A First-Time Home Buyer’s Guide: What You Need to Know

Anyone can buy a house, but finding a home is a little more involved. Check out our guide and find a home you can truly call your own.

Buying a house is a pivotal and often life-changing moment in anyone’s life. There’s a lot that goes into it, and if you’re a first-time home buyer, it can all seem a little overwhelming.

That’s why we put together this comprehensive guide full of information you need to find the house of your dreams. We break down everything from defining what a mortgage is to looking into homeowners insurance all the way up to the day you finally sign.

So, if you’re unsure just where to begin on this new and exciting chapter in your life, don’t worry! Let us help you find a home you can call your own by providing you with all the information you need to make an informed decision.

Step 1: Understanding what a mortgage entails

If you’re like most home buyers, you aren’t walking around with a couple hundred-thousand dollars to purchase a house outright. Rather, a mortgage covers the cost of your home, and you pay it back over the course of several years.

When you take out a mortgage on a house, you’re essentially telling the bank to cover 100% of the house’s cost. The understanding between you and the bank is that, over time and on an agreed upon rate, you will pay the bank back.

Similar to leasing or purchasing a car, you also have the option to put a down payment on your home to help reduce the amount you’ll owe back over time. That’s when you put some of your own money forward.

Step 2: Talking to mortgage lenders

It’s usually prudent to consider your mortgage options before you even think about looking at houses.

For starters, there are quite a few places where you can get a mortgage. The most common place is, as we’ve mentioned, banks. There are, however, other options like non-bank lenders, credit unions, and mortgage brokers.

Mortgage brokers are like your personal guides into the complex world of loans. They can often show you a variety of loan opportunities and work to help you find rates and programs that fit your specific financial situation.

If you don’t have the greatest credit history, then non-bank lenders might be a better alternative. They are often more willing to work with you even if the banks won’t.

Another great option for potential borrowers with not-so-great credit is a credit union. Not only are these organizations willing to work with you, but you could also save money as they are known to offer lower fees. One caveat: Credit unions typically have membership restrictions, so inquire about becoming a member first.

Now that we know all the different places you can find a mortgage, let’s talk about some crucial questions you should come prepared to ask any lender.

What will the interest rate look like?

A lower interest rate on your mortgage often means you’ll have a smaller monthly payment. This, however, is determined by your loan and your credit. If you don’t have the best credit history, you might need to work on that before you’ll qualify for lower interest.

What will the monthly payment be?

Getting a clear answer on this will help you determine if you can afford the monthly mortgage payments in addition to your everyday budgeting needs. This will also factor into your financial goals.

Will this be a fixed rate mortgage or an adjustable-rate mortgage (ARM)?

If you opt for a fixed rate mortgage, then you will keep the same rate for the duration of the loan. The opposite would be an adjustable-rate mortgage, or an ARM, in which the interest rate will adjust after the intro period, usually at regular intervals.

What are points?

‘Points’ are another name for closing fees. They are one-time and can decrease your interest rate depending on how many of these points you pay.

Are there any qualifying guidelines for this loan and, if so, what are they?

These can vary amongst the loans available to you on the market. Generally, they can require proof that you have sufficient funds to make the down payment. Others might delve deeper and seek proof that your income can handle up to half a year of mortgage payments.

What should I budget for?

There are a plethora of things you’ll need to take into account early on. Here are a few of the items you’ll need to consider:

  • Your gross annual income
  • Outstanding debt (credit cards, car payments, student loans, etc.)
  • Monthly bills (utilities, food, etc.)
  • Market value of home you want to purchase
  • Mortgage payments
  • Home insurance payments
  • Real estate agent fees
  • Cost of a home inspector
  • Closing costs (attorney fees, title insurance, etc.)

Some of these items, you’re not going to know the value of until you get further into the process. However, formulating a budget sooner than later can help take some of the stress out of hunting for a home.

Step 3: Shopping for a mortgage

Now that you have a better understanding of mortgages and loans, it’s time to discuss the different options on the market. Here are just a few examples of loans available to first-time home buyers:

FHA Loans

Despite being called an FHA loan (named for the Federal Housing Administration), it is not the FHA that lends the money to any would-be homeowners. Instead, the FHA insures the loans made by private lenders.

That being said, an FHA-backed loan is the most traditional type of loan program for first-time home buyers. They generally feature low closing costs and down payments.

VA Loans

Made possible by the U.S. Department of Veterans Affairs, VA loans are primarily geared toward veterans and active service members. With their ease of qualifications, including flexible credit score requirements and little to no down payments, they are intended to make it easier for service members and their families to find a decent home.

