The average purchase price of a new home in the United States has increased by approximately $80,000 over the past six years. The recent run–up in the price range for homes is primarily due to the extraordinary demand for housing and an increasing supply of new homes on the market.
With these factors working against buyers, it is more important than ever for first–time homebuyers to research and understand all their options before purchasing a home. By doing so, first-time homebuyers can be sure to make the best decision.
Buying a home is not an easy process, especially for a first-time home buyer. It is difficult to know where to begin, which steps to take, or how to embark upon the house hunting journey.
Fortunately, it only seems complicated. There are simple steps to take when attempting to do house hunting for the first time. Read on to learn more about the finances when being a first-time home buyer, so you can get the most affordable house that fits your needs perfectly.
How To Qualify
In order to purchase a home, most aspiring homebuyers need to qualify for a mortgage loan. Because the potential first-time home buyer does not usually have thousands of dollars lying around, they need to apply for a mortgage loan. This involves shopping around for the mortgage loan type that fits their needs, then submitting an application.
Potential buyers, upon applying for a loan, must provide
financial documents for the financial institution to approve the loan.
A complete financial history that these buyers need to submit usually includes tax information, information about your monthly income, pay stubs, proof of employment, and other records. The applicant will also need to provide proof of identity, such as a copy of their social security card or a driver’s license.
The financial institution examines these records to determine
credit history. After examining records, the institution calculates the applicant’s debt-to-income ratio. From there, the institution would either deny or approve the application.
Have a Good Credit Score
Your credit score is the most important factor when it comes to buying a home. You must have a good credit score to qualify for a mortgage and make an offer on a home.
Your credit score and the amount of money you have saved will determine your eligibility for certain types of loans. Lenders will require borrowers to have enough available cash on hand to cover closing costs and any down payment required by their particular loan program.
In some cases, they may even request that buyers contribute a small percentage of their own money toward the down payment. It is important to understand how much cash you need before making an offer on a home.
This means that you will be able to qualify for the lowest interest rate and most favorable terms offered by lenders. A good credit score usually requires having a history of paying your bills on time and avoiding late payments, even if you are in financial hardship.
Having multiple accounts with positive credit balances also improves your score because lenders can see that you can manage money responsibly. However, not all factors are reflected in your credit report.
For example, debt consolidation loans help improve your score by reducing the amount of credit card debt you owe on your other accounts. In addition, negative information may be removed from your report after six months if you make all of the required payments on time.
Down Payments
Depending on the type of mortgage loan you qualify for, you will likely need to come up with some form of down payment. A down payment is a small percentage of the home’s total closing costs.
First-time homebuyers need to pay this sum in order to have the mortgage loan take care of the rest
This money is returned to the lender at closing, minus any loan costs.
Some mortgage loans only require 3-5% of the home’s total cost as a down payment. Other loans require much higher or lower sums. Some mortgage types ask that buyers put 20% down for a new home, though many buyers do not have that sort of money lying around.
Fortunately, there are several down payment assistance programs available for first-time homebuyers. These programs can make the home buying process a little easier by covering some of the down payment, along with any closing costs.
Mortgage Selection
A mortgage and loan fee is essentially a portion of your interest rate that goes directly toward paying off your mortgage. These fees are deducted from your monthly payment.
Some fees can be passed on to the buyer as part of the loan contract or paid for separately by the buyer after closing. In some cases, a lender may include these fees in the loan amount itself so that buyers don’t have to pay extra out–of–pocket costs at closing.
For example, you may be charged an origination fee when you apply for a mortgage loan or an administrative fee when you close on your new home.
There are also fees associated with insurance coverage and escrow accounts where property taxes and homeowners insurance payments are held until they are due.
There are several types of mortgage loans on the market today. Often, qualifying for a loan depends on the buyer’s circumstances and the home’s features.
Lenders will often require buyers to submit financial statements and pay a fee to determine their ability to repay the loan. Lenders also consider a buyer’s debt–to–income ratio when making decisions about mortgage loans.
This calculation considers the size of your monthly income, your monthly expenses, and the amount of debt you owe on your other credit cards.
Among the most popular and common mortgage types are
conventional loans, FHA loans, USDA loans, and VA loans. Each loan type comes with specific eligibility requirements and mortgage-related details.
Additionally, mortgage loans can require different terms. Fixed-rate mortgages ensure that the interest rates a buyer pays will not fluctuate. Adjustable-rate mortgages may fluctuate as interest rates rise and fall.
Home loans may last for 15-year terms or 30-year terms. While a 15-year term comes with a lower interest rate, the monthly costs are usually much higher than a loan with a 30-year term.
As the amount of money you owe on your mortgage increases, so does the interest rate that you pay. This can make it difficult to afford a home if you are making payments based on a loan with a long-term term. However, if you plan to stay in your home for several years, the long-term benefits of paying less interest over time may outweigh the costs.
Home Insurance
House insurance is another expense for purchasing a home. On top of monthly mortgage costs and property taxes come insurance premiums for the property. The homeowners insurance policy is a requirement that comes with homeownership.
Paying for home insurance gives you access to security policies, which ensure that a homeowner’s property has coverage for theft, fire, and other damages. Security policies
also provide coverage for accidental damage.
Insurance costs are based on the risk that a house will be damaged or destroyed. Your homeowners insurance policy may also include a deductible, which is the amount of money you must pay out–of–pocket before your insurance company pays for damages.
These policies are a great way to protect the house as an asset. Insurance is required for homeowners. Fortunately, first-time homebuyers have the choice to shop around for a policy that best fits their needs.
The Buying Process
Potential first-time buyers should pre-qualify for a mortgage loan before shopping for a new home.
A potential homebuyer usually needs to work with a real estate agent. They then look at the houses together and
determine which homes will work with the buyer’s mortgage loan type.
Not all homes qualify for a mortgage with each mortgage type. This means that even if a home is approved for FHA financing, it might not be approved for VA or conventional financing.
When the buyer finds a home that fits their needs, they would then make an offer on the home. An “offer” is the amount that the buyer states they will pay for the home of interest. If the seller accepts the offer, the buyer would then provide earnest money to back the offer they’ve just made.
On top of providing a down payment for the home, the buyer would be responsible for paying for the home inspection before the deal is complete. Following an appraisal and inspection, the buyer can purchase the home from the seller. The buyer, seller, and real estate professional complete the required paperwork.
Hire a Real Estate Agent
When it comes to buying a home as a first-time homebuyer, research the process carefully. Look into mortgage type information, special programs, and insurance requirements.
It’s also wise to work with an experienced real estate agent for guidance and assistance throughout each step of the home buying process. Other than real estate agents, you could also consider enlisting help from real estate brokers.
Work with a real estate agent who will take the time to fully understand your financial situation and help you make the best financial decision. There are several things that an agent can do for you before you start looking at homes.
These include helping you decide what type of house is right for you, showing you homes that fit your needs and budget, and assisting in the negotiation process so that you get the best deal possible.
Most first–time home buyers find it easier to negotiate with an agent because they already have some knowledge about what houses are available in their area. This information allows them to focus on finding houses that fit their needs and budgets.
Once you have narrowed down your choices, it is much easier to reach an agreement with the seller and make an offer on a property. A good real estate agent will also be able to provide unbiased advice about mortgage rates, loan programs, or other financial products based on your situation.
It is important for first–time homebuyers to speak with an experienced agent before making a financial decision so they can compare offers from different lenders.
