What Every First-Time Homebuyer Should Know

First Service Credit Union
8/1/2018 12:00:00 AM - 8 min. read

If you are thinking of purchasing your first home, you are not alone. In 2019, first-time buyers made up roughly 33% of all homebuyers in the United States, and economists forecast that another 9 million people will purchase their first home in the next two years. However, there is a lot to consider. It’s no secret that the process can be complex, and for many people it can get overwhelming. That’s where we come in. At First Service, we want to empower first-time buyers for success. There are some critical steps to be taken throughout the process, so let’s get started.

 

Preparing for Your Home Search

Long before you ever attend an open house, it’s important to take a few steps with your own finances to make sure you’re prepared to start this journey. Here are five things you should do before beginning your home search:

1. Review Your Credit Report

Your credit score is a crucial part of the home buying process. It affects your interest rate and determines how much you will be able to borrow. When reviewing your credit report, check for any errors, unresolved issues, or outstanding debts you might be able to pay off quickly. If you see any mistakes, you will want to report them to the credit bureau immediately.

2. Set Your Budget

After looking over your credit score, set a realistic monthly budget. If you find your credit score is not where it needs to be, focus on a short-term budget that will allow you to pay off some of your smaller debts quickly. If your credit score is in a good place, it’s time to start calculating what you will be able to afford to pay each month. Most financial professionals will advise against spending more than 28% of your gross income on your mortgage payment, so use this as a starting point as you add up your income and expenses to determine what might be feasible.

3. Start Saving

Buying a home requires some up-front investment. Homebuyers are responsible for making a down payment and, typically, covering closing costs at the time of signing their mortgage. Both figures will vary depending on the cost of your home, and the down payment requirement may also change depending on which type of financing you choose. For example, a conventional fixed-rate mortgage may require a down payment between 5% and 20% of the home’s purchase price, while an FHA loan may require as little as 3.5%. Closing costs are separate from your down payment and typically range from 2% to 5% of the purchase price of your home.

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Pro-Tip: If your down payment is less than 20% of the home’s purchase price, you are required to purchase private mortgage insurance (PMI). This is an additional monthly expense that you need to include in your budget.

4. Research Different Loan Types

When looking to finance your home, you will find that there are many options available. However, each comes with unique requirements, including necessary credit scores, down payments, and may include other conditions such as past military experience or income limits. It’s best to work with a trusted professional – such as someone from your bank or credit union, or an experienced mortgage loan officer – to determine which is right for you. Some of the most common loans for first-time buyers include:

  • Conventional 30-year fixed
  • Fannie Mae HomeReady®
  • Federal Housing Administration (FHA)
  • Freddie Mac Home Possible®
  • Veteran Loan (VA)

5. Apply for Pre-Approval

Once you’ve decided what type of mortgage makes sense for you, it’s time to get pre-approved with a trusted lender. This will help you finalize the details of your budget and allow you to shop with confidence throughout the buying process. And, as an added bonus, it gives you a starting point for making an offer when you do find the perfect home.

 

First Home Search Checklist

Once you know exactly what you have to spend, you can get to the fun stuff. Here are some things you should do while you search for your dream home:

1. Find a Trustworthy Real Estate Agent

It’s true that technology has provided us with new ways of buying a home without a real estate agent. However, as a first-time buyer, we do not recommend going this route. You will want to have the experience of a trusted real estate agent on your side. This person will walk you through the process, teach what to look for, and even help you negotiate when you find the right place.

2. Start Touring Homes

When looking at potential homes, consider the neighborhood where you want to live and don’t get hung up on aesthetic values. You want to live somewhere that will make you happy, but it’s best to make your decision with some practical considerations, such as the area's activities, shopping, safety, schools, and proximity to work, friends, and family. When it comes to the home, also consider your future needs. For example, if you're planning to start a family one day, you may want to consider a home with extra square footage and a big yard.

It’s also important at this stage to ask about maintenance and upkeep. Consider the homeowner's responsibilities in each home you tour and think carefully about whether you’re comfortable with any of the projects that you may foresee. On the flip side, if you do find a home you like that doesn’t have quite everything you want, remember that you may be able to make renovations or improvements down the line. This will help you narrow your list and choose the right home for you.

