If you’re a first-time homebuyer, purchasing a home can seem daunting. There’s a lot to consider, from saving for a down payment and getting pre-approved for a mortgage to finding the right property and closing the deal. But with the right guidance, you can confidently navigate the home-buying process and secure the home of your dreams. This guide will provide an overview of the steps involved in buying a home and helpful tips and resources to make the process as smooth and stress-free as possible.
When purchasing a home, you need to have a certain amount of money saved up for various expenses. One of these out-of-pocket costs is the earnest money deposit, which is a deposit made by the buyer to show that they are serious about purchasing the home. This deposit is typically a few thousand dollars and is held in an escrow account until the sale is complete.
Another important expense is the down payment on your new house, which is a percentage of the home’s purchase price that the buyer must pay upfront. The down payment can range from 3.5% to 20% of the purchase price, depending on the type of mortgage you get.
In addition to the down payment, you will also need to pay closing costs, which are fees associated with purchasing the home. These fees often include loan origination fees, appraisal fees, and title insurance, ranging from 2-5% of the purchase price.
It’s also a good idea to have money set aside for moving expenses and an emergency fund. Moving expenses might include hiring movers or renting a truck, while an emergency fund is a stash of cash that you can use for unexpected expenses that may come up after you move into your new home.
Your Credit, DTI, and the 28/36 Rule
A credit score is a calculated number that reflects the creditworthiness of an individual. It is based on a person’s credit history, including information about borrowing and repayment habits. A higher credit score indicates that a person is more likely to repay their debts on time, while a lower credit score suggests that they may be at a higher risk to lenders. When buying a home, your credit score is an important factor that lenders consider when deciding whether to approve your mortgage application. Generally, a credit score of 620 or higher is considered good for home buying. However, the specific credit score requirements may vary depending on the lender and the type of mortgage you are applying for.
DTI stands for debt-to-income ratio. It measures how much of your income is being used to pay off your debts. To calculate your DTI, you divide your monthly debt payments (such as student loan payments, credit card payments, and car loan payments) by your gross monthly income (your income before taxes and other deductions). A healthy DTI for home buying is generally considered to be 36% or lower. This means that your debt payments should not take up more than 36% of your income. If your DTI is higher than 36%, you may have a harder time getting approved for a mortgage.
The 28/36 Rule is a guideline that lenders use to assess a borrower’s ability to handle the financial responsibilities of homeownership. According to the rule, a borrower’s total monthly housing expenses (including their mortgage payment, property taxes, and insurance) should not exceed 28% of their gross monthly income. Additionally, their total debt payments (including their housing expenses and other debts) should not exceed 36% of their gross monthly income. The 28/36 Rule is used to ensure that borrowers are not overextending themselves financially and that they will be able to afford the costs of homeownership.
Pre-Approval for Your Home Mortgage Loan
It is important for first-time homebuyers to get pre-approved for their home mortgage loan for several reasons:
- Pre-approval helps you understand how much you can afford: By getting pre-approved, you will know the maximum loan amount that you are eligible for, which can help you narrow down your home search to properties that are within your budget.
- Pre-approval shows sellers that you are a serious buyer: If you are competing with other buyers for a property, having a pre-approval letter can give you an advantage. It shows the seller that you have been approved for a mortgage and that you are ready to make a purchase.
- Pre-approval can help you move faster: Once you find a home that you want to buy, the pre-approval process will already be underway. This means that you can move forward with making an offer and negotiating the terms of the sale more quickly.
- Pre-approval can save you time and money: By getting pre-approved, you can avoid wasting time and energy on properties that are outside of your price range. It can also help you get a better interest rate on your mortgage, which can save you money in the long run.
Overall, getting pre-approved for a mortgage is an important step in the home-buying process and can help you make a more informed and confident decision about your purchase.
Working with a Real Estate Agent
There are several benefits to working with a real estate agent when you are buying your first home:
- Expertise: Real estate agents have extensive knowledge of the local real estate market and can provide valuable insights and guidance throughout the home-buying process. They can help you understand the various neighborhoods and communities and assist you in finding the right home for your needs and budget.
- Access to listings: Real estate agents have access to a wide range of listings and can help you find properties that meet your specific criteria. They can also help you get a sneak peek at homes that are not yet on the market.
- Negotiation skills: Real estate agents are skilled negotiators and can help you get the best price for your new home. They can assist you in making an offer, negotiating the terms of the sale, and handling any issues that may arise during the process.
- Time-saving: Working with a real estate agent can save you a lot of time and effort. They can handle many of the tasks associated with home buying, such as scheduling viewings, coordinating with the seller’s agent, and handling paperwork
- Stress reduction: Buying a home can be stressful, especially for first-time homebuyers. A real estate agent can help alleviate some of this stress by guiding you through the process and answering any questions you may have.
Overall, working with a real estate agent can provide several benefits to first-time homebuyers and can make the home-buying process smoother and more successful.
The process of buying a home can be complex and overwhelming, but with proper planning and guidance, you can achieve your homeownership goals. By preparing your finances, finding the right home, and working with professionals like real estate agents and mortgage lenders, you can navigate the home-buying process with confidence. Remember to take your time, do your research, and don’t be afraid to ask questions. With the right knowledge and support, you can make informed decisions and find the home of your dreams.