generally mean mortgage insurance or other pricing considerations, but that doesn't necessarily mean waiting until you have 20% saved is the best financial decision.

FHA Loans

FHA financing can be particularly useful for buyers with limited down-payment funds or certain credit challenges.

The minimum down payment is generally 3.5%, subject to FHA requirements.

VA Loans

Eligible veterans, active-duty service members and certain other qualified borrowers may be able to purchase a home using VA financing with no down payment.

VA loans can be one of the most attractive home financing options available to borrowers who qualify.

USDA Loans

USDA Rural Development loans can also provide zero-down-payment financing for eligible borrowers purchasing eligible properties.

USDA loans have household income and property-location requirements, so eligibility needs to be checked for each buyer and property.

Don't Forget About Closing Costs

Your down payment isn't necessarily the only money you'll need to purchase a home.

Buyers can also have closing costs that may include items such as:

• Title and escrow or settlement charges
• Appraisal and other lender-related fees
• Prepaid homeowners insurance
• Property tax adjustments
• Initial deposits into an impound or escrow account
• Other transaction-specific expenses

The exact amount depends on the loan, property, purchase price and transaction.

Here's something many first-time buyers don't realize: you may not necessarily have to pay all of these costs yourself.

Depending on the loan program and housing market, the seller may be able to contribute toward your closing costs. In some situations, lender credits may also be available.

Ask about these options before assuming you need to save every dollar of the closing costs yourself.

Down Payment Assistance May Be Available

Depending on where you're buying, your income and the loan program, you may qualify for a down-payment or closing-cost assistance program.

These programs vary considerably, and assistance isn't automatically the best financial choice for every buyer.

It's important to compare the benefits with any additional costs, interest rates, repayment requirements or restrictions associated with the assistance program.

Homeowners Insurance Can Make a Big Difference

Homeowners insurance has become an increasingly important part of determining whether a property is affordable.

Premiums can vary substantially based on the home's location, construction, age, condition and insurance availability.

Before getting too far into a purchase, particularly in an area where insurance may be difficult or expensive to obtain, get an actual insurance quote.

A substantially higher insurance premium doesn't just increase your monthly payment — it can also affect how much mortgage you qualify for.

Understand Your Loan Options Before Choosing One

There isn't one mortgage program that's best for everyone.

A conventional loan may be ideal for one buyer, while FHA, VA or USDA financing may make much more sense for someone else.

The right choice depends on factors including:

• Credit profile
• Income
• Monthly debts
• Available down payment
• Available funds for closing
• Property type
• Property location
• How long you expect to own the home

Don't choose a mortgage simply because someone tells you it has the "lowest rate."

Compare the entire loan — interest rate, lender fees, mortgage insurance, monthly payment, cash required to close and overall loan cost.

Get Your Financing Organized Before Making an Offer

A strong pre-approval can make the home-buying process considerably easier.

Before you start seriously shopping for a home:

1. Complete your mortgage application.
2. Have your credit reviewed.
3. Provide the requested income and asset documentation.
4. Discuss the loan programs available to you.
5. Determine a comfortable purchase-price range.
6. Review your estimated payment and cash required to close.

Then you'll be in a much better position to shop confidently and make an offer when you find the right home.

One Final Tip: Ask Questions

Mortgage financing has a lot of moving parts, and first-time home buyers aren't expected to know all of them.

If something doesn't make sense, ask.

You should understand your interest rate, loan fees, monthly payment, down payment, closing costs and loan terms before you commit to the mortgage.

A good loan officer should be willing to explain the numbers clearly, answer your questions and help you compare your options without pressuring you into making a decision.

Get Straight Answers About Your Home Loan

Buying your first home is a big decision. Getting the financing shouldn't be harder than it needs to be.

I can help you review your income, credit, down payment and monthly obligations, explain the loan programs available to you, and determine approximately how much home you can comfortably afford.

No sales pressure — just straightforward answers and home loan numbers you can understand.

Mortgage guidelines and loan programs are subject to change. Qualification depends on individual borrower, property and loan-program requirements. This information is for general educational purposes and is not a commitment to lend.