If you’re buying your first home, you’re probably feeling overwhelmed. This is a huge step, and there are so many things you have to get right: finding the right house, in the right location, with the right financing. Do you know where to start?
People will tell you that this process is difficult… but they’re wrong. It doesn’t have to be hard. With the right help, it’s easy! Here is my guide to buying your first home.
To purchase a home, your credit should be above 600. The higher the credit score, the better the interest rate you will get. Why is that interest rate important? Because a lower interest rate means you pay the bank less over the life of the loan. That puts more money in your pocket every month. (Already have great credit? Good – skip down to Pre-Approval.)
Is your score lower than you’d like? No worries – you can fix that. It might even be a good idea to spend a few months working on increasing your credit score. There are free online tools you can use to help you measure your credit progress. Mint will help you track your money, and Credit Karma has a simulator that will tell you how various conditions affect your credit score.
After your credit has risen, revisit the home buying process with the confidence that you are getting a better deal for you and your family.
Now that you’re proud of your credit score, the home buying process can really begin. Before you meet with an agent, before you go online hunting houses, before you do anything else, you MUST get a mortgage pre-approval.
If you’ve already selected an agent you like, a good agent will send you to a lender. If you’ve already found a house you like, the home owners are going to demand proof of your funds. So don’t waste your time: visit a mortgage lender first!
When you find a mortgage lender you trust, ask them to give you a pre-approval letter. Do not get a pre-qualification. What’s the difference?
- Pre-Approval Letter: lender verifies your income, job history, and credit
- Pre-Qual Letter: lender verifies nothing
See what I mean? Home owners and their agents will be much more receptive to you when they see that you have your financing in place.
More importantly, that pre-approval letter will tell you your budget. You’ll know how much house you can afford, which will help you and your buyer’s agent narrow the focus of your home search.
There are several different kinds of loans. Each one has its advantages and disadvantages, and some will be better suited to your needs. Here are brief descriptions of the most popular kinds of mortgages:
- Conventional – You make a down payment (usually 5% or more of the purchase price) and you pay the same interest rate every year for the life of the loan. These are a good idea if you plan on staying in one place for a long time.
- ARM – “Adjustable Rate Mortgage.” Your interest rate will change based on financial market conditions. Often, interest rates start very small and then become much bigger after a few years.
- VA – A loan guaranteed by the Department of Veterans Affairs, and only available to current or previous members of the military (or a qualifying surviving spouse). Advantages include no down payment.
- VHDA – “Virginia Housing Development Authority.” Only available in the state of the Virginia, this loan is mainly designed for first time home buyers. VHDA offers several flexible options to help people buy homes.
- FHA – A loan insured by the Federal Housing Administration. FHA loans were designed to help otherwise undesirable borrowers to get loans from banks.
Of course, there are other loan programs that may apply to you. Your best option is to sit down with a lender you trust and have a candid discussion about your finances and needs. Don’t be shy – they do this for a living, and their expertise will help you. If at any time you don’t feel comfortable with the lender, leave. Lenders are a dime a dozen, and you are entitled to shop around until you find one you like.
Your lender might offer you a bigger loan than you expect. That doesn’t mean you have to take them up on the deal.
If you ignore everything else in this article, do not ignore this: DO NOT MAX OUT YOUR MORTGAGE. This is the biggest mistake first time home buyers make. Take care of yourself first, and make sure you save money every month. You might need it for an emergency, or to repair your fence, or to visit your sick mother. Trust me on this: do not take on more debt than you can afford.
You did it! You fixed your credit, you got a good loan pre-approval with the perfect loan program, and you found the home of your dreams. Yay!
Now let’s be sure the home of your dreams is going to stay that way. Get a home inspection. Do it. It will cost you a few hundred dollars out of pocket. Do it anyway.
You need to thoroughly inspect this house before you buy it. Here are some of the things you should look at:
- Moisture damage
- Leaking pipes
- Exposed wires
- Adequate heating and cooling
- I could go on and on.
This is too big a job for your buddy’s friend’s landscaper. Pay a professional.
What’s a contingency? A contingency is an escape button. It’s a clause we can write into your purchase contract to get you out of a nasty situation. A home inspection is a kind of contingency. Other types of contingency include:
- POA/HOA – Property Owner’s Association/Home Owner’s Association. Before you purchase a house, you get the right to read all the POA/HOA rules. If you see something in there you hate (like not being able to work on your truck in your driveway), you can punch your escape button and leave the contract.
- Condo – Very similar to POA/HOA. Before you purchase a condo, you are given the condo rules and (usually) their financial documents. If you see anything unacceptable, out you go.
- Home Sale – Let’s say you already have a home and don’t want to pay two mortgages at once. This contingency guarantees that you aren’t obligated to buy the new home until you sell the first one.
- Custom – Often we can tailor a contingency designed just for your circumstances. Tell me your needs and we can plan accordingly.
Are you thinking about selling your home and you’re not sure what your home is worth? Thinking about buying a home for the first time but not sure about your earning power?
Contact me today for a complimentary marketing analysis of your home’s value, or to learn about the buying process. There is no obligation, and you might be pleasantly surprised!
Luxury Homes Specialist
Certified Real Estate Negotiator
Accredited Buyers Representative
Certified Distress Property Expert
HRRA Circle of Excellence Gold Recipient