10 Steps for First-Time Home Buyers

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Buying your first home can be a daunting task. But millions of people have been there before you and survived. Also, first-time homebuyers have advantages that can help you buy your first home without breaking the bank. With these steps in hand and if you do your homework, you’ll have the best possible chance of finding a home that you can afford.

KEY TAKEAWAYS

  • Buying your first home can be a daunting task but following these steps help you buy your first home.
  • Perform an audit of your finances, including how much you’re saving and spending.
  • Check first-time homebuyer programs, meet with a lender to see what you can qualify for, and get pre-approved.
  • Find a real estate agent and a pick a desired location within your budget.
  • Before buying, review your financial numbers, research the new home’s utility bills, and get the home inspected.

The American dream of owning a home is alive and well. For first-time homebuyers, you must consider the many factors involved before making your decision to purchase a home. The good news is that there are various programs and incentives to help–although there are requirements for each. Below are the 10 steps that you need to complete for you to realize the American dream.

1) Review Your Financial Health

Before clicking through pages of online listings or falling in love with your dream home, it’s important for you to perform an audit of your finances. First, review your savings. Don’t even consider buying a home before you have an emergency savings account with three to six months of living expenses. Calculate how much is remaining in your savings and investment accounts that could go toward a down payment.

Next, review exactly how much you’re spending every month–and where it’s going. This process will tell you how much you can allocate to a mortgage payment.

“Make sure to account for every dollar you spend on utilities, kids’ activities, food, car maintenance and payments, clothing, entertainment, retirement savings, regular savings, to know how and where a new mortgage payment fits into your budget,” says Liz Recchia, owner and broker at We Sell Real Estate, LLC, in Phoenix, Ariz., and author of “HELP! I Can’t Make My House Payment!”

As you research neighborhoods, factor in how moving to a neighborhood would change your transportation costs to work.

2) Check Programs for First-Time Homebuyers

Before you start meeting with lenders, it’s good to know what constitutes a good deal. And that includes looking into special programs that might make it easier for you to find a property you can afford. There are various credits and incentives for , including being able to use a portion of an IRA without penalty for the downpayment.

For example, the Federal Housing Administration (FHA) offers insurance for mortgage loans to low-to-moderate-income borrowers. FHA loans don’t require you to have a perfect credit history and also offer lower minimum downpayments as compared to conventional mortgages. However, there are various requirements that borrowers need to meet before qualifying for an FHA loan.

Although an FHA loan allows you to put down a smaller downpayment, please remember that it’ll cause your monthly loan payment to be higher–all else being equal. In other words, the downpayment doesn’t just help the bank; it helps you lower your monthly loan payment since you’ve paid down some of the money owed. It’s important to run the numbers for various scenarios with different downpayment amounts to see how they impact your monthly mortgage payments. From there, you can determine the combination of downpayment and monthly loan payment that you can afford.

3) Meet With a Lender

Many realtors will not spend time with clients who haven’t clarified how much they can afford to spend. And in most instances, sellers will not even entertain an offer that’s not accompanied with a mortgage pre-approval. That’s why the next step to speak with a lender or mortgage broker.

A lender or broker will assess your credit score and the amount you can qualify for the loan. The discussion will include your assets–such as savings and 401(k)–as well as debt and any local programs that might be available for down payment assistance. Your research of first-time homebuyer programs can help facilitate a detailed discussion with a lender to better understand what programs are the best fit for you. Once you know the programs that you might qualify for, look for a lender that handles that particular program.

Although you can do some of the research online, working with a lender in-person can review your situation, answer your questions, and suggest how you can improve your credit–if needed.

4) Shop Around for a Mortgage

Don’t be bound by loyalty when seeking a pre-approval or searching for a mortgage. Fees can be surprisingly varied. For example, an FHA loan may have different fees depending on if the loan is through a local bank, credit union, mortgage banker, large bank, or mortgage broker.

“Shop lenders, even if you only qualify for one type of loan,” says Recchia.

When you’ve found the best deal and program for, it’s time to get a mortgage pre-approval so you know how much house you can buy. Please note it’s important that you get pre-approved, and not just pre-qualified. A pre-qualification is merely an estimate of how much you can borrow based on the financial information that you provided to a lender. The pre-qualification amount is not an agreement to lend you that amount of money. The pre-approval process is much more involved since the lender will ask you for copies of financial documents and check your credit score.

5) Have a Back-Up Lender

Qualifying for a loan isn’t a guarantee your loan will eventually be funded. Underwriting guidelines can change, including a lender’s risk analysis.

 “I have had clients who signed loan and escrow documents, and 24 to 48 hours before they were supposed to close were notified the lender froze funding on their loan program,” says Recchia.

Having a second lender that has already qualified you for a mortgage gives you a back-up plan in case the first lender falls through.

6) Find a Real Estate Agent

Once you know how much you can afford and the loan amount you qualify for, it’s time to find a real estate agent. Look for one who works with a team of people who can offer suggestions for home inspectors, insurance agents, and other experts that might be needed for the property.

“Realtors do a lot of your groundwork upfront for you by contacting listing agents to set up showings and help you negotiate the purchase.” [Also,] the best part is, a buyer doesn’t pay for working with a realtor. The service is free for a buyer, as sellers pay all the commission.” says Brandon Gentile, CEO of the Legacy Group Real Estate Team in Clarkston, Michigan.

7) Decide on a Neighborhood

You’ll probably have an ideal location, but keep an open mind as you see how much house you can buy in different areas. Homes and land are less expensive, the farther from a metropolitan area. On the other hand, it’s important to consider the cost of a longer commute as well as the drain on your mental health.

8) Crunch Your Numbers Again

If you’re thinking about making an offer on a home, take another look at your budget. Felipe Pacheco, President and CEO of Avanti Mortgage–who is based in the greater Salt Lake City area–notes that buyers should factor in closing costs, moving expenses, and any immediate repairs and appliances you may need before you can move into the home. Don’t overlook hidden costs such as the home inspection, home insurance, property taxes, and homeowners association fees.

9) Look Over Utility Bills

First-time homebuyers are often moving from rentals that use less water and less energy, such as gas, oil, electric, or propane, versus the new, larger home. It’s easy to get ambushed by soaring rates when your new house has ceilings higher than your rental unit–or older windows that are not energy efficient.

Before submitting a purchase offer, request the energy bills from the past 12 months to get an idea of the average monthly cost, suggests Marianne Cusato, an award-winning designer based in Miami, Fla., and co-author of The Just Right Home. Most utility companies can provide a homeowner copy upon request.

“If you are in love with a house and everything else works but the energy bills, have an audit performed to assess what your options are for making it more energy efficient,” says Cusato. “In many cities, the electric company will come out and do the assessment for free.”

10) Don’t Forgo a Home Inspection

After your offer has been accepted, splurge for a home inspection. Spending even $500 can educate you about the house and help you decide if you really want to pay for necessary repairs. You can also leverage your offer depending on the results of the inspection report and make the seller financially responsible for all or some of the repairs.

The Bottom Line

Purchasing your first home is perhaps the biggest financial decision you’ll ever make. Don’t take on more of a financial obligation than you can handle. Recchia suggests keeping your risk tolerance in mind and says:

“If you find great security in owning your house, save more money for a large down payment and find a loan that works for you. The higher the down payment, the less in debt you’ll be; [and with] less debt, the better you’ll be able to weather economic storms and still own your house.”

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