If you’re a first-time home buyer, you may be feeling a little overwhelmed when other people describe some of the things you need to do to jump into the market. However, if you go about house hunting and financing in a methodical way following three steps, all the pieces will fall into place.
A Three Step Process for First-time Home Buyers
The First Step
The first thing first-time home buyers should do is collect all their documents. You will need your pay stubs, your bank account statements, your W-2s, your tax returns for the past 2 years, your loan statements, your credit line statements, and the names and address of landlords you’ve had going back two years.
The Second Step
After you have organized all your documents, the next step is to consider the answer to these five questions:
1. What is the selling price of houses in the area you want to live in?
One way to find the answer is to do a search of a multiple listing service, referred to as an MLS. You will find this on a number of websites. One good place to look is the National Association of Realtors.
2. What will be your estimated total monthly housing cost?
When answering this question, also consider homeowners insurance and taxes. In some areas, insurance escrow and taxation may actually double your mortgage payment.
To get an idea about insurance in the area you’re considering, call a local insurance agent to get an estimate. This call is merely asking for a quotation and does not obligate you to purchase insurance from the agent should you buy a house in the neighborhood. However, the call will give you a good idea of what you can expect to pay.
To get an idea about taxes, review the website of the local property appraiser. This is only an estimate because how much you will actually pay in taxes will depend on exemptions and local tax laws. What other people are currently paying may or may not apply to you as a new homeowner.
3. What will you be paying in closing costs?
There are some fees that you will have to pay upfront when you buy your first house. These are lumped under the term, “closing costs.” There will be the lender’s origination fee, title, settlement, and taxes. There will also be prepay items like homeowners’ association fees or homeowner’s insurance.
4. What are your current incomes and expenses?
Understanding your cash flow–that is, money coming in and going out every month–will help you determine a realistic budget. Fannie Mae has estimated that for most homeowners, housing costs should not exceed 28 percent of their income. Beyond that range, you risk becoming “house poor.”
In addition, you may need to have a small financial cushion to handle any unexpected costs. There are many unexpected costs that may arise when you own your new home. For instance, the roof may need repairs after a hailstorm or the pipes may freeze and cause plumbing problems. These costs can be a huge drain on your bank account if you do not have any cash in reserve.
5. What is your credit score?
If you have a low credit score, your plans of homeownership do not look good. You generally have to be able to demonstrate good credit to buy a house. You also have to show that you can put down a substantial down payment. While these are not absolutes, it’s important to understand your creditworthiness, so spend a small amount to get your FICO score. Look through your credit report to catch any mistakes. If you find a few, correct them by contacting the credit reporting bureau.
The Third Step
After you have answered these 5 questions, you will have a good idea about your own resources and the housing market, and now the final step is to approach a lender because it will be much easier to bargain when house hunting if you’re preapproved for a mortgage.
If you happen to be a veteran with a young family, you may be able to get a home at an interest rate that is a good two percent less than you might have expected to pay. One way to find out more about home ownership for veterans is to visit a website like lowvarates.com.
When looking for a vendor, consider your local credit union or where you do your banking. Also, use online mortgage rate tools to find one in the area you’re interested in buying a house. It’s advisable to apply to multiple lenders within a month, as this will increase your chances of getting approved for a loan at a good rate without making much of a dent on your credit score
When looking at buying a new home for the first time, you might feel a little trepidation about the cost or the new level of responsibility that comes with homeownership. After all, it’s a big change in your lifestyle. Your life will never be the same again. However, it’s important to remember the big picture: when you buy a home, it may be both expensive and labor-intensive to maintain it, but it is one of the best ways to build wealth.