3. Choose a Home and Make an Offer

Once you’ve toured several homes, it’s time to start narrowing your list. As you weigh the pros and cons for the homes you’ve seen, you ultimately want to choose a single home on which to make an offer. Your real estate agent can advise you on when and how to start this process. They can also help you learn more about comparable homes in the area that have recently sold, as well as the condition of the house.

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Pro-Tip: Your offer should include details about how you will finance or purchase the home, contingencies, and other things such as home warranties that you want to see included when the offer is accepted.

4. Negotiate the Offer and Agree to Terms

When you submit your offer, it should include a time frame for the seller to accept, reject, or counter the offer. If your offer is rejected or is returned with a counteroffer, don't be discouraged. Some back and forth is extremely common when buying a home, especially in popular markets. Your realtor can advise you on how to respond in any of the scenarios. Some common reasons initial offers are rejected by the seller include:

  • The seller received a higher or better offer
  • The buyer doesn't have their financing secured
  • The seller does not like the buyer's loan type
  • There was no earnest money included as part of the offer

Once you reach this stage, it’s important to stay composed. Choosing a home can be an exciting process, and negotiating an offer can feel like crossing the finish line. However, nothing is actually finalized until closing. As long as you are still in the negotiating process, make sure not to let your emotions lead you to a decision you may regret down the road. In this stage, it is critical to work closely with your real estate agent, who is going to help you make an informed, objective decision.

 

Closing the Deal on Your First Home Checklist

Once you and a seller agree to terms on an offer, you may feel like celebrating. This is an exciting time, to be sure, but there’s still more to be done before you receive the keys to your new home. These steps will still need to be taken before you at long last become a homeowner:

1. Finalize Your Loan Application

After your offer has been accepted, you'll start your official loan application. Remember, you have only been pre-approved for your loan prior to this step, so this still needs to be handled. The process is not complicated, but it does take time, so plan accordingly. A loan officer can guide you along the way, if necessary, and many lenders now offer applications online.

2. Don’t Make Any Big Purchases

Once you’ve entered into the home buying process, don't make major purchases or apply for new credit. This helps keep your loan prospects and credit score in good standing. Even if you’ve already been pre-approved for your mortgage, new activity on your credit report can put your official application in jeopardy.

3. Have the Home Inspected by a Licensed Professional

When you submit your offer, it should always include a stipulation that will allow you to back out of the purchase pending a home inspection. There is only so much you can see when touring a home, and a thorough home inspection conducted by a licensed professional will give you a better idea of any significant issues the house may have. Ideally, you won't find anything to worry about, but if the inspected reveals unexpected problems, you will have several options on how to proceed, including:

  • Renegotiating the price
  • Canceling the purchase
  • Asking the seller to make repairs
  • Doing nothing and continuing with the sale

4. Complete the Lender Appraisal

Before approving the loan, your lender will require an appraisal of the property. It’s important to note that your lender cannot allow you to borrow more money than the appraised value of the property, and typically this is the last hurdle you will need to cross before finalizing your loan. If your appraisal comes in higher than expected, you can try to contest it. However, the appraised value is likely to stick with the home for two to six months. And even if you do try going through another lender, they will still be able to access prior appraisals.

If your appraisal comes back under what you had expected, talk to your real estate agent about whether this might be an opportunity to renegotiate the selling price with the owner. The home buyer is usually responsible for covering the cost of the appraiser. Most of the time it is paid at closing, but may vary depending on your lender and offer.

5. Choose a Home Insurance Plan

Most lenders will require you to secure your new home's insurance policy before the loan can be finalized. Shop around for the best rates, and consider bundling with your auto insurance to save money. Depending on the area, consider additional coverage for things like flooding that may not be covered in a standard home insurance policy.

6. Complete the Final Walkthrough

The final walkthrough is typically the last step of the home buying process before a loan is finalized. Walkthroughs normally occur on the same day as the closing or the day prior. However, like most things with buying a home, it can vary and will depend on the seller. This walkthrough is your chance to make sure things are in good standing, and nothing major has been altered or damaged within the home since the inspection and appraisal before you take ownership.

