Purchasing a new home is one of the biggest financial decisions that most people will make, and there is no doubt that there are many factors to consider when attempting to achieve this crucial milestone.
If this is your first time buying a home, you may want to ask yourself a series of questions to determine if you are ready to purchase.
If you are currently renting or still living with your parents or roommates, you may think it’s a good idea to invest in your first primary residence. While the answer to this question might be a yes, there is more than a monthly mortgage payment involved in owning and maintaining a home.
In general, renters do not have to worry about home repairs and regular maintenance. If you are ready to deal with a leaky roof, replace AC filters, or mow the lawn every two weeks, you might be ready to take on this new financial responsibility.
The great news is that this also means you now have the freedom to keep pets without worrying about extra fees or additional security deposits, play music without neighbors knocking on the door about the noise, and paint the walls whatever color you wish.. The best part is that now your monthly payments will build equity in the home you own, instead of going to your landlord or the apartment complex investor..
As a rule of thumb within the mortgage industry, your purchasing power is determined by your debt-to-income (DTI) ratio. Your total liabilities reported to the credit bureau—including your projected mortgage payment—should be 45% or less of your gross income. For example, if your before-tax monthly income is $10,000, your monthly debt—including the projected house payment—should not surpass $4,500 per month. ($10,000 x 45% = $4,500).
In this same example, if your monthly liabilities are $1,000 without the mortgage payment, then your maximum monthly mortgage payment cannot exceed $3,500.
Technically, you could qualify for a Federal Housing Administration (FHA) loan with a minimum 500 credit score. Now, the odds of approval at this lower credit score can be very limited and include a higher interest rate and points than with a higher credit score. In general, lower credit scores can make the process more difficult
You will need to have enough money to pay for closing costs and your down payment. The down payment is an upfront amount you pay to the lender to buy a home. Depending on the loan product you select, the down payment minimum can vary from 0% to 3.5%. As a first-time homeowner, you might also qualify for 3% down payment on a conventional loan, based on Fannie Mae’s guidelines.
Closing costs tend to fall between 3% to 6% of your loan amount. They include any lender fees, title fees, and across-the-board charges like property taxes, homeowners’ insurance (HOI), and homeowners’ association (HOA) fees.
The table below will show you a snippet of the loan product down payment minimum and percentage of closing costs that can be paid by the seller, also known as seller concessions.
How long you plan to live in your new home is an important question new homeowners should not overlook. A new study shows that US homeowners stay in their homes for 13.2 years. This means that if you want to take a lower interest rate by buying down discount points, you may be able to. In general, the amount of time it takes for you to recoup the points is called the breakeven point. As a rule of thumb, the breakeven point is from 5 to 8 years.
On the other hand, if you buy a home with zero down or low down payment options, you won’t have any equity in the home at first. Home equity is the difference between your home worth and what you owe your lender. Financial difficulties, such as a sudden job loss can put you at risk of selling your house. After 6% real estate charges to sell the home, you may not have enough quality to cover these costs and could end up underwater.
The table below will give you a broad idea of the different loan programs for first-time homeowners. You can also check for any down payment assistance programs with local government or county.
GET PREAPPROVED: Complete a mortgage application and work directly with your assigned mortgage loan originators to make sure everything looks good. They will send you a preapproval letter (your golden ticket!) so you can start putting offers on your dream home.
WORK WITH A REAL ESTATE AGENT: A good real estate agent is crucial in this process. You want to work with someone that is after your best interest and knows the ins and outs of your local market.
GET A HOME INSPECTION: A home inspection is different from a home appraisal, which the lender will usually require. Once you find a home, your real estate agent will most likely recommend you getting a home inspection to make sure everything in the home is working and that no major repairs are needed.
SEND YOUR PAPERWORK TO THE LENDER: Nowadays most transactions are done electronically. Make sure to upload all requested documentation so that your underwriter can review your file and give you their best assessment. Lenders will usually ask for photo IDs, pay stubs, bank statements, and other documents, depending on your specific scenario.
PREPARE FOR THE BIG DAY: Lenders are required to provide a closing disclosure 3 business days before the big closing day. Review your final figures with your loan advisor and make any changes if needed. After you sign your closing documents at the attorney’s office, the lender will proceed to send the funds to complete the transaction. Lastly, the title company will receive the funds and send them to the seller to then transfer the title to you. This will officially make you a new homeowner!