original article: https://www.quickenloans.com/blog/top-10-things-first-time-home-buyers-need-know
As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
Buying your first home is not something you (or anyone!) should take lightly. You should learn as much information about the process as you can before you begin, and understand your real estate market and the current mortgage market. The more you know, the better.
The U.S. Department of Housing and Urban Development defines a first-time home buyer as a person who has not owned a personal residence in three or more years. So, this could be someone who has never owned a home, or someone who has owned one in the past but has been renting for a while.
Whether you’re buying your first home or you just haven’t owned a home in a while, it’s important to get as much information as you can so you can make the best decision for you.
How Much Home Can You Afford?
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. Depending on your financial situation, that number might not be the same, so always use what you can afford as your main metric for deciding how much house you should mortgage.
One of the realities of home buying is the frustration of finding a perfect home only to discover it’s not in your price range. Finding out how much home you can afford can be easier than it might seem. Your Home Loan Expert will help you, of course, but you can also try using a purchase calculator.
Should You Get Prequalified or Preapproved?
Often a mortgage lender will tell a potential buyer they’re prequalified for a loan. This can confuse first-time home buyers, who think they will qualify for that exact amount. With a prequalification, little information about your finances has been verified. You might find out later that the amount you were prequalified for is different than what you actually do qualify for.
What you need is a preapproval, where more information (your credit and other financial factors) has been checked and verified, meaning you’ll have a better idea how much you can afford. With a preapproval, you’re in a better position to negotiate because the seller knows you’re verified and more likely to be able to complete the transaction. Having a preapproval will also help you know which price range you can look in.
What Is Your Credit Score?
You should obtain a copy of your credit report and review it. Mortgage companies will pull your credit, but it helps if you know approximately where you stand before you start the process.
Credit scores are determined by factors like debt, debt payment history, debt-to-credit utilization and length of your credit history. There are places like Rocket HQ where you can get a free credit report. If you find an error on your credit report, it’s likely going to be easier to fix the issue before finding a house, rather than when you’re trying to close on your new house. Your mortgage lender can also give you tips to help with any minor blemishes found on your credit report.
What Kind of Mortgages Should You Consider?
For first-time home buyers, mortgages might be confusing or a bit overwhelming. Ask your Home Loan Expert any questions you may have. A good Home Loan Expert will ask you numerous questions about your specific financial needs so they can match you with the best mortgage option.
The mortgage option best for you will depend on:
- Your current financial situation
- Whether or not your financial situation will change in the next few years
- How long you want to stay in your home
- If your income is steady or fluctuating
What Documents Do You Need?
You’ll need these items to complete your mortgage application, plus other documents that may be needed to get a correct view of your financial situation:
- Pay stubs
- Bank and/or other asset statements
What Is a Reasonable Offer?
With a purchase as big as a home, it’s always a good idea to get advice from an expert. A real estate agent can be very helpful in deciding how much your offer should be.
In today’s seller’s market, it’s very important to know what fair market value is for homes. 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.
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 (seller can pay closing costs on some home loans) 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! Earnest money is not required; it’s usually a small percent of the asking price and is later applied as part of your down payment or closing costs. It’s 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.
Should You Have the Home Inspected?
Always! You should never buy a home without inspecting it and the purchase agreement should say that the sale is contingent upon inspection. It’s a good idea to spend a few hundred dollars and hire a qualified, licensed professional to inspect your new home before you buy it. An inspection is the best way to ensure the home is in the condition the seller has disclosed.
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.
The home inspector should provide a very detailed summary report listing the condition of each item and recommend repairs. You can 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. Feel free to ask questions as you go along.
If there are problems, you can ask that the seller adjust the purchase price of the home or repair the problems. If the repairs are more extensive than you want to take on, you may not want it anymore. If that’s the case, you should be able to get your deposit back and resume your house hunting. It’s a good idea to make sure that you have a condition in your purchase agreement that would get you out of the purchase if the house is not in good enough condition.
Do You Need Homeowner’s Insurance?
Yes! You’ll need a valid homeowner’s insurance policy before you close on your home. You can’t get a mortgage without it.
What Are Closing Costs?
This is one of the top-asked questions 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 the amount ahead of time. Closing costs can be made up of taxes and insurance, a lender fee or inspection costs.
Keep in mind, various additional costs might apply depending on your state, mortgage type and down payment amount. For instance, title companies handle many closings, but some states require an attorney to conduct the closing.
Before your closing, you’ll receive a document that outlines the actual costs you’ll pay at closing. You’ll likely be asked to bring a valid picture ID, a certified check for any down payment due (or it may need to be wired 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 right 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 agents 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!