When you do a Google search, you’re hit with page after page of resources, confusing any certainty you may have felt. It’s daunting enough having to think about your finances in general– never mind pulling together all your documents and finding the right loan officer to work with. You sold yourself on the benefits of ownership over renting- tax deductions, equity building, no monthly increases! Now you just need to understand how to follow through on your plan of becoming a homeowner. Before you start diving into the paperwork, you need to understand the steps involved.
Below we walk you through the steps necessary to buying your first home. From the finances to the keys in your hand. The process doesn’t have to make you crazy. Let’s go step by step!
Review Your Credit With a Knowledgeable Loan Officer
If you have credit cards, car loans or have ever made a large purchase, chances are you have credit. Whether or not you have “good credit” is another story. Good credit is determined by things like whether or not you pay your bills on time and whether or not you are maxing out your credit limit. Tweet this You should never charge more than 35-40% of your credit limit. Late payments will reflect poorly on your credit since, to a lender, payment history and spending habits predict future performance.
Make sure you know the full picture as it relates to your credit and know your FICO score. The FICO® Score is the standard credit score in the U.S, used in more than 90% of lending decisions and it will significantly affect the rate your mortgage lender can offer you. Credit scores determine whether or not you will qualify for the best possible interest rates.Tweet this
If your credit picture is looking less than desirable, or has errors that you need to fix, you may want to work on improvements before applying for a loan. Talk to your loan officer for details on how it relates to your situation.
Develop A Budget That Works For You
Many people hear the word “budget” and they think of all the sacrifices they will have to make. That doesn’t have to be the case if you work on creating a budget that fits in with your lifestyle. Look at it this way, a budget is simply a plan that lays out your income and expenses as precisely as possible.
It also helps you to examine how you use credit and will help you achieve your goals. If you have a bad attitude about budgeting then you most certainly won’t stick to it. Instead of seeing it as sacrifice, see it as a path to meeting your goals. Whether the goal is small, like going on vacation every year, or larger like saving for college, buying your own home etc. A budget will help you be in control of your financial future. Budgeting doesn’t have to be painful, just develop one that is easy, flexible and works for you.
Ask Your Loan Officer To Get You Pre-qualified
Pre-qualifying can be frightening if you don’t know what to expect. Hopefully you’ve found a reputable loan officer to assist you. A good loan officer will help you understand the costs as well as the process of buying a home.Tweet this
Pre-qualifying will show you just how much home you can afford and how much your monthly payment will be. This will take into consideration your entire financial picture: income, debt, savings and current interest rates. During pre-qualifying your lender will help you determine things like how much of a down payment you will need and any remaining budgeting goals you need to set in order to realize your dream of homeownership. Remember pre-qualifying with one loan officer doesn’t lock you in to doing business with them, if you decide during the process to work with someone else, you still have the right to that option. You aren’t committed until the actual loan application process begins.
Decide What You Are Looking For In A Home
There are many options to consider when shopping for a home. The interior condition of the home like plumbing, floors, walls etc as well as lifestyle choices like how far it is from schools? How long will the commute be? Is the neighborhood “walkable?” You will have to prioritize, and most likely compromise, when your wish list doesn’t match your budget. A good real estate agent can help you balance your dreams with your reality.
Get A Real Estate Agent Referral From A Friend Or Colleague
Once you find the agent you will be working with, the process becomes a lot more exciting. You will get to look at houses in your area and really hone in on what you want and need in a home. Working with an agent makes discovering what’s available that meet your specifications a lot easier. They will also have more information than is readily available about the neighborhood in general like tax rates, school district and transportation options.
Don’t Rush Into A Purchase!
Looking at homes can be an emotional experience. Sometimes we fall in love with a place only to find out the plumbing needs work or the taxes are too high. It’s important to look at a few homes in different neighborhoods you like so that you can make the best decision from a wide a variety of options. In some extremely competitive markets, you may feel rushed to put in an offer. If this is the case in your market, “know before you go” – things like tax rate, schools, transportation options, so you can act quickly and put in an offer if you really love the home.
Making An Offer When You Are Ready
Typically when you have decided to make an offer you will meet with your agent and you will prepare what is called an “Offer To Purchase” form together. Make sure your agent goes through everything on the offer form so you know what you’re committing to. You and your agent probably already discussed how much you might offer for the home. Now is the time to solidify based on all the other factors like how much can you afford to pay, how bad do you want this house and if there are other offers pending. Call your loan officer and ask her/him for an estimate for the home you are interested in. All these factors will determine if you offer lower or higher than asking price.
