Just because you can afford the mortgage payment doesn't mean you can afford to own a home. So... you've decided to buy a home, and you're pretty confident you can make the mortgage payment, after all it's about the same as what you're paying in rent now. It makes perfect sense, however there are a few things you may want to consider. There are costs involved in owning a home that don't apply to renting, home owners insurance, property taxes (in some states the taxes can be more than your mortgage payment), repairs, improvements and home owners association dues, not to mention yard maintenance and increased utility bills. Utility bills on a typical home are much larger than a tiny apartment. The minute your home closes you'll be responsible for hook-up fees, possibly deposits as well as trash, water, gas, electric and in some areas sewer. Before you begin looking for homes follow these steps to ensure you can make the payments and cover all the additional costs.
- Check Your Credit Score - This is often over looked by first time home buyers. You should be aware of your credit score long before you start looking for a home or a loan. A bad credit score will increase your interest rate which could cost you thousands of dollars in interest or even worse you may not qualify for a loan at all. Checking your credit score early will allow you time to clean it up if necessary.
- Shop For A Loan - I love to shop, but this is one thing I'm not crazy about shopping for. The process can be tedious, painstakingly detailed and down right invasive, but the simple truth is, it has to be done, you may not buy a home without a loan, unless you're independently wealthy, so suck it up and do it. Then you can move on to the the fun part, looking for the perfect home within your financial parameters. Only smart first time home buyers do this first, dumb first time home buyers skip this step which leads to shattered dreams when they realize they can't qualify for a loan. Be smart, do first things first.
- Research First time Home Buyer Programs - Many states and some cities offer first time home buyer programs and incentives. You definitely want to find out about programs that are available in your area. You're only a first time home buyer once.
- The Federal Housing Administration (FHA) has first time home buyer loan programs that are issued through qualified lenders. In plain English, that means if you want the benefits of an FHA loan you need to find a lender who is qualified to do an FHA loan. An FHA loan is a mortgage that is insured by the Federal Housing Administration. Some of the advantages of an FHA loan over a conventional loan are as follows:
- The down payment on a conventional loan is typically 20%. The down payment on an FHA loan can be as little as 3%.
- FHA loans have lower interest rates which means you pay significantly less interest over the life of your loan.
- Competitive rates translates into lower monthly payments.
- FHA loans also allow a high debt to income ratio, sometimes as high as 50%.
These benefits allow you as a first time home buyer to qualify for a loan that is within your financial means.
- Get Pre-Approved not just Pre-qualified-What's the difference you ask? That's a great question. Sometimes all these financial terms can be confusing for the first time home buyer. I'll be happy to clear up the confusion.
Pre-qualifying is the first step in the loan process.It's simple and doesn't require too much time. You give the bank or lender some information about your financial status; how much debt you have, what your income is and if you have any assets. The bank or lender will asses this information and give you an idea an of how much you might qualify for. Basically it's an idea of the amount the lender might agree to lend you. Might being the key word here. This amount is not a sure thing. It's just a starting point so you can discuss with your lender mortgage options and your lender can recommend which loan would fit your particular financial situation.
Pre-Approval is the next step in the loan process. It's much more involved and can feel a little invasive (did I just say a little? What I really meant was, it's very invasive.) You'll fill out an official loan application (which usually requires a fee) and submit documentation that will allow the lender to perform an extensive financial background check. Yep, you give them permission to search everything related to your finances, including your current credit score. That's why check your credit score is item #1 on this post, it's very important. The lender can then tell you a specific loan amount you qualify for. This gives you buying power and the ability to move quickly when you find a home you love.
Completing both these steps before you begin the house hunt will give you a clear picture of what you can afford. It also allows you to omit the financing contingency from your offer. The sellers will know you're serious about the house and it could give your offer more weight. As a first time home buyer its a good idea to be prepared.
- Let the House Hunt begin Finally, you made it to the fun part.