Buying your first home can be one of the most challenging but rewarding experiences of your life. From the life-altering changes you need to make to start saving for a down payment, to finally closing the deal, and everything in between. There are bound to be a few sleepless nights. There are also questions when starting the search. To try to make your life easier, we have put together this article that details ten steps to help you successfully close your first home. These steps are just the basics every first time home buyer should know. They will differ slightly with each individual situation.
Step One – Start Saving For A Down Payment Today
Most people begin saving well in advance of needing a down payment; they understand that the higher their down payment, the lower the amount of money they will have to borrow and as a consequence the lower the interest and monthly payment over the length of the loan. There are many different ways to save for your down payment; here are some of the most common methods people use to get the money together.
- Open an individual savings account and save a set amount each month,
- Cut out more substantial expenses such as vacations for a few years
- Stay at home on the weekend – reduce your unnecessary expenses
- Stop using credit cards or any other high-interest debt you need to service
- Get a loan from a relative
- Cash in your retirement plan
- Sell stock and shares
- Now that you have some free time – get a second or third income
- Negotiate a better price with the seller
- Are they eligible for down payment assistance
Ideally, your target should be to save 20% of your dream homes price. This will allow you to avoid specific fees and higher interest rates that may apply if you do not have any down payment. Certain mortgage types will accept lower down payment, in some circumstance, you might only need 10% or 5%, and even 0% for certain mortgage types such as those can get from the VA or the USDA.
Step 2: Work On Your Credit Score
Your credit score will affect the success of any mortgage application, and it will also dictate the amount of money you will be able to borrow and the rate of interest you will be charged. Luckily if you have been following some of the advice in step one will already be taking steps to recover your score.
Every lender is concerned about getting a return on their investment, and the ability of the borrower to repay is one of the first things they are worried about. They ideally want customers who have a history of borrowing and servicing debt. When you apply for a mortgage one of the first things they are going to do is look to see what your three-digit score is. Hopefully, it is at least 600. This will show them your history of debt management, your credit card history and student loans etc.
They will do some simple equations to assess the risk attached to giving you a loan — the higher your credit rating, the lower the risk. Their estimation will also dictate how much they are willing to lend you and at what interest rate. If you have a large amount of outstanding student debt, but you have been servicing this debt consistently, this will impress the lenders, as it shows your honesty and dedication to honoring contracts. If on the other hand, your credit history shows several late payments on credit card etc., this will set a few alarm bells ringing on the assessor’s side.
As you begin to save for your down payment, you should be taking steps to bring your credit score in line with the levels expected by the lender you will choose to use. Reducing your high-interest loans and clearing any credit card debt, as mentioned earlier, are two giant steps in the right direction.
Step 3: Apply For Mortgage Pre-approval
Before you ever start viewing potential homes, it is advisable to apply for mortgage pre-approval from your preferred lender. I always advise people to get approval from several different lenders if they can. The importance of this will become clearer later in the article.
Most legitimate mortgage lenders will want to scrutinize your finances heavily – they will want to calculate your debt to income ratio and list any of your assets. They will need this information to decide whether you are eligible for a loan, how much they are willing to lend to you, and what rate of interest they will charge.
Once you receive pre-approval, this will tell you the price range that you can operate within. Remember that you do not want to borrow to the limit of your credit, as this makes repaying your debt a burden and increases the possibility of you defaulting on your loan.
Be sure to clarify with your lender that you are interested in pre-approval, not pre-qualification. If you pass the pre-qualification process, they will provide you with a ballpark figure that you might be given as a mortgage. But the key difference is you have not received any promise from the lender; the process of pre-approval takes longer and is more of a pain. Still, it is definitely worth the trouble as it makes a guarantee of your creditworthiness and allows you to buy a home.
To help yourself in this part of the process, you can do your due diligence and work out how much you can afford to repay every month. Please take into consideration a sudden loss of income and how this will affect your ability to service the loan. There are many calculators available online to help with this process.
Step 4: Look For A Realtor You Can Trust
Do you want someone you can trust to help you buy your first home? Buying your first home is a big deal; find the right person to help you is essential to the process going smoothly. Finding a buyer’s agent who you know has your best interest at heart is vital to both parties. Look for someone who talks about finding you the right house and negotiating the best price they can for you. Getting an agent who is willing to educate, someone who will explain the process along the way is essential.
Step 5: Time To Go House Hunting
Now it’s time for the fun, you have found your buyer’s agent, you have your mortgage pre-approved, you know how much you can comfortably afford to borrow. It’s time to find your perfect home within that budget. Let your agent do their job, but at the same time, you can spend your days driving around the neighborhoods you want to live in, or searching online. Maybe your hunt shouldn’t start with Zillow? You can do both at the same time these days.
Since there are thousands of homes to choose from at any given time, it is vital to make a list of things you want in your first home. You should start with the essentials, something that you are not willing to compromise on. The items you would like, these would be considered a bonus. Use these to chip away at the sheer number of available properties until you find several suitable properties.
Step 6: Make An Offer.
So you have found your dream home, congrats. Now begins the most challenging part of the whole process, closing the deal. At this point you have an idea of what the seller wants, chances are they have posted a price that is 5% to 10% more than they would accept. Use your common sense, do they appear to be a distressed seller (someone who needs to sell quickly), if so they are vulnerable and may make an offer much lower than they are asking for. Unless you are experienced at this, leave it up to your agent to start negotiations.
Step 7: Get The House Inspected
Before you make any final offer on the house, you need to make sure it is safe to live in and will not need any significant (expensive) work to maintain. Employ a professional inspector to check the home inside and out, to determine if there is anything you need to be worried about. Something that would make you think twice about moving in. Things you do not want include, asbestos, mold, termites or a faulty foundation. Don’t get me wrong, the vast majority of issues can be resolved, but if the inspector finds a big problem, it should be factored against the purchase price of the home.
Step 8: Get The House Appraised
All lenders will want to get a house appraised before they approve a loan application. As you home will act as collateral against the loan, they will want to make sure they will get a return on their investment on the chance you default on the loan. This is similar to a house inspection, but it is done on behalf of the lender.
Step 9: Close The Deal
Depending on the part of the country you live in, this part is described as settlement, closing or escrow, this brings the different parties to the deal together, to sign on the bottom line. This is the day you have been looking forward to, the day you eventually receive the keys to your first home. Be prepared for a shock, and this bit can be expensive, anything from 2% to 7% of the value of the house.
Step 10: Its Moving Day!!!
Game, set and match! Closing has finished, you have your keys, the deal is done. Congrats. You have fully transitioned from a buyer to an owner. One final step, you need to move in. Take a piece of advice; don’t do this on your own as it is stressful. Get some help, so you guys can sit back and celebrate with the people you love at the end of the day.
I know this list of the basics every first time home buyer should know makes buying a house sound pretty straightforward and in the vast majority of cases, it is. But the level of help that you can find will generally dictate how smoothly the whole process goes.