Purchasing your home comes with many benefits – tax breaks, wealth accumulation, and improved credit, to name a few. However, acquiring that first one can be overwhelming, and making missteps in the process can bring unwanted challenges and problems. Therefore, truly understanding this buying process is essential to a successful close. Let’s review some of the key concepts and steps to purchasing your home for the first time.
1 – Determine Your Buying Power and Save Your Down-Payment
A lot of people first start with looking at houses when what they first should do is chat with a lender or loan broker. The reason is because they can give you options of loan programs as well as let you know what the down payment you need to have for each. Both those points are essential to gage your position in what you can aquire. Those options include terms of your loan notably including the monthly payment and rate. To gain this understanding, it is best to consult with a lender or use an online tool such as Bankrate.com or MortgageCalculator.org.
The second step in determining your buying power is to look at homes in your area and get an idea of the typical price range. Then, identify how much you will need to save, which will depend on the type of loan you plan to use. There are three primary types of loans that homeowners qualify for, including a VA loan, an FHA loan, and a conventional loan. Each one requires a different amount down, and each comes with its own benefits and disadvantages.
For example, a VA loan can allow a buyer to get into a home with zero down, and an FHA loan may require as little as 3.5 percent down. However, both of these loans will require private mortgage insurance (PMI), a premium you must pay to protect a lender in case you default on your payments – This premium can include an up-front cost and increase your monthly expenses. On the other hand, a conventional loan, which does not require PMI, will typically demand at least 20 percent down. This is a more traditional loan, but it can be inaccessible to those who are having difficulty saving enough for such a hefty down-payment.
2 – Get Pre-Qualified
So, you have saved up enough for a down-payment and know more or less what kind of program you maybe able to utilize for financing. What next? Now, you will want to get pre-approved by a lender before you actually start making any offers. The truth is, unless you are an all cash Buyer, sellers will often want some kind of verification in having the financing to purchase their deal. No Seller wants their real estate tied to a buyer who cannot pull the trigger. Loan terms can vary. These terms of your loan will depend on your credit history, debt-to-income ratio, collateral, and loan term, in addition to the sum of the down-payment you have saved. If you have a high credit score and a low amount of debt, you will typically qualify for a better loan. But what do we mean by “better loan?”
The cost of the mortgage that you pay monthly will depend on the amount that you borrow, the term, the amortization schedule, and the interest rate that you qualify for. For example, a longer amortization schedule means that your payments will be spread out over a longer period of time, resulting in lower monthly payments. Furthermore, the lower the interest rate that you qualify for, the lower the payment that you will be responsible for. However, if you have a high interest rate, you may need to consider borrowing less to reduce your monthly payments.
Due to the multiple factors that contribute to your mortgage, you will want to get pre-qualified before looking at homes. This will give you an exact measure of how much you can afford and will help ensure that you will have enough money to make your monthly payments.
3 – Determine the Type of Residence You Want
The amount that you have saved and the amount that you qualify to borrow can impact the types of residence that you can purchase. For example, in many communities, single-family homes can be pricey, and first-time homebuyers often turn to apartments or condos for their first purchase. It is important to examine your values, goals, and vision for your future in order to determine whether or not these are good options for you and if you are willing to sacrifice – or put off – the benefits of living in a single-family home. It is also necessary to understand the homeowner association fees (HOAs) attached to living in different communities since this will also increase your monthly payments. Some communities have high HOAs that may make living in them an unrealistic goal for you.
If you are set on buying a home, it may be best to hold off on your purchase and save more for your down-payment.
4 – Hire an Agent
Once you have a full understanding of your buying power, it is time to start making offers. Note that it is always recommended that you hire an agent to help you during this process. A good real estate agent understands the market and provides insight, helping you see when a home is overpriced. They can also be your advocate in the negotiation process and possibly argue down the price of a home that might otherwise exceed your budget.
Additionally, when working with an agent, make sure that you are transparent with them – Identify the essentials you want in your home and what you are willing to give up. This will allow them to really assess all available homes on the market to be sure you get into the right home for you. Always utilize the assistance of a lawyer as well since there are many contracts that have legal effects.
5 – Stay Educated
Through the process of purchasing a home, always stay educated! Stay updated on current interest rates, fluctuation in home prices, and which homes are selling in your area. The market trends will impact your experience and opportunity, and staying up to date can provide you opportunities that you otherwise might miss.
