7 Essential Tips for First-Time Home Buyers
Before you start seriously shopping for a home, there's some preparation you ought to do to put yourself in the best situation to purchase a home. Start early, a couple of months before talking to a lender or hiring a realtor.
1. Check and repair your credit
The Fair Credit Reporting Act requires the three nationwide consumer credit report companies, Equifax, Experian, and TransUnion, to provide you with a free copy of your credit report and FICO scores upon request once a year. You can order the reports by visiting AnnualCreditReport.com, or call 1-877-322-8228.
Each credit report company has its criteria for scoring your credit report. A lender will usually use the middle FICO score. All three scores need to be as high as possible for you to receive the best interest rates.
If you can, order the reports at least three months before applying for your home loan. If you find a mistake you need to correct, or you want to improve your score by paying down an account, you'll need at least two months before the credit score improves.
You can dispute an incorrect item on the report by contacting the consumer reporting company and the information provider in writing. Be sure to include copies of your proof.
Don't accidentally raise your scores
Lenders not only look at how much credit you're using, they consider how much credit you have available. However, now is not the time to be opening any new accounts or closing existing accounts. Don't purchase furniture or a new car or any other big-ticket item before buying a home. Lenders are cautious about the amount of debt you have and how much you pay down every month on the debt payments.
2. Get Loan Pre-approval
Don't start house hunting without knowing how much home you can buy. To find out, you have to apply for a loan, which means you're sharing financial information with the lender, such as income and work history, student loans, child support or alimony, and credit card balances.
Contact your lender for a pre-approval letter. The letter shows that the lender has taken a 1003 loan application, studied your debt ratios to your income, and helped you select a loan program such as fixed rate, ARMs (adjustable rate mortgages), FHA, or VA government-backed loans, etc.
Your lender will confirm your down payment source, interest rate, type of loan that's best for your circumstances, and the terms of your loan. The lender will give you a loan commitment based on your qualifications. The home you select must meet appraisal, and the underwriting department must approve the loan.
A pre-approval letter will open doors for you. Sellers will be impressed because you're prepared to buy and that a lender has agreed to process your loan. Your real estate agent will have to know the terms of your mortgage to write your offer.
3. Find out about federal, state, and local government incentives
Get help with your loan rate, closing costs, or down payments through federal and state housing authority programs. For example, there are also incentives for workforce personnel police, firefighters/emergency services personnel, and teachers.
Each community is different, so click on HUD's Housing Authorities to learn what incentives are being offered in your community. Your city may be offering tax incentives to revitalize a designated public improvement area.
4. Narrow the choices
Think about how you want to live. One story or two? Low-maintenance condo or big yard for the kids? New or older home?
Drive through the neighborhoods you're interested in and look at homes. Visit a few open houses in the areas you are considering. They will usually be listed in your local newspaper with the hours hosted. Be sure to tell the real estate professional hosting the open house that you are already working with a buyer's agent.
With Google maps, video, virtual tours, multiple photos, school reports, neighborhood reports, and more available online or on phone apps, you can get a good idea of what neighborhoods, home styles, and home prices are like where you want to live.
5. Find an Experienced Real Estate Broker or Agent
Buying a first home is a complex process. An experienced real estate broker or agent will assist you all through the process: the home search, comparable homes sold, making an offer, inspection, repairs, and the appraisal, as well as help you find the best value, neighborhood, and quality home for your budget and requirements.
The seller's real estate broker pays your broker or agent out of your loan proceeds. If you don't use your agent, the seller's broker keeps the commission, so you might as well avail yourself of professional advice. Your real estate broker or agent works in your best interest.
6. Don't expect perfection
There's no perfect home. You may want all the latest amenities of a new home, but even new homes come at a price, including longer commutes, higher community fees, and larger price tags.
Homes that need updating are priced below homes that are up to the minute and move-in ready. That could be to your financial advantage, so try to look beyond outdated fixtures and focus instead on the floor plan and dimensions. Ignore the seller's tastes and imagine each room clean and clear of clutter and with your things in them.
Most cosmetic changes are relatively inexpensive, and you can even pay for them with your mortgage loan, in some cases. Talk to your lender.
7. Think long-term investment
Buying a home can be a wise financial investment if you buy right and hold your home for long-term gain. Because of closing and moving costs, it's nearly impossible to buy a house and sell it immediately for a large financial gain. Still, it is possible to sell after a couple of years with no capital gains tax should you make a profit.
According to the National Association of REALTORS®, home equity growth beats inflation by about one to two percent annually, not to mention government subsidies for homeownership in the form of tax relief and other incentives.
However, if you look at owning a home strictly as an investment, you'll miss many pleasures. Look at your home as a home, rather than part of your portfolio. Buying a house allows you to live in the neighborhood you want for as long as you want, without having to worry that the landlord is going to sell out from under you. Your stake in a home makes you part of the community, committed to making it a better place to live.