7. Close the Deal: Final Paperwork and Fees

At closing, you will finalize the deal by signing the paperwork and paying any outstanding fees, such as closing costs and your down payment. Your loan officer will let you know how much you will need to pay and what you will need to bring. Once these balances are paid and you've signed all the paperwork, you'll receive the keys to your new home.

This is the moment you’ve been waiting for. From this moment on, you can expect to hear, “Congratulations, you are now a homeowner!”

 

Moving into Your First Home Checklist

After you sign on that dotted line, it will finally be time to move in and enjoy your home. Here’s what you need to do at this point:

1. Keep Track of Your Moving Expenses

Keep a log of all your moving expenses. On top of paying closing costs and covering the down payment on your home, you will likely also be responsible for things like utility deposits, new furniture or appliances, and insurance premiums. Keeping a close eye on your budget will be extremely important through all of this.

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Pro-Tip: If you are moving for a job, many of your expenses may be tax-deductible. Be sure to keep track of your costs and save your receipts.

2. Set Up Your Home’s Utilities

Before spending a night in your home, you will want to make sure the utilities are connected. This process can begin before closing on the house, so we recommend contacting your local water, electricity, natural gas, and other utility providers to ensure uninterrupted service to your new home as soon as you have your closing date.

3. Register Your New Address

In all the excitement of everything going on, many first-time homebuyers forget to change their address. You should consider updating important account information with your credit union, school, or voting records so that they reflect your current address. You will want to update your driver’s license or state ID, and also update your address with the postal service to forward mail from your old address.

 

First-Time Homebuyer FAQs

When it comes to buying a home, there are many things to consider. It should come as no surprise that there are a few questions we hear pretty frequently. Take a look below to see first-time homebuyer FAQs:

FAQ #1: Do I Really Need to Make a Down Payment?

Answer: Absolutely! Having a down payment will lower the amount you borrow, which will lower your monthly mortgage payment. An ideal down payment is at least 20 percent of the cost of the home, as it will allow you to avoid having to pay private mortgage insurance (PMI), but even if you can't afford to put 20 percent down, there are down payment assistance programs. Work with your real estate agent or lender to discuss those options to see if you qualify for any assistance.

It bears repeating that many loan types will require down payments, so keep this in mind when you are evaluating different lenders and loan types. Make sure to find out all you can about what will be required of you as early as you can in the process.

FAQ #2: What Can I Actually Afford?

Answer: The best way to answer this is to look at your current budget. After totaling up your income and expenses, you can figure out what you may realistically be able to spend on housing each month. We also recommend using an online mortgage calculator to see how much home you can afford. This will help you house hunt with confidence.

FAQ #3: Should I Always Get Pre-Qualified for a Loan?

Answer: No doubt about it! Getting pre-qualified with your lender shows potential sellers that you're serious and ready to make an offer. It confirms you've submitted an application with proof of income, assets, employment verification, and a credit check. A pre-qualification letter will also give you an approximate mortgage loan amount and purchase price range for which you qualify.

FAQ #4: How Do I Make an Offer?

Answer: Once you've found your dream home, your real estate agent will submit an offer in writing. He or she will advise you on what price to offer based on the home's value and comparable houses and help negotiate the closing costs, earnest money, and other factors. Once you and the seller agree on the terms, you'll sign your purchase contract and submit your earnest money, which shows you're committed to buying the home.

FAQ #5: What Do I Need to Have when Applying for a Mortgage?

Answer: When applying for your mortgage, be prepared to provide the following:

  • Proof of Identity
    • Driver's license
    • Social security card
    • Passport
  • Proof of Address
    • Utility bills
    • Lease agreement
    • Insurance card from your vehicle or rental
  • Proof of Income
    • Pay stubs
    • Bank statements
    • Tax returns
    • W-2 or 1099 tax forms

 

Stress-Free Lending with First Service and SWBC Mortgage

At First Service, we are committed to helping first-time homebuyers in Texas realize the dream of home ownership. Alongside our mortgage lending partner, SWBC Mortgage, NMLS #9741, we work to offer low interest rates and flexible terms. If you think it may be time to stop renting and purchase your first home, we are here to help. Complete the form below to get started!

 

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