The U.S. housing market is as challenging as ever for homebuyers, with mortgage rates close to a 23-year high, housing prices near an all-time record and inventory tight across the nation. Still, first-time homeownership can be an attainable goal for consumers who are organized and who do their research. Here, we’ll share some money-smart moves that can put you on the path to successfully buying a home.
EXPAND
House-hunting tips for first-time homebuyers
1. Check your credit (and work on it)
The higher your credit score, the better the interest rate on your mortgage.
Pull your reports
Thoroughly understand where your credit stands — and why —by pulling free reports from all three agencies (Equifax, Experian and TransUnion). “Look for any errors or past-due accounts that might have gone to collections,” says Ralph DiBugnara, president of New York City-based Home Qualified, an online resource for homebuyers. “These liabilities can create roadblocks when you apply for a home loan. If anything is amiss, contact the creditor to see if you can sort it out.”
Fix and then monitor your credit
Your credit score is largely based on your amount of available credit — credit card limits, overdraft-protection amounts and any other lines of credit you have — and how much of that you’re currently using. One key component is your credit utilization ratio: how close to the limit your outstanding credit card balances are. It’s derived by taking your total credit card debt and dividing it by the total amount of credit you have.
“Ideally, your credit utilization ratio should be 30 percent or less,” says Lindsey Shores, assistant manager of real estate originations with SchoolsFirst Federal Credit Union in Sacramento, Calif. “For many people, this number is something they have to plan for and work to pay down to achieve.” If you’re over that number, try to pay down your balances.
Focus on keeping them low as you go forward. You also want to make sure you’re paying all your bills on time, as late payments significantly impact your credit score.
Keep periodic tabs on your credit through any number of free services, including those offered by many banks as well as Bankrate. And if you’re not already signed up for a credit monitoring service, you might consider doing so. “You’ll get notified if your credit score changes, or if there’s suspicious activity on your report,” says DiBugnara.
2. Nail down your budget
“One lesson from the [2008 housing] crash: Just because the bank approves you for a certain amount, it doesn’t mean you can afford it,” says Lauren Lindsay, a Houston-based independent financial planner.
Another thing to consider: If you shop for houses below your budget, you’ll actually have some leverage to go above asking price in the event of a bidding war, a not-uncommon occurrence in the current market.
In budgeting, think about not just how much house you can afford, but how much in recurring costs you can handle once you’ve purchased your home.
Mortgage, insurance and property taxes are the three primary monthly expenses of homeownership, but you’ll also need to cover utilities and possibly HOA fees. Plus, it’s a good idea to put aside some money regularly for maintenance and unexpected repairs.
“As a rule of thumb, I tell clients to prepare to spend 1 percent to 3 percent of the value of their homes each year on house [expenses],” says Steve Sivak, a certified financial planner and managing partner of Innovate Wealth in Pittsburgh. You might need to set aside more if the home you end up buying is older, bigger or has maintenance-heavy amenities, such as a pool.
3. Consider your needs and wants
Finding the ideal location and address can take more time than you expect, so begin scouting neighborhoods early in the process.
“Drive and walk around that area at different times of the day and night,” says Bill Golden, a Realtor and associate broker with Keller Williams Realty Intown Atlanta. “This will help you get a feel for what you like and don’t like.”
Along with pinpointing the neighborhood, now is a good time to narrow down your preferences for the home itself. What type of house are you looking for? What can you compromise on? What are the dealbreakers? Think about what you like and dislike about where you currently live — that can help inform your list of needs and wants.
4. Get finances in place
Regardless of income level, you should be able to document to potential lenders that you have a stable source of earnings.
“Your income and how much you earn monthly will be scrutinized by lenders, who will look for a two-year employment history and want to see consistent income — whether you’re receiving a salary, hourly pay or are self-employed,” says Tom Hecker, a loan officer with Cherry Creek Mortgage in Greenwood Village, Colorado.
If you’re self-employed, be ready for closer scrutiny than someone getting a salary or hourly wage.
In terms of your liquid funds and overall financial health, in addition to reviewing your credit report, mortgage lenders typically look at your bank statements from the last two months when assessing your application. If you plan to make any deposits into your checking or savings accounts from other assets — such as a down payment gift — do it before that 60-day window. This gives the funds time to “season.”
And it’s best to avoid opening new credit accounts or loans, or racking up more debt, at this stage, DiBugnara adds. All those activities could possibly ding your credit report.
Tips for finding the right mortgage
5. Comparison shop mortgage lenders
At this point, you should know what monthly payment you’re comfortable with, what areas you can afford and how much you can put down. Now it’s time to shop for a mortgage. Consider these factors:
- Comparison shop: Compare mortgage rates from at least three different types of lenders, as well as different types of mortgages.
