Buying your first home is not something you (or anyone) should take lightly. If you prepare yourself by gathering as much information about the process as you can before you begin, you’ll gain a broader understanding of your real estate market and the current mortgage market. The more you know, the better.
The following are 10 key questions you, as a first-time home buyer, should ask yourself.
How Do I Prepare to Buy My First Home?
Before you sign up with a real estate agent and start surfing home shopping sites, it’s best to make sure you’re financially prepared. For most people, the purchase of their home will be the biggest personal financial transaction they’ll ever make. Before you lay down that kind of money, you should make sure you’re ready.
We’ll cover some of this in greater detail later, but there are four big things you really need to consider before moving forward with your home purchase:
- Budget – Take your monthly income and compare it against your expenses. How much do you have left over for a house payment? Are there areas you could permanently or temporarily cut in order to turbocharge the pace of saving for a down payment?
- Assets – If you have existing assets for a down payment, closing costs and reserves, how much?
- Credit – How’s your FICO® Score? Do you have negative marks on your report dragging it down? How about inaccurate information that needs to be disputed?
- Debt – One of the big factors in determining how high your monthly payment can be (and by extension, how much house you can afford) is your debt-to-income ratio (DTI).
How Much Money Can I Get as a First-Time Home Buyer?
There are no special rules or regulations for how much money you can be approved for as a first-time home buyer. You’re treated just like anyone else looking for a home. If there are no special rules, what do you need to consider?
It’s important to have an accurate idea of how much money you can borrow for your new home and most importantly, how much you can afford. Sometimes those two aren’t exactly the same (depending on your financial situation), so always use what you can afford as your main metric for deciding how much house you should mortgage.
One of the realities of first-time home buying is the frustration of finding that perfect home, only to discover that it’s not in your price range. Finding out how much home you can afford is not as difficult as you might think. Your Home Loan Expert will help you, of course, but first you can try using our purchase calculator.
Which Loan Is Best for First-Time Home Buyers?
When you’re getting a mortgage, you have a variety of loan options available to you. In terms of loan options that are most common, let’s start with FHA and conventional loans. Then we’ll move on to USDA and VA loans after that.
FHA Loans
FHA loans are available for clients with a median FICO® Score of as low as 580. You do need a lower debt amount compared to your income if you’re going to qualify with a credit score that low. However, if you have a higher credit score, you may find that an FHA loan enables you to qualify with more debt than a conventional loan. This means you can be approved for more money when you go shopping for a house.
With an FHA loan, you do need a minimum 3.5% down payment. Also, FHA loans come with both upfront and monthly mortgage insurance premiums (MIP). The upfront premium can be built into the loan if necessary. If you make the minimum down payment, MIP sticks around for the life of the loan. If you make a down payment of 10% or more, you pay MIP for 11 years.
If you want to ditch that mortgage insurance payment, you can refinance into a conventional loan once you reach 20% equity if you qualify based on credit and other factors.
Conventional Loans
For a single-unit primary property, you have a minimum down payment of 3%. You do need a median FICO® Score of 620.
While conventional loans do have private mortgage insurance (PMI), you have some different options than you would with an FHA loan. You can either do borrower-paid mortgage insurance (BPMI) – where a monthly fee is added to your payment for mortgage insurance – or lender-paid mortgage insurance (LPMI) options like PMI Advantage, which comes in two different flavors. You have the option to take a slightly higher rate in exchange for not having a monthly mortgage insurance fee. You can also pay for the entire policy upfront at closing and keep a regular rate.
Additionally, if you make a down payment of 20% or more, there’s no mortgage insurance. If you have BPMI, you can request that it be removed once you reach 20% equity.
USDA Loans
Available for people in rural areas as well as the outskirts of suburbia, USDA loans offer the opportunity to get into a home without a down payment.
In addition to being sure you’re in a qualifying area, loan requirements stipulate that the income of every adult in your household add up to no more than 115% of the area median. There are certain exceptions to this for students and those paying for child care, but we recommend speaking with a Home Loan Expert for more details.
USDA loans also come with upfront and monthly guarantee fees. As with an FHA loan, if it’s impractical to pay the upfront fee at closing, it can be built into the loan. This is essentially the same as mortgage insurance. It’s cheaper than the monthly mortgage insurance for FHA loans, but sticks around for the life of the loan.
You also need a 620 median FICO® Score. Here’s more USDA loan information.
VA Loans
VA loans are available for eligible active-duty service members, veterans and surviving spouses.
One of the big advantages of VA loans is that there’s no down payment required. Also, rather than having mortgage insurance, VA loans have a one-time upfront funding fee. If this is your first time using a VA loan, the fee is 2.15% if you don’t make a down payment. However, it can be built into the loan.
It’s also worth noting that this funding fee can be waived for those with a service-connected disability or surviving spouses of those who lost their lives in service to our country.
What Is There for First-Time Home Buyers?
While qualification standards are the same for first-time home buyers as they are for anyone else, that doesn’t mean there aren’t some special options available to this group.
