New year, new you.
The first of the year starts a lot of people thinking this is the year to buy their first home. If you bought a home before, home buying can certainly present its challenges.
But for a first-time home buyer, who has never been through the home buying process, buying a first home can be downright daunting. Being properly prepared will definitely make the first time home buying process a lot smoother and more enjoyable.
Often the thought hits to buy a home several months to even a year before you actually are ready to pull the trigger. In that time period, there are certainly first steps first home buyers can take before they start looking at homes.
6 First Steps To Buying A Home For First-Time Home Buyers
Assess Your Finances
Many home buyers don’t spend the time thinking about and organizing their finances to buy a home until they put in an offer on a home. Often they look at the house before thinking of anything else.
Then they find the house they love.
This leaves these buyers scrambling around trying to make decisions under duress and with short timelines. But going about buying your first home this way is unnecessary and backward.
Wrapping your head around the financing early, allows you to hone in on exact numbers and make good decisions.
Determine How Much You Can Afford
A bank looks at your debt-to-income ratio to determine how much you can afford when purchasing a home.
Your debt-to-income ratio is calculated by taking all of your monthly consumer debt (minimum payments on credit cards, student loans, auto loans, mortgages etc…) and dividing it by your gross monthly income.
The result is a percentage of your income that goes towards debt. A bank in general wants to see no more than 43% of your gross income go toward debt.
Meaning if you and your spouse make $12,000 a month combined and have $1800 dollars go towards car payments, student loans and minimum payment on credit cards, the bank will allow you to purchase a home with a monthly payment of roughly 3,300 dollars or approximately borrowing $500,000 from the bank.
Please realize this is just a rough guideline to get you started. Loan programs and your individual circumstances can vary your ability to secure a loan greatly.
And, just because you can qualify for a loan doesn’t mean you are comfortable with it. Make sure YOU come up with a budget you can live with and don’t just think the bank says it’s okay, so it is….
Determine How Much Money You Have In Savings To Put Into The Purchase
Next figure out how much money you have saved to put towards the purchase of your first home.
Most first-time buyers are aware they will most likely need a down payment of 3-5% of the purchase price of the home.
But often a first-time home buyer will forget about closing costs, pre-paids and escrows. These items can run around 2 to 3 percent of the purchase price. They are the hard costs of securing a mortgage, pre-payment of insurance for a year and funding of escrow accounts to pay your next tax and insurance bills.
Don’t forget to have extra cash on hand as a buffer as well, so you don’t deplete your saving down to nothing. By knowing these numbers before you start to look, you will know if you need to save more or get a little gift money for a down payment.
Review Your Credit Score
Pull your credit early from AnnualCreditReport.com
Often there can be mistakes in your credit profile that are affecting your credit score as well as there may be things you can do over the next several months to improve your credit.
Your credit score is critical. It affects the interest rate you will be offered, the rate of your Private Mortgage Insurance if you put less than 20% down on a home as well as home insurance itself.
As an FYI last year I had a client whom the mortgage officer and myself were able to help improve their credit score 118 points in less than 45 days. While a 118 point change is almost unheard of 30-60 points may be obtained easily depending on your individual issues. The credit score improvement saved that client $250 a month because they could now be put in the most favorable loan program reserved for top tier credit profiles.
Start Viewing Homes Online
While you are assessing your finances don’t be afraid to start viewing homes online as well. This is the time to start setting your housing goals to reality. Often a buyer has a perception of what they can buy when in reality their budget doesn’t fit their initial goal.
By viewing online, will get a sense of what communities fit your budget and start to set a realistic picture of what is available to you for inventory. You will also start educating yourself on the real estate market.
This time might also be a great time to take an afternoon and drive by a group of homes that interest you as well as visit a few open houses. Looking online is one thing. Driving thru actual neighborhoods and getting into a few is another.
Find A Buyer’s Agent
From the time you have the idea to buy a home, keep an eye out for a good buyer’s agent. While it is not absolutely necessary to use a buyer’s agent it is in your best interest to work with one. Think of a buyer’s agent as a home-buying coach that works on your behalf.
A buyer’s agent will use their extensive experience guiding you through the first time home buying process. They can save you much time, money and aggravation during the purchase of your first home.
A buyer’s agent can walk you through these first steps in the home-buying process if you find one early. It is not unusual for a buyer to start talking to me months before they look at homes.
Get Pre-Approved
Take the time to get pre-approved before getting serious. A pre-approval letter is absolutely necessary to make an offer on a home.
But as important as your pre-approval letter is, so is having a complete understanding of what your first home will cost you in monthly mortgage payments and closing costs.
Squaring away the financing early and having a complete understanding of the money will save you time, money and aggravation down the road.
Your mortgage professional will identify exactly how much you can qualify for, disclose how much you need for your down payment and closing costs and help you identify areas in your credit that can be improved easily.
A week before the closing is not the time to be surprised with higher payments than you expected or credit issues that may hinder your ability to get a mortgage.
The First Steps For First Time Home Buyers Can Save Much Aggravation
Many buyers just view homes and skip some of the critical first steps that help prepare them to buy. Only dealing with financing and finding the appropriate professionals under duress when they have a short timeline.
By taking these first steps for first-time home buyers you will be ready to start looking at homes with a lot more confidence and certainty. You will have an idea of the market, know with certainty what a house will cost you and already have top-notch professionals lined up, to help you to prevent costly mistakes from being made.
Let’s recap the first steps for first-time home buyers:
- Figure out how much home you can afford.
- Assess your savings that you have, to put towards closing costs, pre-paids and escrows.
- Review your credit for any mistakes and issues that can be rectified.
- Find a buyer’s agent to work with.
- Get pre-approved.
- Review homes online to get a sense of the market and align your wants with reality
Bring in a mortgage professional and buyer’s agent early. They can help you with these steps and are certainly happy to help.
Now that you have taken these first steps and squared away your financing and have a little education about the market, start looking at houses! Happy house hunting!!
Other Real Estate Resources:
- Learn about escrow money deposits. Bill Gassett gives us a great tutorial and what escrow deposits are and how they are handled.
- Moving from one home to another can be a pain in the neck. Add children to the mix and chaos ensues. Sharon Paxson provides some great tips on moving with kids.
- Looking to buy and hold an investment property? Spark Rental provides us with some great real estate investment strategies.
- Buying the worst house in the best neighborhood may not be the best advice. Luke Skar advises us on why it may not be the best strategy.
This post, 6 First Steps For First Time Home Buyers, was provided by Kevin Vitali of EXIT Group One Real Estate In Tewksbury MA. You can contact Kevin by email at kevin@kevinvitali.com or call 978-360-0422.
I pride myself 0n the quality of my work while helping buyers and sellers make dreams come true.
Real Estate Services in northeast Massachusetts, around the Merrimack Valley, Southern New Hampshire including the towns of Andover, Billerica, Boxford, Chelmsford, Dracut, Georgetown, Groveland, Haverhill, Lawrence, Lowell, Merrimac, North Andover, Newbury, Newburyport, North Reading, Rowley, Tewksbury, Tyngsboro, Westford, Wilmington, West Newbury
