So you’re ready to buy your first home. But where do you start?
As a first-time homebuyer, the entire home buying process seems like a daunting task.
But it doesn’t have to be.
In this article, we’re going to walk you through the home buying process from start to finish and give you some tips to help the process run smoothly.
Rate Search: Get Approved for a Home Loan
1. Know Your Credit Score
One of the most significant factors in qualifying for a loan is your credit score. If you have good credit, then you’ll get approved and have the most favorable terms. However, if your credit score is low, you will have a hard time getting approved, and if you do, your interest rate will be high.
Review your report to see if there is any room for improvement. If you have open credit cards, make sure you pay the balances down below 15% of the credit limit to maximize your credit score. Check out our article on how to improve your credit score in 30 days for more information on raising your scores.
2. Get Pre-Approved for a Mortgage
First things first, you need to get a pre-approval letter before you start your home search. Getting pre-approved for a mortgage is a fairly simple and straight forward process.
You need to contact a lender. This can even be completely done by phone. A loan officer will pull your credit report to make sure you meet their minimum credit requirements. You will also need to have w2’s, tax returns, paycheck stubs, and bank statements to verify your income and ability to afford the loan.
A pre-qualification letter is NOT the same thing as a pre-approval. Pre-qualified means you spoke to a lender who pulled credit but did not verify your work history, income, or bank statements. Most homeowners will not accept an offer with a pre-qualification letter.
Usually, you can get a pre-approval letter within an hour. The letter will show the maximum loan amount you qualify for, so you know how much you are eligible for.
Documents You Need to Get Approved
- Past two years of tax returns
- Paycheck stubs and w2’s
- Last 2-3 months of bank statements
- Proof of down payment
3. Know Your Budget
There are many costs associated with getting a mortgage besides the loan payment. There’s property taxes, mortgage insurance, homeowners insurance, HOA fees. You need to make sure you have enough saved up for all the costs.
Most mortgages include the property taxes, mortgage and homeowners insurance in escrow that is added to your monthly payment.
Your debt-to-income ratio (DTI ratio) will decide the maximum loan amount you qualify for. Debt to income to the amount of your monthly income compared to your monthly debt obligations, such as credit cards, auto loans, etc. Most mortgage lenders will allow a maximum DTI ratio of 41%.
Use our calculator to see how much house you can afford
4. Make a List of Home Features you Want
It’s always a good idea to make a list of key features you want in your new home. Talk to friends and family members who own a home and ask them what features they wish they had or didn’t have.
The number of bedrooms, bathrooms, do you want an office? Media room? Open or closed floor plan. Most likely, you will not find a house that has everything on your list, so you should prioritize it, which features are a must and which are preferred. Be ready to compromise.
5. Hire Your Own Real Estate Agent
Some first-time buyers make the mistake of not hiring their realtor and working with the seller’s agent. This is a big no-no. The seller’s agent will be loyal to the sellers and look out for their interests first. This is why you should hire your own real state agent that will work for you.
Realtors do get a nice commission when you buy a house. Still, you need to know that you do not pay that fee out of your pocket, it’s built into the sales price of the home, and the seller expects to pay a buyers agent.
6. Get a Home Inspection
Home inspections are not required by mortgage companies in order to close on a house. However, you should never skip the home inspection, even on brand new homes, you should get an independent home inspector to ensure there are no problems or potential problems.
The average cost for a home inspection is around $300-$400, depending on the square footage of the property. If there are any issues, you can have the seller repair them before you close, or have them reduce the price so you can get it repaired on your own. Skipping the inspection could cost you thousands in repairs down the road.
7. Get the Right Type of Loan Product
There are many different types of loan products to choose from. It’s important to know which one is best for you before you begin house hunting.
FHA Loans – FHA loans are the most popular type of home loan used by first-time homebuyers. This is because they are easier to qualify for and have a low 3.5% down payment. FHA home loans allow for higher DTI ratios making it easier to qualify for a home loan with low income. They also have the lowest credit score requirement of any mortgage. You need just a 580 credit score with 3.5% down.
Conventional Loans – A drawback of FHA loans is that they cap out at $275,000 is low-cost areas of the country. However, conventional loans are available up to $424,100 in low-cost areas. However, they require a higher credit score of 620 and a down payment of at least 5-10%.
VA Loans – One of the greatest benefits of being a Veteran are VA loans. VA loans require no down payment and do not require mortgage insurance, which can save you thousands of dollars per year.
8. Speak to Several Different Lenders
When shopping for a mortgage, you shouldn’t just go along with the first lender that gets you approved. You should always compare loan offers from at least three different lenders to ensure you’re getting the best deal possible.
Rates will vary from lender to lender, just as closing costs and other fees vary from lender to lender. All mortgage companies are required to give a loan estimate to the borrower within three days. This loan estimate will break down all the costs associated with the mortgage loan.
You can also use these loan estimates to help you negotiate even lower fees with lenders.
9. Don’t Apply for New Credit
Your credit score is the most important factor there is when it comes to getting a mortgage. You should make sure you do not do anything at all to drop your credit score, or raise red flags to the lender.
Avoid applying for any new lines of credit or loans while you are shopping for a new home. When you apply for new credit and open new accounts, your credit score will drop initially and build back up over a few months.
Don’t rack up debt on your credit cards either as that will drop your credit score as well. You should be working on paying the balances down as much as possible to help increase your score.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.