First Time Home Buyer Guide
Buying a home for the first time is exhilarating and stressful all at the same time. After all, there are so many steps, tasks, and requirements, not to mention for most it will be the biggest purchase of their life. So expect a mix of feelings it is totally normal.
First-time homebuyers enjoy special advantages that were created to encourage new individuals to purchase their first home.
The First-Time Homebuyer Advantage And Is It You
As a first-time buyer, you have numerous state programs, tax breaks, and federally backed loans. You don’t usually need to have the usual minimum down payment of 20% but 3.5% of the purchase price for a conventional loan. Militiary and others can buy a home with nothing down.
A first-time homebuyer, according to the U.S. Department of Housing and Urban Development (HUD), is someone who meets any of the following conditions:
- An individual who has not owned a principal residence for three years. If you’ve owned a home but your spouse has not, then you can purchase a place together as first-time homebuyers.
- A single parent who has only owned a home with a former spouse while married.
- A displaced homemaker who has only owned with a spouse.
- An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
- An individual who has only owned a property that was not in compliance with state, local, or model building codes—and that cannot be brought into compliance for less than the cost of constructing a permanent structure.
- Native American
- Served in the Military
Determine Why You Want To Buy A House
Your first step is to determine what your long-term goals are and how home ownership fits in with those goals. Perhaps you’re simply looking to transform all those “wasted” rent payments into mortgage payments that give you something tangible: equity.
Or maybe you see homeownership as a sign of independence and enjoy the idea of being your own landlord. Buying a home can also be a good investment.
Narrowing down your big-picture homeownership goals will point you in the right direction. Here are six questions to consider.
Can You Financialy Afford It
Before clicking through Zillow looking for your dream home, do a serious audit of your finances. You need to be prepared for both the purchase and the ongoing expenses of a home. The outcome of this audit will tell you whether you’re ready to take this big step, or if you need to do more to prepare. Follow these steps:
Look at your savings. Don’t even consider buying a home before you have an emergency savings account with three to six months of living expenses. When you buy a home, there will be considerable upfront costs including the down payment and closing costs. You need money put away not only for those costs but also for your emergency fund. Lenders will require it.
One of the biggest challenges is keeping your savings in an accessible, relatively safe vehicle that still provides a return so you’re keeping up with inflation.
- If you have one to three years to realize your goal, a certificate of deposit may be a good choice. It’s not going to make you rich, but you aren’t going to lose money either (unless you get hit with a penalty for cashing out early). The same idea can be applied to purchasing a short-term bond or fixed income portfolio that will give you some growth, but also protect you from the tumultuous nature of stock markets.
- If you have six months to a year, keep the money liquid. A high-yield savings account could be the best option. Make sure it is FDIC insured (most banks are) so that if the bank goes under you will still have access to your money up to $250,000.
Review your spending.You need to know exactly how much you’re spending every month—and where it’s going. This calculation will tell you how much you can allocate to a mortgage payment. Make sure you account for everything—utilities, food, car maintenance and payments, student debt, clothing, kids’ activities, entertainment, retirement savings, regular savings, and any miscellaneous items.
Check your credit. Generally, to qualify for a home loan, you’ll need good credit, a history of paying your bills on time, and a maximum debt-to-income (DTI) ratio of 43%.2 Lenders these days generally prefer to limit housing expenses (principal, interest, taxes, and homeowners insurance) to about 30% of the borrowers’ monthly gross income, though this figure can vary widely depending on the local real estate market.
What Are Your Home Needs
You have a number of options when purchasing a residential property: a traditional single-family home, a duplex, a townhouse, a condo, a co-operative, or a multi-family building with two to four units.
Each option has its pros and cons, depending on your homeownership goals, so you need to decide which type of property will help you reach those goals. You may be able to save on the purchase price in any category by choosing a fixer-upper. Though my wife will say it costs more in more ways than one.
Decides What Futures You Want And What You Need
It’s important to differentiate between these two so you know what you can negotiate on.
Your list should include basic desires, like size and neighborhood, all the way down to smaller details like bathroom layout and a kitchen fitted with durable appliances.
At times if the price is right you can purchase the home and then have it fitted to your need.
What Size Mortgage Do You Qualify For
Before you start calling agents and searching Zillow, it’s important to get an idea of how much a lender will give you to purchase your first home.
You may only qualify for $200,000 so don’t look at 300,000 homes. How much you may borrow is based on multiple factors such as how much other debt you have, your monthly income, and how long you’ve been at your current job.
Make sure to get preapproved for a loan before placing an offer on a home: In many instances, sellers will not even entertain an offer that’s not accompanied by a mortgage preapproval.
How Much House Can You Afford
Sometimes a bank will give you a loan for more house than you really want to pay for. Don’t assume because the bank will lend you the money means you can afford the loan.
In deciding how big a loan to actually take, you’ll want to look at the house’s total cost, not just the monthly payment. Consider how high the property taxes are in your chosen neighborhood, how much homeowners insurance will cost, how much you anticipate spending to maintain or improve the house, and how much your closing costs will be.
Of course you must know what your monthly expenses are such as groceries are.
Real Estate Agent When Buying A Home
A real estate agent will help you locate homes that meet your needs and are in your price range, then meet with you to view those homes. Once you’ve chosen a home to buy, these professionals can assist you in negotiating the entire purchase process, including making an offer, getting a loan, and completing paperwork.
A good real estate agent’s expertise can protect you from any pitfalls you might encounter during the process. Most agents receive a commission, paid from the seller’s proceeds.
Stay tuned much more on this topic coming!
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