Although there is an abundance of properties on the market nowadays and sellers are more willing than ever to negotiate, first-time home buyers still need to be cautious and well-prepared before jumping into the mortgage loan process. If you are a first-time home buyer, acting wisely can save you time and money, as well as reduce the aggravation that might arise from unanticipated issues.
Determine how much you can afford
Before the house hunting phase begins, first-time home buyers should consider how much they can afford to spend on monthly mortgage payments (which include principal, interest, property taxes, mortgage insurance, and homeowners insurance). Make sure that you are being completely honest with yourself about how much house you can afford. In general, mortgage lenders will not offer loans to first-time home buyers whose monthly mortgage payments are more than one-third of their monthly income. Your income and debt will be assessed during pre-qualification or pre-approval.
Reduce debts and improve credit
If your debt levels are high, it’s recommended that you pay-off as much debt as possible before meeting with a lender. You will also need to have money saved for up-front loan expenses (such as the down payment, lender fees, and closing costs). First-time home buyers should work on improving their credit score as well, because excellent credit will help secure the best mortgage rates. A lower mortgage rate, in turn, can save you thousands of dollars on your loan over time.
Find a mortgage lender
First-time home buyers will want to find a reputable mortgage lender, which may be a national or local bank, savings and loan association, or credit union. The lender will require proof of your income, assets, debts, investments, credit history, and current employment. Therefore, you should be prepared with copies of your recent tax returns, W-2s, paystubs, and account balances. [See related article “What Type of Mortgage Lender Is Best for You?”]
Get approved for a loan and establish the terms
Once you complete a mortgage application, the mortgage lender will run a credit inquiry and combine that information with your financial records to determine if you are approved. As a first-time home buyer, you may be eligible for special financing programs or grants to help pay for the down payment or closing costs. You will likely have the option of choosing between a fixed mortgage (interest rate does not change) and an adjustable-rate mortgage (interest rate adjusts periodically). You may also be able to choose from term lengths of 10, 15, or 30 years. [See related article "What Type of Mortgage Loan Is Best for You?"]
Find a real estate agent
As a first-time home buyer, you will need to take care in selecting a real estate agent. A good agent will walk you through the homebuying process, from finding the right home to mortgage closing day. Your real estate agent must be familiar with the neighborhood, be able to find comparable listings, and have a clear understanding of the type of home that you want. [See related article “Should You Use a Real Estate Agent?”]
Do the research and shop around
Unfortunately, too many first-time home buyers give in to pressure and make hasty decisions. It’s a good idea to shop around for mortgage loans as well as mortgage lenders, and look at many properties so you can compare features and prices. Do the research and learn about the neighborhood, local taxes, future construction or development plans, restrictions and ordinances, school system, crime rates, road conditions, public transportation, etc. When on location, consider introducing yourself to the neighbors and see if they can share insight about the community. Just because you’re a first-time home buyer doesn’t mean you can be unprepared.
Close the loan
Long before mortgage closing day, the lender is obligated to provide you with a Good Faith Estimate (GFE) explaining the costs of the loan and what will be due at closing. At settlement, you will need to supply certain loan documents and sign a lot of paperwork. Don’t be afraid to take your time and ask questions as they arise. Once the contracts are signed, the title of the property will be transferred to the first-time home buyer.
Conclusion
While buying a house is an exciting experience, don’t let your emotions get in the way of sound judgment. First-time home buyers should be especially prudent when navigating through the mortgage process, so as to avoid being scammed and making mistakes.