Currently I’m working with a friend, a young man who is buying his very first home. It’s fun to see his excitement and answer his nervous questions!
Here are some of the tips I’ve given him as we began this journey. These are the five things you need to buy your first home:
- CREDIT. You have to establish credit somehow. If you have NO credit, it’s as bad or worse than BAD credit. You can establish credit with your bank (and, yes, you need to have a bank account and at least a few month’s worth of bank statements) by getting a secured credit card (you put up the cash as like a security deposit and you can start with as little as a few hundred dollars). One of the best ways to establish credit is with an auto loan. Make sure you make all your payments on time! If you have some blemishes on your credit, see what you can do to clean it up. Sometimes a phone call is all that’s needed to fix false information. If you need professional help to clean up your credit, there are some good credit repair companies that can help you. Go to creditkarma.com to get an idea what your credit looks like. The better your credit, the better loan program you’ll qualify for.
- DEBT TO INCOME RATIO. This is a term you’ll hear from your mortgage broker or lender. After they pull your credit, they will want to know how much you owe versus how much money you earn. So, you need to have a track record of reliable income. If your debt compared to your income allows enough room for a mortgage payment, you should be able to get a pre approval letter for a home loan.
- MONEY. You will need to have some cash on hand, some savings. When you are ready to make an offer, with that offer you propose a good faith down payment. It should be at least a few hundred dollars or around 1% of the sale price. If your offer is accepted, that money is due and will be kept safe in an escrow account until closing. At closing, those funds go back to you, toward your closing costs. You will also need money for an inspector; you’ll want a professional inspection of the property. That will be at least a few hundred dollars. Your lender will also want you to get an appraisal, to make sure the property is actually worth what you’ve offered for it. An appraisal costs several hundred dollars and can often be paid at closing. Your mortgage broker will advise you on how much down payment you will need for your loan. There are programs with zero down (think VA), 3.5% down (think FHA), 5-10% down (think conventional) or more down. If you put at least 20% down you can avoid mortgage insurance, which adds to your monthly payment. Your Realtor can often negotiate with the seller (when you make your offer) for the seller to pay some or all of your closing costs. Your mortgage professional will also let you know that you are allowed to receive as a GIFT a certain amount of money from friends or family.
- MORTGAGE. You will have to select a mortgage broker, bank or lender and officially apply for a mortgage. They will ask you about all of the above and tell you what program you qualify for. If you are not quite in the position to buy yet, they can at least advise you what you need to do to get there. They can also tell you if you could qualify for down payment assistance programs or a zero down payment VA or USDA loan. You will need to get an official pre approval or pre qualification letter–your Realtor will want a copy of that. This essentially says they’ve checked the basic information that you provided and they’re confident you’d get approved for a loan.
- YOUR TEAM. Once you have a mortgage professional on your team, next you need a great Realtor. Your Realtor will work closely with your lender to make sure the home we find will be able to be financed by your loan program (or what other types of loans you’d qualify for). Your Realtor knows which loans will allow for some renovation or repairs (construction type or renovation type loan). Often sellers will ask for only cash buyers because they know the condition of the property will not pass inspection and therefore would not be approved by the lender for a regular loan.
These were some of the things my friend got in order to be at the point we are now: actually looking at houses. Wish us luck as we go house hunting this weekend! Next, I’ll be teaching him the seven things to look for when evaluating a house.
If I can guide you through the process of being a first time home buyer, please call me at 407-236-6559. It will be a fun adventure! You can check out my Service Providers page for some excellent mortgage professionals to choose from.