Lending Tips For First Time Home Buyers
Buying a home involves a lot of lingoes that the average consumer may not either be aware of or understand.
Considering that most people will finance the purchase of a home for a rather significant amount, it makes sense to get familiar with the real estate terminology that will likely be used not only by the real estate agent but also by the mortgage lender.
Much of what first time home buyers need to know about the process centers around getting a mortgage.
#1 Understand Your Numbers
The majority of people that are approved to buy a home will be able to finance more than they perceived.
For example, if your current rent amount is $985 per month, you might be surprised to learn that you could potentially be approved for a monthly mortgage payment of $1,300 or more.
But that does not mean you should look for a home that is at the limit of your ability to pay.
You will likely have living expenses to take care of that don’t show up on a credit report. Items like an annual vacation, the purchase of a better vehicle in 2 or 3 years, along with your hobbies, all add up over time.
Don’t forget about paying for mowing the lawn, plowing the driveway, as well as well as the monthly purchases you may make for your home.
Sit down and really focus on everything that you spend during a month to get a comfortable feel for a new house payment.
Above all else make sure you avoid these home buying mistakes that can cost you!
#2: A Down Payment is Only One Out of Pocket Expense for Purchasing a Home
You may qualify for a no down payment or low down payment mortgage, such as the VA loan or the FHA loan. If so, this can save you thousands of dollars at the time of purchase. However, the down payment is only one piece of the home buying puzzle.
Before you ever make the down payment, there is a thing called earnest money. The amount of earnest money usually is 5% of the purchase price. This amount is expected when you sign a contract to place an offer on the home. If the seller accepts the offer, and your loan is approved, the earnest money is usually applied towards the closing costs. But, you are still asked to pay it up front as a sign of good faith.
There is also the matter of the closing costs. Some service providers are called upon each time a mortgage transaction is completed. The lender, the real estate agent, the home appraiser, the local county courthouse, a homeowner insurance agent and the closing attorney are just some of the representatives involved in the purchase, and each of them will charge a fee.
All of the fees are paid when the loan is closed.
There also may be other items to consider. Hiring a moving company, transferring utilities, and eating fast food while moving and getting the new place set up are also common expenses
#3 Get Your Credit Score As High As Possible
This point cannot be emphasized enough. People with the highest credit scores will usually get approved for the absolute lowest interest rate mortgages and also for small down payment loans.
It behooves any buyer to work on increasing their credit score before applying for a mortgage to buy a home!
Look at the following chart for a simple example:
|Scenario 1||Scenario 2|
|Term (in Months)||360||360|
|Monthly Payment Amount||$1,349||$1,208|
|Difference over 30 years||$50,760 savings!|
As you can see, the difference from a 1% change in interest rate is only $141 per month. However, over the course of 30 years, that can mean a savings of $50,760 in interest.
In order to get your score as high as possible, follow these simple rules.
-Pay everyone on time, every month, without fail.
-Pay down all credit cards as much as possible.
-Do not close out any credit cards, especially older ones.
-Do not take on any new debt.
#4: Include More than the New Home Payment in Your Budget
Buying a home will mean that you are now responsible for all maintenance and repairs on the home. New carpet, new paint, plumbing problems, electrical issues or a fix to the air conditioning/heating unit are all on you. It also means that when the roof needs to be replaced, or the exterior walls need repainting, you will even need to pay for that too.
It is a good idea to set aside a certain amount of money each month to handle the repairs and eventual replacements that will occur over time. Expect to save 10% to 15% of the monthly mortgage payment as part of a rainy-day fund.
It also means paying for all utilities. The electricity, water, trash collection, natural gas, internet and cable/tv/satellite bills will all be up to your discretion. If you currently live in a place where one or more of those items are covered by the monthly rent, it may be surprising to find out how much each of those things cost.
Inquire with the real estate agent about the current monthly utility bills if possible. Having this information will help you work out the budget numbers.
#5 Get Pre-approved For a Mortgage
Talk to a local mortgage lender and get a pre-approval for a mortgage loan before you start looking for a home. Getting pre-approved will do two things for you.
- It will define the price range for your home purchase
- It will show real estate agents that you are serious about buying and make it easier to negotiate with sellers
In order to get pre-approved for the home, you will need to document your income with the lender and be subject to a credit check. An experienced mortgage lender will be able to go through credit and income documents and determine not only the best type of loan for your situation but explain which mortgage programs will approve you for the home purchase.