HomePath Ready Buyer™
The HomePath Ready Buyer program is an option through Fannie Mae that lets you put as little as 3% down toward buying a Fannie Mae-owned foreclosure. As mentioned above, there are other 3% down options for conventional loans. What’s unique about this program?
Available only for first-time buyers, you can get 3% back in closing cost assistance if you apply for it. In exchange, you have to complete an online homeownership education course from Fannie Mae. The course costs $75, but if you end up buying a Fannie Mae home at the end of the process, you can get it back as part of the closing cost assistance.
To qualify for this program, at least one applicant must be a first-time home buyer, which is defined as someone who has not owned residential property in the last three years. You have to be purchasing a primary property to live in.
Check out this post for more info on the HomePath Ready Buyer program.
Look for Grants
There may be ways for you to get grant money as a first-time home buyer toward your down payment and other closing costs. This could help you save money and put it toward other things you need like furniture and fixing the house up after you move in.
The Department of Housing and Urban Development has a list broken down by state to determine what homeownership programs may be available in your area. There may be other grants available in addition to those available for first-time buyers.
How Strong Is Your Mortgage Approval?
There are various terms thrown around in the industry when it comes to mortgage approval that determine how much you can afford. The term preapproval has traditionally been used, but the problem with that term is that, depending on who you talk to, the preapproval can mean different things.
In order to clear up confusion around the approval process so that buyers, sellers and real estate agents can know exactly where they stand, Quicken Loans introduced a three-tier Power Buying Process™.
Prequalified Approval
A Prequalified Approval involves Quicken Loans checking your credit in order to get your median FICO® Score. This gives you an idea of the loan options you might qualify for. We’ll get into that more below.
We also ask you about your income and any assets you might have saved for a down payment or reserves. Between your income and the debts that show up on your credit report, we’re able to calculate your DTI and give you an estimate of what you can afford.
The keyword is estimate. While a Prequalified Approval is the easiest to get, because your income and assets aren’t verified, it doesn’t mean as much to sellers and their agents. We encourage all of our clients to take the next step and get a Verified Approval.
Verified Approval
A Verified Approval incorporates the credit pull step in a Prequalified Approval, but takes things a step further by having you share income and asset documentation with us.
Income documentation can take the form of pay stubs and W-2s. We also gather asset documentation in the form of statements for any bank accounts or investments you plan to liquidate for your down payment or reserves.
Because your documentation is verified, when you go to make an offer on a home, that offer has the strength of a cash buyer because the sellers know you’re good for the financing.
We’re so confident in our Verified Approvals that if, through no fault of your own, your loan doesn’t close, we’ll give you $1,000.1
Knowing you can afford the property isn’t the only concern home buyers have. You also want to pay as little as possible.
RateShield™ Approval
With interest rates on the rise, it’s understandable for that to be on home buyers’ minds. You may want to take advantage now and lock your rate before they go up further. However, in the past, you needed to wait until you made an offer and had a purchase agreement to buy a home before locking a rate.
With RateShield Approval, you can lock your rate for up to 90 days while you shop for a new home.2 If you find a home within that timeframe, current rates are compared with your locked rate. If rates are higher, you keep your initial rate. If they’re lower, you get the new lower rate while you get time to close. It’s a win-win.
What Is a Reasonable Offer?
Unless you’re very familiar with your area and completely understand how to price an offer on your first home, you might want to consider getting help from an expert. A real estate agent can be helpful in deciding how much your offer should be.
Have your real estate agent run comparable sales in your area and pay attention to prices per square foot for recent sales. This can give you a good idea of how much to offer.
If you’re looking for a real estate agent, our friends at Rocket HomesSM can match you with one in your area based on your goals and the type of home you’re looking for.
What Is a Purchase Agreement?
The purchase agreement sets the amount of your offer and usually includes extra details, such as which appliances stay, who pays closing costs (the seller can pay closing costs if negotiated) and when you’d like to take possession of the house. The seller (or selling agent) will have you sign the purchase agreement and offer earnest money. Earnest money is a deposit showing that you’re serious about your offer to buy the home; it’s usually at least 3% of the asking price and later applied as part of your down payment or other closing costs. It comes in the form of a check that your agent holds on to until the offer has been accepted. Title companies can also prepare a purchase agreement. If you choose not to work with a real estate agent, seek the advice of an attorney to help you prepare your documents.
Understanding the Appraisal and Inspection Process
There are some basic differences between appraisals and inspections. An appraisal is required, while a home inspection isn’t. But what are they and how do they work?
Appraising Home Value
Once you sign a purchase agreement, you work with your lender to schedule an appraisal. You’re usually given a timeframe in the purchase agreement that says how long you have to complete both an appraisal and home inspection. During this time, the property is taken off the market.
The purpose of the appraisal is to establish a value for the home. This is done for two reasons: One, as the buyer, you’ll receive a third-party opinion of what the value of the property actually is, which helps protect against overpaying. Second, the lender isn’t allowed to give you any more than the property is actually worth. The appraiser is also responsible for making sure that the property is at least safe enough to move into.
