28 July 2021

What Does a First-Time Homebuyer Need to Know?

Buying a house for the first time can be a daunting process, but even a first-time homebuyer can navigate the real estate process with the right tools. Read on for tips on buying your first home!

Where Do You Start as a First-Time Homebuyer?

Being a new homebuyer can make a person feel a little vulnerable. First-time homebuyers compete in an ever-shifting housing market against more experienced buyers. They deal with real estate agents and lenders who know the game very well. They must sign their names to what’s probably the biggest financial deal of their lives while taking on a big pile of debt.

Yet, many people pull it off successfully every day. (Notice that we didn’t say perfectly.) This is the time it pays off to do your research and get organized.

How Hard Is it Being a New Homebuyer?

If you enjoyed doing word problems in math class, love researching and learning new things, possess tremendous attention to detail, and get a thrill from negotiating big business deals, then buying your first home won’t be hard at all.

One of the difficulties of being a first-time homebuyer is that the process pulls you into so many different, uncharted territories.

Finances

When you begin this journey, set aside a notebook or create a folder on your computer desktop or both, to keep track of all the calculations and comparisons you will be making.

  • Remember that every math problem you do might save you hundreds and even thousands of dollars.
  • Assume that when someone gives you a cost estimate, the final cost will be higher.
  • Don’t tell yourself that because you are working on a $250,000 deal, some small part of it is “only $1,000.”

House Hunting

New homebuyers must learn about the real estate market they are entering. The internet has made it easier than ever to find out things like price trends, taxes, the quality of local schools, and home inventory. You also have to learn how to tell the difference between a fixer-upper and a disaster. The home inspection will help, but that comes after you've made an offer.

Logistics

Besides all this research, new homebuyers have to budget time to interview realtors, quiz lenders about getting the best interest rate, and look at homes, both online and in person. This is not the time to start a new hobby. You just did!

Be prepared to face scheduling challenges at work and with the children’s school and activities.

Emotions

Buying a new homebuyer can test you emotionally. You might fall in love with a home but shouldn’t let your real estate agent know that. (In fact, you should remember at all times that the agent will be paid through the commission on the sale. It’s usually some share of 6 percent of the sales price. So, the higher the sales price, the more the agent makes.)

You might experience fear about spending too much on a home or spending too little. You’ll find frustrations, too. In short, expect first-time home buying to be a test of your mettle, but one that you can pass.

What Qualifies Someone as a First-Time Homebuyer?

The U.S. Department of Housing and Urban Development says a first-time homebuyer is:

  • Someone who has not owned a principal residence for three years. If you’ve owned a home, but your spouse hasn’t, you can buy a place together as first-time buyers.
  • A single parent who has owned a house only with a former spouse while married.
  • A displaced homemaker who has owned only with a spouse.
  • Someone who has owned only a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
  • Someone who has owned only a property that was not in compliance with state, local, or model building codes and cannot be brought into compliance for less than the cost of building a permanent structure.

What Questions Should a First-Time Homebuyer Ask?

There is no end to the answers new homebuyers need. Here’s a sampling. And each of these questions can lead to others.

  • What’s my credit score? What can I do to improve it? What does my credit report show?
  • How do I get pre-approved for a mortgage?
  • How do I shop for the best interest rate and mortgage?
  • What programs are available to help first-timers?
  • How long do I expect to stay in the house?
  • How much should the down payment be?
  • How much of a monthly payment do I want? The question should not be “how much can I afford”? There’s no law that says you have to buy as much house as you can afford. You do not want to become house poor.
  • How much savings will I have left after I’ve made my down payment and paid closing costs?
  • What neighborhood do I want to live in?
  • What are the features I must have in a house? What would I like to have? What are the things I refuse to have?
  • Should I get a real estate agent? How do I find a good one?
  • How should I prepare for the closing?
  • Do I need a mover, or can I handle it myself?

When You Buy a House, What Do You Pay Monthly?

Your mortgage payment consists of principal and interest. If you put down less than 20 percent, your mortgage will include the cost of private mortgage insurance or PMI.

PMI protects the mortgage lender, but not the borrower, if you can’t pay off the loan. However, there are PMI options that avoid this, like paying it all upfront.

The mortgage probably includes real estate taxes and house insurance, taken from an escrow account set up when you buy the house. Part of your closing costs, which is the money you must have at the signing to complete the deal, goes into setting up an escrow account.

The escrow account begins with roughly enough money to pay your real estate tax and insurance. These are rather high bills that many people might find it difficult to pay when due and which can have serious consequences if not paid on time. And the processes for paying real estate taxes can be cumbersome.

The escrow account allows those bills automatically while you pay in monthly increments. It’s possible to pay them yourself as they come due, but few people take that route.

