Tips For Buying a home for the first time
Purchasing a home can be a daunting undertaking. Between securing a down payment, working with the bank, and in some cases, interviewing with a COOP board, purchasing a home can often take months. In this article we’re going to specifically talk about securing a mortgage but regardless, this article is relevant for anyone looking for tips for buying a home for the first time. According to a 2018 Zillow Consumer Housing Trend Report, only 23% of homebuyers pay cash, leaving 77% of buyers taking on a mortgage. Before taking on a mortgage there are a few things to consider; let us break it down for you.
Familiarize yourself with the terminology
Mortgage: A legal agreement by which a bank or other creditor lends money with interest in exchange for taking title of the debtor’s property, until final payment of that debt when the property title is released to the debtor.
Interest Rate: A proportion of the loan charged (typically monthly) by the lender.
Principal balance: The amount the debtor owes to the lender minus interest and other fees.
Lender: The entity that lends money to the debtor (typically the bank)
Clean Up Your Finances
Buying a home generally does not happen on a whim. This will be the largest purchase you make in your lifetime so make sure you take time to think about it. While you’re thinking, use that as an opportunity to clean up your finances. Banks will be looking at your finances as a way to judge your level of risk. COOP boards want to see that you’re fiscally responsible and have the capability to pay the maintenance fee every month. Start by paying down your debt and limiting unnecessary purchases. Your debt to income ratio may affect your chances of securing a mortgage or favorable interest rates. Try to avoid unusual credit activity as this will have to be explained later on. Also, make sure you keep record of rent payments; banks want to see you already know how to make steady payments for housing. This is probably the #1 tip for buying a home for the first time I wish I knew earlier-it would have saved me a lot of time explaining myself to the bank.
Calculate How Much You Plan on Spending
Typically, we like to follow the 28/36 rule which means your monthly mortgage payment should be no more than 28% of your gross income, and your total debt payment (including mortgage, car loans, etc.) should not exceed 36% of your gross income. For example, if your gross household income is $100,000, your monthly mortgage payment should be no more than $2,800 assuming that the total monthly debt you incur would not exceed $3,600. If you have other debt that would bring your monthly total above $3,600, you should consider taking on a more manageable mortgage.
Come Prepared
Buying a home is an extensive process. You should have a packet of these items ready for your bank, real estate agent, and if necessary, the COOP board:
- Last three years of tax returns and W-2
- Credit report
- Past year bank statements
- At least 3-6 recent paycheck stubs
- Documentation explaining any unusual activity (this could be large deposits or withdrawals)
Note: You will need this information for everyone who is listed on the loan
Explore your mortgage options
There are the most common types mortgages you can secure as a homebuyer:
- Government Insured
- Fixed Rate
- Adjustable Rate
Get pre-Approved
A great way to show a seller that you’re serious about buying is to get pre-approved by the bank. To secure pre-approval you generally meet with a mortgage lender who reviews the documentation listed in the note above. He/She will ask you what you plan to put down, how much you want to spend, etc. and if all goes well, will offer you a pre-approval letter signifying the banks willingness to offer you a mortgage at a particular interest rate. However, the mortgage approval process will trigger a credit check which will temporarily lower your credit score a bit. You’ll want to keep your credit score high, so don’t hunt for pre-approvals every 3 months if you haven’t found anything you like. Pre-approval letters only last for 60-90 days so just be wary of this when hunting. You can shop for interest rates here.
Know Your Down Payment Requirements
A down payment is the cash you pay upfront to purchase your home. The lender (typically the bank), will pay the rest. How much money you put down will depend on the type of property, the market, and your credit history. For properties like COOPs, typically you are asked to put down at least 20% of the agreed upon price. In less expensive markets, your down payment requirement may be as low as 5%. Anywhere between 15-20% is generally a good range; a higher down payment will likely help you get approved for a mortgage from your lender (lower down payments make you look higher risk to the lender). Putting down a larger down payment will also help you get a better interest rate, a lower monthly payment, and more equity in your pocket ASAP.
Check out First Time Home Buyer Programs
There are plenty of programs out there that will help you secure better interest rates and more feasible down payments. Check with your local bank to see if you qualify.
when In Doubt, Hire a Lawyer
DO NOT sign anything you don’t fully understand. When you go through the home buying process you should have a lawyer who specializes in real estate to help you. He/She will be able to translate the legal jargon. Don’t be afraid to ask questions; you are on the hook for this money and want to understand completely what you’re up against.
I hope you’ve enjoyed these tips for buying a home for the first time. While buying a home can be stressful, it can also be rewarding so make sure to enjoy the process.