The appraiser finds value by comparing the home against recent sales of similar homes in the area. These are called comparables. Two-bathroom, three-bedroom ranches are compared against other two-bathroom, three-bedroom ranches. The sales typically have to occur within a fairly small area around the home, although this can be expanded a bit in rural areas.
If the appraisal comes in lower than expected, you have some options as a buyer:
- You can renegotiate with the seller. They may be flexible on the price of the home if they’re motivated to move.
- If the seller doesn’t come all the way down to the appraisal value, you have the option of bringing the difference between the appraised price and the loan amount to the closing table. Just keep in mind you’ll have to have money for the down payment and other closing costs as well.
- If you feel the appraiser used the wrong comparables, you can work with your lender to appeal the appraisal. It’s important to note that the seller can’t do this because the appraisal is meant to protect the buyer.
- If no deal can be negotiated, you may have to walk away from the deal.
Should You Have the Home Inspected?
Yes, you should. You should never buy a home without inspecting it, and most purchase agreements are contingent upon inspection. Spend a few hundred dollars and hire a qualified, licensed professional to inspect your new home (before you buy it) – it’s the only real way to ensure the home is in good condition.
The home inspector should provide a detailed summary report listing the condition of each item and recommending repairs. You should always be there when the home inspection takes place. It usually takes a few hours and you’ll learn not only about the condition of the house, but also how everything works. Ask questions as you go along. If there are problems, the seller may adjust the purchase price of the home or simply repair the problems.
There’s always the possibility that the home is in such bad shape or has some monumentally costly problem that it’s no longer the home you want. If that’s the case, get your deposit back and resume your house hunting. These are the cases when you’ll be the happiest you got an inspection.
A thorough inspection includes:
- Heating and cooling systems
- Plumbing and electrical systems
- Structural integrity of walls, floors, ceilings, foundation, roof
- Condition of gutters, spouts, insulation and ventilation, major appliances, garage, etc.
You can also have specialized inspections for things like pests and chimney condition.
Do You Need Homeowners Insurance?
Yes, you’ll need a valid homeowners insurance policy before you close on your home. You can’t get a mortgage without it. Your lender will require you to get at least enough homeowners insurance to cover the replacement value in the event that your home is totally destroyed in an unfortunate event.
Depending on where you live, you might have to get extra hazard insurance to cover things like flooding or wildfires.
Homeowners insurance also covers personal property items up to a certain amount in the event of a theft in your home. However, if you have high-value items, you may have to purchase what’s known as a rider for replacement. This can be useful for things like jewelry and some higher-priced electronics.
What Are Closing Costs?
This is probably the top question asked by first-time home buyers. All mortgage lenders are required by law to disclose in writing your estimated closing costs and fees, so you’ll know ahead of time. If you don’t get this from your mortgage lender, you know something is wrong. Back out before you waste any money.
This estimate is commonly called a loan estimate. Keep in mind, various additional costs might apply depending on your state, mortgage type and down payment amount. For instance, title companies handle most closings, but there are some states that require an attorney to conduct the closing. In those states, borrowers are not required to pay a title company closing fee.
Before your closing, you’ll receive a document that outlines the actual costs you’ll pay at closing. This is known as a Closing Disclosure. While third-party charges for things like title insurance and appraisal can change by as much as 10%, the actual charges for your loan shouldn’t have changed very much from the loan estimate. You’ll be asked to bring a valid picture ID, a certified check (if applicable) for any down payment due (or you may have to wire the money to the title company) and any other additional documents that your circumstances may require.
Be sure to ask for and take a final walk through of the property shortly before the closing to make sure the home is in the condition you expect it to be.
Any number of people may attend the closing – you, your lender, the seller, the seller’s mortgage holder, respective attorneys, the real estate agent, the transfer agent (if it’s a co-op), the managing agent (if it’s a condo) and the title company representative. Once everyone signs the appropriate documents and the checks are exchanged, you’ll be given the keys to your home!
So there you are! As a first-time home buyer, you’re on your way to becoming better prepared for getting a mortgage and buying your first home. Don’t take chances.
We invite you to check out Zing University, where you’ll find a great course for first-time home buyers that contains an in-depth look through the entire home buying process.
If you think you’re ready to get started, you can do so online with Rocket Mortgage by Quicken Loans. One of our Home Loan Experts would also be happy to talk to you if you give us a call at (800) 785-4788. If you still have questions, you can let us know in the comments below.
1 Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply. Verified Approval within 24 hours of receipt of all requested documentation.
2 RateShield Approval locks your initial interest rate for up to 90 days on 30-year conventional, FHA and VA fixed-rate purchase loan products. Your exact interest rate will depend on the date you lock your rate. Once you submit your signed purchase agreement, we’ll compare your rate to our published rates for that date and re-lock your interest rate at the lower of the two rates for an additional 40 to 60 days. Quicken Loans reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Quicken Loans. This is not a commitment to lend. Additional conditions or exclusions may apply.
The post Top 10 Things First-Time Home Buyers Need to Know appeared first on ZING Blog by Quicken Loans.
from ZING Blog by Quicken Loans https://ift.tt/2NPUbHi
via Naza Finance Blog
No comments:
Post a Comment