5 Tips for First-Time Homebuyers
Buying your first house is an exciting milestone, but it can also be overwhelming and complicated. With so many moving pieces, it’s a challenge to keep track of what you need, what you don’t, and what to look out for. The following tips will help first-time buyers navigate the process, save money and close the deal.
Tip #1: Gather your finances
Before sitting down with a mortgage lender, you should first take stock of your financial situation, such as debts owed, credit score and history, savings, and taxes. Your credit score and credit history affect your mortgage interest rate in a big way. For example, the lower your credit score, the greater the chance of higher monthly payments, fees, the requirement of private mortgage insurance (PMI) and potential rejections. Also, it’s important that you pay attention to your debt-to-income ratio. Even if you’re comfortably making payments, a high amount of debt can be a red flag to mortgage lenders. Finally, go through your bank statements, tax returns and all other financial accounts to get a crystal-clear understanding of where your money goes.
Tip #2: Shop around for your mortgage loan
First-time homebuyers are usually surprised by the amount of options available to them, so it’s important to shop around to ensure you’re getting the best deal. The best programs really depend on an individual’s situation and there’s “no one-size-fits-all” solution for first-time buyers. Below are some of the loan options to consider:
- First-time home buyer programs: These programs can assist potential homebuyers through grants, discounts, special interest rates, or even cover closing costs. First-time home buyer programs can also help narrow down mortgage lenders, as they usually have a short list of approved lenders that work directly with agencies administering benefits.
- Government loans: You should also check to see if you qualify for government-backed loans, such as Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), or Department of Veterans Affairs (VA).
- Conventional loans: If you don’t qualify for first-time home buyer programs or government-backed loans, your research still hasn’t gone to waste. You’ve already found a few potential mortgage lenders just by seeing who works with first-time homebuyers through those aforementioned programs and products. Another option is a conventional loan, which typically involves a 20% down payment (though this can vary based on the lender and your overall financial health).
Choosing a mortgage lender from your short list is a matter of comparison. Look at the APRs offered, but also add up the fees, from the application fee to the loan appraisal fee. These all will affect the closing costs you’ll pay, so less is definitely more.
And although there’s no rule that says you have to get pre-approved, a pre-approval letter has its benefits. Namely, it will tell you the maximum loan amount you qualify for, so you won’t get your heart set on a house only to find out you can’t afford it.
Tip #3: Know what to expect at closing
Buying a house isn’t just a transaction between the buyer and seller, it’s also a relatively complex legal process. To help you navigate the process, hiring a real estate attorney can ensure the closing goes smoothly. For Massachusetts specifically, this is required by all banks providing a mortgage, but even for cash transactions, having a lawyer on your side can help you avoid unexpected issues down the line.
All bank documents signed at closing are non-negotiable, so it’s crucial that your attorney explains all of them to you. Here are some of the documents you can expect to receive during the process:
- Final Closing Disclosure (CD): Like a loan estimate, the final closing disclosure outlines details of your mortgage including terms, interest rate and final closing costs. You should receive this form at least three days before closing. This window of time gives you a chance to compare what’s on your initial loan estimate to the final closing disclosure. Make sure all the information is correct, including the spelling of your name.
- Mortgage Note: This is the most important document of the whole package, as it states your promise to repay the mortgage. It indicates the amount and terms of the loan and what the lender can do if you fail to make payments.
- Mortgage: This document secures the note and gives your lender a claim against the home if you fail to live up to the terms of the mortgage note.
- First Payment Letter: This letter has all the information you need to make your first payment, including: due date, amount, address of the bank and the loan number.
- Initial escrow statement: This form contains any payments the lender will pay on your behalf from your escrow account during the first year of your mortgage. These charges can include taxes, private mortgage insurance and homeowners insurance.
- Plot plan: This is a general overview of your new property (only provided for single family homes). If you need to know the exact boundaries of your property, you will need to hire an engineer to conduct a survey.
Tip #4: Include all terms, contingencies and personal property you desire into your Offer to Purchase
An offer with no contingencies is more likely to be accepted, however contingencies are important as they allow you to terminate the agreement if certain terms aren’t met. That being said, all specific terms, contingencies and any personal property you want included in the purchase must be included in your Offer to Purchase. If you have a deal breaker, list it in the offer, because once the offer is accepted your broker or attorney will have less leverage to negotiate it.
Some examples of contingencies include:
- Moving into the property before closing or moving personal property into the property before closing
- Mortgage contingency: if you’re unsure you’ll get financing
- Home inspection contingency: if you want to know what to expect for home maintenance and any unexpected costs that might pop up
Don’t assume things are included such as refrigerators, microwaves, washer/dryer, a chandelier, window treatments, etc. Even if you think something is a “fixture” and included in the sale, it might not actually be attached to the home and the seller may not intend to leave it. Some sellers will consider including personal property in a purchase such as a swing set, BBQ grill, workout equipment, etc., so if you want it to stay, be sure to list it in the offer. For condos, this also includes parking and storage, don’t assume it comes with the unit.
Tip #5: Don’t cheap out on expertise
The real estate agent, attorney, and loan officer you choose to work with will be there every step of the way – from setting your budget and choosing a loan program, to finding your dream house and closing on it. So, take some time putting together an ace team before you set out to buy a house.
Legal work is similar to medical work, as you don’t necessarily want the lowest price for something with serious ramifications/consequences. You want a team who will protect you, is easy to reach and you feel comfortable with. If you cheap out, you risk the process taking longer, altogether halting, or having increased costs due to mistakes.
Ultimately, the most important thing to do when beginning your first home purchase process is research. Without proper research, you can end up with inexperienced realtors, loan officers, and attorneys. You also risk the chance of sky-high interest rates and paying more for a house with problems. The goal is to cover all your bases legally and financially so the process runs as smoothly and quickly as possible. If you have any questions, please contact Danielle Dallin to learn how Ligris + Associates can help.