How to Buy a Home, First Time Buyer
Being a first time home buyer is an exciting but also overwhelming time. The tips below will help you get to know the process of purchasing your first home and help you avoid some of the common first time buyer mistakes. The steps to move into your first home! 1. Start Saving for a Down Payment 2. Start Working on your Credit Score 3. Explore Home Loan Options and Mortgage Lenders 4. Get Preapproved! 5. Find the Best Real Estate Agent 6. Find What you are Looking For 7. Make an Offer! 8. Inspection 9. House Closing! 1. Start Saving for a Down Payment It is important to have some money upfront to use as a down payment, but a little extra helps with closing costs, furnishing the home, and an emergency fund. An FHA loan can get you into a house for only 3.5% down, however the average purchase price in Denver is $460,000. That means with 3.5% down, that is still $16,100. Many conventional loans require 3% or more down. There is also something called PMI (Private Mortgage Insurance) that you will need to pay additionally each month until you get to a 20% debt to equity. The higher the down payment you can provide the lower interest rate you can receive from a lender. The IRS allows you to withdraw up to $10,000 from your IRA without paying a 10% penalty. If you are a married couple and both of you are first time home buyers than you can withdraw $10,000 each so $20,000 total! It is important to remember that you must enter a contract with 120 days of withdrawing the money or else the IRS will want their penalty money. This will also lower your retirement savings so it might be worth talking with a financial planner before making this decision. 2. Start Working on your Credit Score Having a good credit score 740+ is ideal to get the best interest rate terms however don't be too afraid if your credit score is below that. As you are saving up for a down payment you can help work on your credit score. First, check what your score is, most credit cards offer this service for free. If you don't have any credit at all, opening a no annual fee credit card is an option to start building credit and establishing a payment history. Make sure that you don't miss any payments, this is a large factor in calculating credit score. Third, if your budget allows, try to pay off some of your current debt. Credit utilization makes up 30% of your credit score. You can also pull your full credit report once per year from one of the three credit bureaus to ensure that it is accurate and dispute anything that is incorrect. 3. Explore Home Loan Options and Mortgage Lenders The first step is to identify what type of loan program you want. If you have a military background, a VA loan (Veterans Affairs) can let you purchase a home with 0% down payment. a FHA loan through the federal housing administration can provide individuals with only 3% down. Conventional loans can also typically start with only 3% down. It is also important to search for closing cost assistance programs or other similar things provided by HUD (Department of housing and urban development). Good Neighbor Next Door Program (GNND). This provides housing for federal/state employed teachers, police, firefighters, EMT's and more. There are also a variety of state specific closing cost assistance programs and down payment assistance programs out there. There are also fixed rate mortgages vs adjustable rate mortgages. The difference between these are that with a fixed rate you will know exactly how much you owe for up to 30 years. An adjustable rate mortgage will change the interest rate after a set period of time. These could be ideal for those who don't plan on staying in their home for a long period of time and know that they will either sell or refinance in the future. It is very important to shop around for a mortgage as interest rates, origination fee's and more vary lender to lender. I always recommend that people start with their current bank as they can help walk you through the process since you already have a relationship with them. However, don't forget to check that same rate with online options and other local lenders. 4. Get Preapproved! Preapproval allows you to go out and shop knowing that a lender will back you. It allows your offer to stand out and ensures that you are aware and comfortable with the monthly mortgage payment. This means that your lender has already verified your debt to income ratio and credit score. It is also important that your lender includes the approximate property taxes and homeowners insurance. 5. Find the Best Real Estate Agent Finding a real estate agent to help you with your home purchase is very important and there are several factors to consider. Make sure that your agent is aware of the first time home buyer programs as helping you guide through the process is vital. Secondly make sure that they know the area, when it comes to real estate just a neighborhood away can make a large difference. Third, make sure that you have an agent who really cares about you and won't push you into the wrong house. Luckily you can find a great Denver Realtor® right here! 6. Find What you are Looking For Finding your dream home is something that might not be readily apparent. It is important to think of current and future needs in a house and write down the must have's vs the wants. There might be certain neighborhoods that are more desirable because they offer an easier commute or better schools for children. Neighborhoods can also have a large influence on the price range. 7. Make an Offer! Working with your real estate agent, it is time to make an offer. It is important to remember that the highest bid doesn't always win and allowing for some leeway on things like move in dates can be a great help. It is important to know what is usually left behind when buying a house and what you may want to negotiate. 8. Inspection Having a home inspection is very important to ensure that you won't have any surprise issues when you move in and anything found can be negotiated on in the final price. Make sure that you are aware of what the inspection includes as there are often add on items such as radon, sewer line inspection or mold testing. A proper realtor can help you identify important tests in your local area. 9. House Closing! Finally the time has arrived to truly appreciate your new home. The hard work has now paid off and time to sign the papers. You have now saved up for a down payment, secured the best interest rate on your mortgage loan, and found the best home on the open market. What should you not do before buying a house? Part of a home closing for many people includes the approval for a mortgage. The lender will verify all paperwork, credit and employment sometimes up until the day of closing. With a large purchase ahead of you it is important to know what you should and should not do before buying your new home! Credit for purchasing a home is very important and the lender will verify everything up until the day of closing. Some of the important things are: Keep up to date on all payments Do not take out any new loans, especially something large like a car Avoid changing jobs Don't change your bank Avoid any large deposits or withdrawals In short don't do anything different from your current lifestyle and if you do have an urge review it with your lender first! What should you do before buying a house Improve your credit score Shop lenders Know every expense Know what you want out of a house Set a comfortable budget How many houses do you see before buying? Many home buyers see between five to ten houses before finding a house they love. It can change dramatically depending on how well the buyer knows what they want and how well the real estate agent can properly select a home that delivers value to the client. It is important to establish a clear list of must haves to help narrow down your home search. How many houses can you view in a day? We can view as many homes as you would like in a day with the average home tour taking an approximate 30 minutes depending upon the size of the home, distance between each location, and how interested the buyer is. It is however recommended that there are no more than five tours in a single day however to keep the home buyers head clear and avoid scrambling the properties they enjoy together. To help with this, it is recommended to take photos and notes of each property. You and your real estate agent can always make a second visit to your favorite properties! At what age should I buy a house? There is no specific age to start buying a home however most first time home buyers are between 25-34. This can be tougher in high cost areas such as Denver where it can take longer to save up for a proper down payment. This has been heightened in recent years by increasing student loan debt. The quicker you are able to move into your first home comfortably, the more that your equity can grow over time. What price house can I afford on 40k? When looking to see what you can afford in a home it is important to reference the 28% rule. Using this rule you can afford a monthly payment that is worth 28% or less than your monthly income. Making 40k a year this would equate to approximately $933 monthly payment. The monthly loan amount can vary depending on your down payment, credit score and what the current rates are going for. At this time, with 20% down and a 740+ credit score you can comfortably get a 3.25% loan on a 30 year fixed mortgage. Using this rate, you can afford a home worth $185,000 with a $37,000 down payment. Since there are so many factors, it is recommended to use a mortgage calculator on your personal situation! If you are in the area and want to pursue home ownership, I'd be glad to be your Denver Realtor®!