Other Monthly Bills

Don’t forget monthly payments for utilities and municipal services, like electricity, natural gas, water, sewage, and garbage and recycling collections. And many people consider their internet, cell phone, and cable TV service to be essential utilities.

Another monthly burden might befall you: a homeowners association fee. If your new home is a condominium, you will have condominium fees. However, those fees might replace your utilities and possibly your cable TV costs. As you head toward high-priced homes, other monthly costs might include lawn service, gardening and landscaping, pool service, pest service, security service, and house cleaning.

A sensible new homebuyer would add another $100 a month for maintenance expenses like new HVAC filters, lightbulbs, cleaning supplies, and basic repairs. If you don’t spend it, put it in a rainy day fund for larger repairs, furniture, and appliance replacements.

Do You Have to Pay Off Credit Cards First?

It depends on how much credit card debt you have compared to your income.

If you have a low credit score, paying down credit card debt before applying for pre-approval can help.

Lenders check out your debt-to-income ratio (DTI) in two ways.

The front-end ratio compares your anticipated mortgage payment, plus related fees, to your gross income (your pay before taxes and other deductions). Lenders generally prefer a ratio of 28 percent or less.

For example:

  • Gross income is $5,000 a month.
  • Anticipated mortgage payment is $1,400, with a homeowner association fee of $50.
  • Front-end DTI is $1,450/$5,000, which equals 29 percent.

The back-end ratio considers the anticipated mortgage and related amounts plus total debt payments, including credit cards, and other obligations, like child support. Lenders prefer 36 percent or less. If your debt-to-income ratio is more than 43 percent, a loan officer probably will turn you down.

For example:

  • Gross income is $5,000 a month.
  • The anticipated mortgage payment is $1,400, with a homeowner association fee of $50, a car payment of $300, credit card payments of $350, and child support payments of $280.
  • Back-end DTI is $2,380/$5,000, which equals 47.6 percent.

How Much Do First-Time Homebuyers Have to Put Down?

People often assume that 20 percent is the “right” amount for a down payment. That’s because that amount means you won’t have to pay PMI, which is good.

If you can put down 20 percent, the lender feels comfortable enough to loan you the rest without needing insurance in case you fail. And if you do fail, they will have at least 20 percent equity in the house when they resell it.

The main consideration is that the higher your down payment, the lower your monthly payment will be.

If you buy a $280,000 house, a 20 percent down payment would equal $56,000 and leave you with a mortgage on $224,000.

However, that assumes that you pay closing costs on your own and do not roll it into the loan, as often occurs. Average closing costs are 2 percent to 5 percent of the loan. In this scenario, that would equal $4,480 to $11,200. So, to complete the deal, you would need an amount in that range, plus $56,000 for the down payment.

Lenders do give you an estimate of closing costs well in advance so you have time to think about this. And yes, this is just the sort of thing that drives new homebuyers bonkers. If you pay the closing costs upfront, it keeps your monthly payment lower. It also means you are not paying interest on the closing costs for up to 30 years.

If you roll those costs into the mortgage, you increase your monthly payment, but need less money upfront. However, if you want to avoid PMI payments, you must make sure that rolling closing costs into the mortgage does not make the loan more than 80 percent of the sales price.

Can I Buy a House With No Savings?

You might be able to pull it off. But should you even try?

If you have a good employment record and an impressive back-end DTI, a lender might take you on. The excellent DTI ratio will indicate that you have plenty of income to make your house payment.

If you have no savings, however, you leave yourself vulnerable to any financial setback, such as an unexpected, expensive home repair.

Lenders’ requirements and prudence will lead the new homebuyer toward buying something below his or her means. And that’s a good thing. That allows time to build up savings, plus equity in the house, for taking a step up with a second home.

Covering a Down Payment and Closing Costs

You might qualify for one of the first-time homebuyer programs or the Down Payment Assistance programs and grants available to first-time home buyers.

But unless you are a qualifying veteran or buy a house in a qualifying rural area, and thus can get a no-money-down VA or USDA loan, you’ll have to come up with at least a few thousand dollars.

FHA loans, Freddie Mac Home Possible loans, Fannie Mae HomeReady loans and some conventional loans require down payments of 3 percent to 5 percent.

You also might want to look into a few other programs, including the Chenoa Fund, an affordable housing program administered by the CBC Mortgage Agency; Community Seconds, a Fannie Mae-approved second mortgage; and HUD programs such as The Good Neighbor Next Door, Section 8 Housing Choice Voucher Program and Section 184 Indian Home Loan Guarantee Program.

The Reward of Being a First-Time Homebuyer

First-time homebuyers face a big challenge, but not an impossible one. Homeownership remains a cherished goal. Take a step-by-step approach, do the leg work and you can soon be moving into your first home.



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