- What others have to say: Read customer reviews for lenders online to get a sense of what the experience is like with individual lenders.
- Interactions with the lender: Even “in this market, you can find competitive rates and service, but you want to pay close attention to lenders’ responsiveness and communication,” says DiBugnara.
- The mortgage terms: It’s also a good idea to focus on not just the rates lenders quote you but also all the mortgage terms. What are the late fees? What are the estimated closing costs? Is there a prepayment penalty? If you’re able to get a mortgage with the bank where you already have accounts, will you get a better deal? Sometimes, it makes sense to choose a loan with a slightly higher rate if the other terms are more favorable overall.
6. Get preapproved
Once you settle on a lender, get preapproved for a mortgage. This will require documentation of your income and finances, and organizing your paperwork in advance can help the process run smoothly. It will also prepare you for mortgage underwriting, which will require similar documentation.
Unlike prequalification, which is a projected loan size you’ll be able to get, a preapproval is an official letter from a lender stating exactly how much it will loan to you. A preapproval will put you in a much stronger position when you’re making an offer on a house, and it will ease the process once your offer has been accepted and you’re actually applying for your loan.
Preapprovals usually expire after 90 days, says DiBugnara, so ask your lender how long yours will be good for. If you’re a first-time homebuyer with significant debt or so-so credit, you might want to apply for a preapproval as soon as possible to identify issues to fix.
“Once you have a preapproval in place, keep sticking to your budget and savings plan and continue to pay all debts on time,” says Hecker. “Try not to make any extraordinary purchases or take on extra debt, either.”
7. Look for down payment assistance
There are many first-time homebuyer and down payment assistance programs, including at the local, regional and national level, that can help cover your down payment or closing costs. These programs are typically limited to borrowers with an income below a certain level (based on location), and can impose a cap on the home’s price, too.
Many of these programs pair with state housing finance agency mortgages, which are geared toward first-timers and low-to-moderate income residents. Often — but not always — you must be getting one of these HFA loans to qualify for the assistance, which can take the shape of a low-rate or forgivable loan, or even an outright grant.
Often, your loan officer can provide info on the available programs and what you might be able to pair with your mortgage.
Tips for buying your first home
8. Work with a real estate agent
After you have your financing squared away and a preapproval letter in hand, your next step as a first-time homebuyer is to hire a real estate agent or Realtor.
An experienced real estate agent who knows the area you’re looking to buy in especially well can advise you on market conditions and whether homes you want to make offers on are priced properly. Your agent can also identify potential issues with a home or neighborhood you’re unaware of, and go to bat for you to negotiate pricing and terms.
You can start by asking friends, relatives or co-workers for referrals. Interview several prospective agents to get a feel for who may be a solid match in terms of personality and expertise.
“Don’t just pick [an agent] blindly — make sure it’s someone who works in the general area you’re looking in and whom you feel comfortable with,” says Golden. Offerings “come up every day, and a good Realtor will be on top of that and get you to see new listings as soon as they become available.”
9. Negotiate with the seller
Even when you see the home of your dreams, don’t be afraid to negotiate the price with sellers. Yes, it can be difficult in red-hot real estate markets — as we’ve seen in the past two years — but with interest rates rising and sales slowing, some parts of the country have seen conditions getting more balanced between buyers and sellers.
Besides, it never hurts to ask — especially if you’re a strong candidate and the home has been on the market for a while. Consider putting in an offer under the list price or asking for concessions, such as the seller helping cover some closing costs or repairs.
If you can get the seller to agree to some of these terms, you can score a better deal.
10. Draw up a contract
When you find a home and prepare to make an offer, be clear about any conditions or situations that will allow you to walk away from the deal. These can include the home inspection revealing costly issues or your mortgage approval falling through. If your offer is accepted, you’ll then put these contingencies in a contract, officially known as the purchase and sale agreement, that you and the seller sign. If these terms are spelled out in writing with deadlines, you’ll have an out if the transaction doesn’t go as planned — and get your earnest money deposit back, too.
If there is a problem with the home, get estimates from contractors on any repairs or upgrades it might need before you close on the home, says DiBugnara. Doing this research can help you plan for those expenses and buy you time to have the work done before moving in.
Bottom line
For a first-timer, buying a home can feel overwhelming and endless. But breaking down the process into steps and tackling them one at a time can help you stay focused and get the job done. Doing your research in advance and working with a trusted real estate agent can help you stay on track throughout the process. Keeping your finances steady and limiting other big-ticket purchases can also help you qualify for a loan and get into your first home.
Additional reporting by Allison Martin
Read the full article here
