Being a first time home buyer is one of the biggest milestones in anyone’s life. With any milestone or big change in life comes stress, frustration, and confusion. There are so many things to consider before even getting to the fun part of looking at possible future homes. Many first-time home buyers want to ‘skip the line’ in the process and jump straight to looking at homes and meeting with real estate agents without realizing that the process starts way before that point. While looking into the home buying process your first time can seem like a daunting task, there are a few tips and tricks to simplify the process and take some weight off of the home buyer’s shoulders.
Pre-Planning: Credit and Debt
Pre-process planning can immensely help the home buyer whenever the time comes to start the process. Pre-planning could be the difference between being approved for your mortgage loan the first time around, or getting your hopes up and being denied, only to have to complete things that should be investigated before seeking a mortgage loan. These things may seem relatively common knowledge, but with all the excitement and several things on a first time home buyer’s checklist, they may be overlooked. The first thing to take care of is the home buyer managing their current debts. It is expected to have some current debts, maybe student loans or a credit card, but there are two ways to manage the debt to 1) bring your credit score up and 2) lower your debt to income ratio which is two of the most critical aspects that mortgage institutions will look at. The first way to manage your debt is seemingly the simplest, paying off as much debt as possible. This does two things besides raising your credit score, it also shows that you are a reliable borrower and are able to pay off your debts. This will lower your debt to income ratio as well, which is crucial for receiving a mortgage loan. The recommended percent of debt to income ratio is 28%. Your debt to income ratio is the percentage of income that goes towards paying debts. The percentage that is acceptable can be affected by multiple things including the loan institution’s standards, the down payment that the home buyer has available, and the credit score of the home buyer. The second thing a first-time home buyer can do to manage their debt is to consolidate their debt into one payment if possible. A mortgage institution will look at how many debts are on an applications credit score and how much money is going out to each individual debt. Consolidation for debt is where you take all the individual debt you have out against your credit score and turn it into one debt and one payment instead of several. This is usually done by taking out a loan for the amount of all the individual debt and then paying on the one loan versus multiple debt sources. This can also save the borrower money if the interest on the loan is lower than other debts that are out against their name. Both things can bring your credit score up and lower your debt to income ratio simultaneously, which are needed for approval for a mortgage loan.
How Much Can the First Time Home Buyer Afford?
The next step after cleaning up your credit score and lose ends debt wise would be to get pre-approved for a mortgage loan. This is where a mortgage institution runs the figures without a home, just based off of the home buyer’s information alone. This can give you a mortgage loan estimate and give you a ballpark figure for how much home you can afford and what is your price range. If the home buyer does not want to get preapproved for a mortgage loan just yet, it is still important to figure out how much house you can afford. This also may sound simple, but it is number crunching on the part of the home buyer. This includes looking at your personal budget and looking for a price range for a home. There is no reason to fall in love and look at homes out of your personal price range, so it is best to save yourself the heartbreak of falling in love with a home you cannot afford and do a personal budget to determine what price range you could afford for a home. A good rule of thumb is to make sure that your monthly home expenses including the mortgage payment, homeowner’s insurance, and taxes or other expenses are no more than a total of 25% of your monthly take-home income, not gross, after taxes. Since certain rates vary, it may be a good idea to talk rates over with a real estate agent to get your closest estimate so that the house hunting fun can begin!
Location, Location, Location
When house hunting does begin, it is important to know what features or key aspects you want in your new home. This will help narrow down the search and help speed up the home buying process. One of the most important parts of the home buying search that the first time home buyer needs to decide upon is the location. You can change a lot of things about a home, but one thing the home buyer will never be able to change is the home’s location. This is an unmovable feature of the home. Many home buyers are willing to compromise on the condition of the home and the size of the home for the right neighborhood. But what makes a neighborhood the ‘right’ neighborhood? That is entirely for the home buyer to decide. It is all dependent upon where or what the home buyer wants to live close to. Many home buyers want to live in neighborhoods with good school systems, so if that is a factor the home buyer needs to research which schools they would prefer and narrow down their search from there. The home buyer also needs to research crime rates in neighborhoods and other statistics that may affect their choice on which neighborhood to search for their new home in. Some locations will be more pricey than other and out of the home buyer’s price range. If that is the case, the home buyer can look at buying a cheaper fixer-upper in the same neighborhood and sacrifice condition for location. This is all dependent on the home buyer’s preferences, and one home buyer’s preference is not going to be another’s so that is important to keep in mind when looking at certain statistics.
Costs for First Time Home Buyer
Another tip for making the home buying process as smooth as possible is saving up for your down payment and closing costs associated with buying a home before you start the paperwork. Usually, mortgage institutions require 5%-10% of the home’s cost for a down payment, which depending on the cost of the home this can be a pretty good chunk of change. If the home buyer waits until they have already found the home that they want to start saving for the down payment for the mortgage loan, the home may be off the market by the time they have the funds together for a down payment. To not miss the chance at your dream home it is advised to start saving for the down payment and closing cost before beginning to go home hunting, that way whenever you find the perfect home it does not slip away. Closing cost is also important and needs to be saved up for to ensure that the home buying process goes smoothly. Closing costs are expected to be paid by the buyer, so this is something the first time home buyer needs to be expecting and be prepared for. There are many fees associated with closing costs so it is best to talk with a real estate agent on what fees to expect for your area so that you are best prepared.
The home buying process is all about preparation. This process may seem never-ending, but the light at the end of the tunnel will be worth it, your brand-new home. With a few tips and tricks and knowing what to prepare for, the home buying process can turn into a walk in the park. Do not dread the process because it is unknown and lengthy, the home buyer should just know that research is key, and knowledge is power whenever it comes to buying a home. There are a few options to gain the knowledge needed to make the home buying process as smooth as possible. The home buyer could either hire a real estate agent who is knowledgeable in the field and will help the home buyer navigate the process of buying their first home, or they can choose to market and sell the home themselves. With the mass amount of information on the internet now, it makes the home buying process much easier for anyone, even someone who is completing the process for the first time home buyer.
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