How to buy your first home?
You shouldn’t rush into the process of buying a house.
First time home buyers need to take a few steps before getting started.
Step 1. Check your credit report and scores
Your credit score is one of the most important factors in determining if you qualify to buy a house. Before buying your first home you need to make sure your credit is up to par. Everyone has three credit scores, one from each credit bureau. TransUnion, Equifax, and Experian. You can get a free copy of your credit reports from all three credit bureaus from www.annualcreditreport.com. This is a free Government run website that provides consumers their credit report free once per year.
Check for errors and negative accounts
Many credit reports contain items that are inaccurate. Review your report for any errors, if you find any you can dispute the inaccurate information directly with each credit bureau. You should also check for any negative items that are potentially hurting your credit score. These could be late payments, collection accounts, credit inquiries, and judgements.
You can dispute negative items, even if they’re accurate. The credit bureaus have 30 days to validate the disputed items. If they fail to verify them within 30 days, by law they must remove it.
Step 2. Maximize your credit score
For most mortgage programs you will need a 620 credit score. However, FHA loans can be found with a 580 credit score in some cases. Because many first time home buyers have lower credit scores than the average American, FHA loans are very popular. Improving your credit score doesn’t have to take months, there are a few things you can do to increase your credit score in weeks.
Pay down your credit card balances
First thing you need to do is to pay your credit cards balances off. The amount of credit you have used up is called your “credit utilization ratio”, and it makes up 30% of your FICO score. Having high credit card balances will significantly lower your credit score. Pay the balances as close to zero as your can, at the very least keep your balances below 20% of your credit limit. Doing so will help you maintain high credit scores.
Get collection accounts removed
Collection accounts will drastically reduce your credit score as well. However, paying collections will not increase your credit scores. Only if a collection account is removed will it positively impact your FICO score. There are several ways you can go about getting collections removed. You can contact the collection agency asking them for a pay for delete. A pay for delete is when a creditor agrees to remove the account from your report after you pay the amount due.
You can also dispute accounts directly with the credit bureaus. They have 30 days to investigate it, if the creditor fails to respond the account is removed from your credit report entirely.
Step 3. Make sure you can afford to buy a home
Not only do you need to be able to comfortably afford the mortgage payment. When buying your first home, obviously there are upfront costs to consider when purchasing a house. You’ll need to make sure you have the funds for the down payment and other costs associated with getting a mortgage.
You don’t need a 20% down payment to be able to get a mortgage these days. With FHA loans you can qualify for a home loan with just 3.5% down. Another great benefit of FHA loans is that your down payment can be a gift from a friend or family member. Because of these benefits, FHA loans are the most used type of mortgage among first time home buyers.
Generally, lenders want to see a couple of months worth of mortgage payments in your savings account when closing on a loan. If you are spending all of your savings to get a mortgage chances are much higher that you could default on the loan.
Step 4. Find out how much house you can afford
The maximum amount you will qualify for will be determined by your debt to income ratio (DTI). Debt-to-income ratio is the amount of your monthly obligations compared to your monthly income, including the mortgage payment. It’s advised to keep your DTI no higher than 36% when purchasing a new home. However, many lenders can accept DTI ratios as high as 41%. Try not to extend yourself too much, if any emergency comes up you could be in danger of falling behind on your mortgage payments.
Step 5. Find a mortgage lender to work with and get pre-approved
Before you start searching for your first home you need to be pre-approved. Most real estate agents will not take you out looking at properties until you have a pre-approval letter in hand. A pre-approval letter means that a lender has checked your credit, verified your income, and bank statements and that you meet the qualifications for a mortgage. Having a pre-approval letter is often required when submitting an offer on a home. There are many first time home buyer grants and down payment assistance programs out there you should look into.
Each lender is not the same. One lender may decline you while another lender approves you. Credit score requirements vary just like mortgage rates and fees will vary from lender to lender. It’s recommended that you compare loan offers from at least 3 different mortgage companies. Getting several loan quotes can also help you negotiate better offers with your lender.
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.