#6 Choose The Location Of Your Home Wisely
There are a lot of things to consider when purchasing a home. Morning commutes to school and or work are a significant part of daily life.
If the new location adds 20 or 30 minutes to your daily commute, that means you are giving up almost an hour every day for the opportunity of living in that home.
There are also things like proximity to family, friends, shopping, and entertainment.
For example, if you have a habit of eating a meal with your sibling or parents once a week at their home, will the new home location put a damper on those plans? Or, if you like to socialize with friends on a regular basis at a particular hot spot, how far will that hot spot be from your new home?
Consider the usual routine that you currently enjoy and determine how that habit will be affected by the purchase of a home.
#7 Consider The Ability To Sell The Home In The Future
While you may be buying a house now with long-term plans in mind, that does not mean that things won’t change.
Nobody can predict the future, and something may happen that causes you to sell the home. Keep these things in mind when purchasing a home:
Never buy the most expensive home in the neighborhood – the most costly house will be the toughest one to sell, historically speaking.
Never buy the smallest or biggest home in the neighborhood – similar to the item above, the smallest and largest homes in a particular neighborhood will be more difficult to sell
Also, keep in mind the target audience that would likely be interested in purchasing your home. As long as there are a lot of people that could consider living at your place, you should be in good shape to sell if your life circumstances should change.
#8 Review The Home Owners Association Documents Thoroughly
If you are moving to a neighborhood that has a Homeowner’s Association Agreement, you owe it to yourself to read the contract before buying the property. Some Associations are very laid back and have very few rules.
Other groups have guidelines about a wide range of items that cover the colors of the exterior walls, type of roofing material, the things that can or cannot be left in the driveway and other details. Make sure you agree to these rules and have no problem abiding by them.
#9 Read The Purchase Contract Thoroughly
Signing a contract to buy a home makes you liable to carry out the purchase. For this reason alone, it is wise to read over the entire contract. Some sellers may have restrictions in place, and you need to be aware of the limitation.
Just as an example, the sellers may require that they remain in the home for a week or 30 days after the loan closes while their new home is being built.
Or, the sellers may expressly state that they will make no improvements or repairs to the home before the sale. These things may not stop you from buying the home, but it could have an impact on your plans for moving and taking up residency.
It is also essential to find out if there are any contingencies in place. Some sellers will place a contingency on the contract they will only sell their home if their agreement is accepted on a different home. If the contract on the different home is rejected, then they cannot sell their home to you.
#10 Investigate The Demographics of The Area
Most people wish to be surrounded by those similar to themselves. If you are a young married couple with a small child, then you may feel more comfortable in a neighborhood with other young children.
On the other hand, if you are single with no plans to marry, the idea of being surrounded by lots of families and young kids may not be your thing.
Along those lines, if you are buying your home, you likely don’t want to buy a home in the midst of multiple rental properties. Rental homes normally do not rise in value as quickly as homes owned by the occupants.
#11 Push Emotions Aside During Negotiations
When we want something really bad, it is easy to get caught up in emotions and ignore facts. However, this is precisely the opposite of what should happen.
When you are dealing with the real estate agents and the sellers, make sure to get a fair deal. If things need to be repaired, point that out before signing the contract.
Perhaps the price can be lowered to cover the repair costs, or the sellers can pay for it out of pocket. If the home is overpriced for the area, find out why and see if the sellers will come down on the price.
It is important for you to get a good home. However, you must protect yourself from signing a contract that could harm your interests.
#12 Determine What Is Necessary Versus What is Wanted
Most of us want to have the absolute best that we can afford. However, when buying a home, it is easy to claim something is necessary, when it is really just a want.
Make a list of things that you feel are absolute must-haves. If you have two small kids, then you will likely want a bedroom for each of them. Having an extra bedroom for a “man-cave” is probably a want, not a need.
If you have a large dog that needs daily exercise, having a large yard or a convenient park is a need. Having 20 acres is a want.
If you suffer from achy joints or a weak back, getting a tri-level home with narrow steps may be a bad idea for the long term.
These are just examples to get you thinking. Consider what you dislike about your current place and the things that you actually enjoy. This can be a right starting place for you and help you come up with a list of items and features that you will need at the new place.