Credit and Initial Preparation
- Before you actually begin the purchase of your new home, it is important that you begin to organize your documents and review your credit standing. Your credit, though not always the only factor, is the most important factor when considered for financing for a home loan. You should review your credit reports and capture a clear understanding of where you stand. Even if you have great credit, you must make an analysis. Lenders look at your income-to-debt ratio, as well as your credit score and activity. It is important that this ratio reflects that you can afford the expenses of the home (principal, interest, taxes and insurance). Most lenders agree that your income-to-debt ratio should not exceed 28 percent to 30 percent of your overall income. If you find that your credit needs improvement or your ratio is too high, this is the time to initiate the adjustments that are needed.
Paperwork is also very important in your preparation. You will need to gather your yearly tax returns, W-2s, regular pay stubs and bank statements. Your lender may require additional information, which they will present to you at the time of purchase. However, if you have these initial items readily available, you will be on the right track.
Mortgage Interest Rates, Loan Types and Lenders
- Mortgage interest rates are ever-changing and are vary by loan type. These variances should be considered when making your purchase. If the interest is higher than the normal average, you might consider delaying your purchase or reconsidering your lender. Choose your lender wisely. Research your lender before contacting them. If you are dealing with a real estate agent, ask for recommendations. Make sure that your lender is reputable and has a good financial history. Have a few lenders on your list as not all lenders finance all locations.
When preparing for your purchase, you should also understand the various loan types. The most common loan types are conventional, FHA and VA loans. Conventional loans are backed by general banks and/or finance companies while FHA and VA loans are sponsored by the government and its branches. Investigate your options. While you may not qualify for one type, you may qualify for another. Additionally, different loan types allow for varying interest rates.
In this consideration, you will also need to understand the different types of loan options. The most common loan option is the 30-year fixed mortgage. This loan option provides for 30 years of monthly payments on a fixed interest rate. However, there are other options that include the 15-year fixed mortgage, the five-year fixed mortgage and the three-year ARM, or adjustable rate mortgage, where the interest is periodically adjusted and the loan is paid off much quicker.
- Begin your home search. Search wisely and never rush into a home purchase. Consider what type of home fits, not only your current needs but your future needs. Are you planning to start or expand your family, or is it just you? Will you have pets? How close is it to your employment and favorite shopping areas? How close or far do you want to be? How long do you plan to own the home? Consider all these factors and any others that are important to you. You can search for homes through newspaper and online listings, through a real estate company or agent, or just by driving through your ideal neighborhood. This is the time to consider the little things.
Make the Offer
- Once you have found the home, it's time to make an offer. Familiarize yourself with the neighborhood's listed home values so that you don't bid too high. If the listed purchase price is much higher than the average value, inquire about the differences. The seller may have made improvements to things that you missed during the first few viewings. Likewise, if the selling price is much less than the average, inquire about the difference. While the seller might be motivated, the house might have some issues.
When you make your offer, be prepared to provide the agent with a deposit, normally referred to as 'earnest money.' The deposit is placed with the real estate agent or agent's company to secure your position with the offer. The deposit shows the seller that you are committed to purchasing the property and would like the utmost consideration toward your bid. If the seller chooses not to accept your bid, your money will be returned. Also, the seller may choose to counter-bid because your initial bid was too low. Be prepared to haggle. However, if you provide an honest and worthy first bid, you shouldn't encounter this issue.
- Once your bid has been accepted, it is time to establish your financing. This is where all of your preparation comes into play. Generally, you will have only 30 to 60 days after the acceptance of your bid to establish your financing and complete the closing. Based on your home selection, your research and recommendations, complete the financing application with the lender. Provide the financial documents to the lender in an organized manner, even if you are sending the information via email or their website. You may have come across a lender during your search and completed a preapproval. If so, you will only have to provide the lender with the address of the home and any additional information that they request.
Most local lenders have information on city and county grants and tax abatements in which you may qualify. Make sure that you provide any additional information that these programs require, as separate copies and information may be needed.
- During the purchasing process, the lender will send out an agent to complete an appraisal of the property. This appraisal will ensure that the home is being financed for its actual value and establish that the home will back the loan. Although it is not required, you should contact your own agent and have a separate appraisal completed. While the bank's appraisal establishes their confidence, you should establish your own. Your appraiser will provide you with the information you need to ensure that your home is structurally sound and will give you years of satisfaction. If repairs are required, such as a new roof or asphalt in the driveway, you may need to renegotiate the offer, readjust the financing amount, and escrow may be required for final financing approval. Your lender and agent will guide you through the process. It may seem like an additional expense or additional hassle to your purchase, however, completing your own appraisal can save you from financing disaster.
- With all the preparation and hard work, you will receive an approval from your mortgage lender. The lender will schedule a closing day. On this day, you will come together with your lender's representative and your seller to complete the purchase and provide the final signatures of transfer. Once the signatures are gathered, you will be given your keys. As a first time home buyer, you have now completed the purchase of your first home. Congratulatons! Keep those payments up and enjoy.