There may be “strings attached” to your offer called “contingencies.” These protect you from having to finalize on a loan if certain conditions aren’t met. For example, a common contingency is a home inspection. Your offer may be contingent on the findings after the home inspection is complete or that may be done during your option period.. Obviously, if the home inspection reveals major termite damage, or if the foundation needs repairs, you will need this period to reconsider your offer during this option/inspection period.
It is highly recommended that you get a home inspection before you finalize your offer. If the home conditions are not acceptable to you, you still have the right to withdraw your Offer to Purchase during this option period. Usually your realtor can recommend a home inspector that they trust to complete the job. If your realtor doesn’t have one for you, you can consult the American Society of Home Inspectors through their website here.
A thorough home inspection usually takes between 2-3 hours and covers things like the cooling system, electrical and plumbing, walls/floors/ceilings, insulation, plumbing, condition of the roof and other exterior items. It is up to you whether or not you are present at the home inspection. If you are, it gives you the chance to ask questions. If you cannot be present make sure you get a copy of the report to review at a later time with your agent.
Know Your Rights
When shopping for a mortgage you have certain rights based on the passage of the Fair Housing Act in 1968. HUD.gov defines your right to not be discriminated against “…in the sale, rental, and financing of dwellings, and in other housing-related transactions, based on race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women, and people securing custody of children under the age of 18), and disability.” If you feel your rights have been violated you should contact HUD immediately.
Choosing The Best Loan For You
There are many types of loans you can choose from and what you decide is based on your specific circumstances. Most mortgages range from 10-30 years. The loan term is part of what determines your monthly payment and how fast you build equity. Before you select a loan, you should think about things like, “What mortgage payment can I afford every month?” “How much loan can I qualify for?” “How much of a down payment do I have?” The payment will generally include :
- mortgage (principal)
- private mortgage insurance
Sometimes it will also include:
- homeowners insurance
- HOA fees (condos or properties in a planned unit development or PUD)
The most common types of loans are fixed rate and variable rate loans. Fixed rate means that the interest rate does not change over the life of your loan as opposed to variable where the interest rate will fluctuate based on the prime rate or the “index.” On a variable rate mortgage, as the index changes the interest rate can go up or down, making this type of rate riskier for the borrower, as your payment will fluctuate with the interest rate. See the consumer finance protection bureau (CFPB) website for more information.
More On Loan Types: Down Payments
The down payment you invest will determine how much equity you have in your home at the time of purchase. Equity is the difference between what the house is worth and what you owe on the loan. The more you can invest, the more you own and the less your owe. This will lower your monthly payment and the amount of interest you will pay. If you are a first time home buyer and don’t want or are not in a position to invest 20% for your down payment, your lender may require your loan to have private mortgage insurance called PMI.
With PMI, you will pay a bit more per month to help protect the lender in case of default. There are other options such as VA Loans and FHA loans that can also offer the lender a type of guarantee of your mortgage when you don’t have the 20% down payment. These government insured programs are available to help and generally offer lower down payment than conventional loan options.
The Mortgage Process: From Application to Closing
This is the part that has most first time home buyers throwing up their hands in frustration. A good loan officer should be able to make this as easy as possible for you. Remember way back during pre-qualification when you had to lay all your financial records out for your lender to see? Well, most likely, your lender will re-run your credit and financial records again now to make sure that everything is as it should be.
You will also receive some additional paperwork to sign and review such as a Good Faith Estimate which is your lenders estimate on the total closing costs and fees; a Truth-In-Lending Disclosure which will lay out the total costs of the loan including finance charges, interest rates, and your monthly obligation. At this point the lender will be doing most of the paperwork such as ordering insurance documents and the underwriting necessary to close your loan, leading up to the closing day.
What To Expect
The buyers will be in attendance, along with a representative of the title company, called a closing officer. You may or may not see the seller, they may close at a different time then the buyer.
What To Bring
Make sure you have a copy of your photo ID or driver’s license and a cashiers check that will cover closing costs and down payment. You may also wire the funds to closing. The title company can provide you the wiring instructions. Your lender will tell you the exact amount shortly before closing.
Make sure you review the loan docs to make sure they are accurate.. Those docs will be the Mortgage note(terms of the loan), the mortgage itself (deed of trust) and the Settlement Statement (HUD) which itemizes all the costs. It’s a good idea to tell your lender and the title company that you would like to review the loan docs prior to closing so you’ll have plenty of time to read them and get your questions answered.
The keys are now in your hands. You have become a successful first time homebuyer without losing your mind! You have learned exactly what you need to make this process less daunting and more rewarding. Congratulate yourself and celebrate making your dreams come true!
This post was written using educational resources from-