Fannie Mae’s 97% LTV Loan

While most conventional mortgages can require up to 20% down payment of a mortgage, this program gives first-time home buyers the option of paying as little as 3% down. The caveat, however, is that such a low down payment will require private mortgage insurance (PMI). PMI is meant to protect the lender in the event you are unable to continue making payments.

Freddie Mac First-Time Home Buyer Loans

A variety of mortgage programs make up the Freddie Mac selection, including the Home Possible Mortgage and the Affordable Merit Rate Mortgage. These programs, in particular, feature flexible credit terms and are just a small sample of the programs offered by Freddie Mac.

USDA Loans

If you’re not particular about finding a home in a major metropolitan area, you might consider the loan options provided by the United States Department of Agriculture. While property and income eligibility requirements will vary by state, it is possible to qualify for a 100% no-money-down loan.

Interest rates with USDA loans are often lower than those found in conventional loans, as well. Just be aware that these loans are typically geared toward rural housing.

Budgeting and understanding PITI

PITI is broken down into Principal + Interest, Taxes, and Insurance. These are the four parts of a mortgage payment and are crucial to understanding and building your budget.

  • Principal + Interest is your monthly mortgage payment. This takes into account the agreed upon monthly rate combined with the fluctuating interest rates.
  • Taxes refers to the annual real estate tax you are responsible for which can sometimes be 1-2% of your home’s value.
  • Insurance is something we’ll touch upon in the next step, but this refers to your home insurance.

Having an idea of what these amount to in overall cost is invaluable for maintaining your budget.

Step 4: Researching homeowner’s insurance

Before you start hunting for a house, you’ll want to do your homework when it comes to home insurance. This is a crucial step in the process since, in most cases, mortgage lenders will require some proof that you’re signed on with a home insurance agency. And you need a mortgage in order to find the perfect home.

As we’ve covered in previous pieces, there are a variety of home insurance coverage options including:

  • Dwelling Coverage: Helps pay to repair or rebuild plumbing, electrical wiring, or HVAC system.
  • Liability Insurance: Covers costs associated with a lawsuit when you or a family member is responsible for another person’s injury (or if they are injured on your property).
  • Other Structures: Any repair costs to a detached garage, shed, or other similar structures are covered by this.
  • Personal Property Coverage: Covers the cost of your clothing, electronics, furniture, or other such personal property that has been damaged or destroyed by a cause outlined in your policy.
  • Loss of use: In the event your home is so damaged you can no longer live in it, this covers the costs of living expenses.
  • Guest Medical Coverage: If someone is injured on your property but they are not pressing charges, then this can cover their medical bills.

For the most part, it’s easy to shop around for homeowner’s insurance. You can look online, or you can use our search tool to find rates in your area.

Step 5: Shopping for a home and making an offer

So, what kind of house are you looking to call home? Do you need a lot of space for the family? How about a nice, big yard for the dog? Or maybe you’d like to have a cook-out and a deck is in order.

This is the fun part because you get to see what’s out there on the housing market. There are lots of tools online that can help you find available housing options in your area as well as anywhere you might be looking to move. It might also be prudent to consider a real estate agent.

A real estate agent might be able to open up even more housing opportunities than what you can find online. The cost, however, can vary so be sure to consider all your options if you decide to go with an agent.

When shopping for an agent, you’ll want to look for a few things including the cost. Different agents charge different fees for the responsibilities they take on. It might also be wise to go with an agent that can serve as a valuable mediator so you don’t make any emotional or impulse purchases.

When you do find the perfect home and you’re ready to make an offer, remember to take the homeowner into consideration. For example, is the homeowner living in a situation where they would benefit from selling the home sooner than later? In that case, you might be able to put up an offer that, while comparable to other homes in the area, can afford to be discounted just a little.

A lot of first-timers stress about putting up an offer. Do you go high? Do you go low? As long as you take the time to see what other homes in the area are going for and base that against the homeowner’s needs, you should be able to come up with a reasonable offer.

Step 6: Reviewing the contract, submitting the mortgage application, and closing

At this point, the home insurance policy should have come through, and you’ve just received word that your offer on the home has been accepted. Before you sign the contract, you’re going to want to get a home inspector.

An inspector will charge a couple of hundred dollars, but it’s well worth it to spot any defects in the home. Once the house gets the stamp of approval and you’ve reviewed the contract for any restricting stipulations, it’s time to submit your mortgage application.

Now that you’ve squared all this away, review your closing costs we covered in Step 2. If you’re satisfied, then it’s time to sign on the dotted line.

You’ll need a plethora of documentation including a photo ID as well as proof of insurance and the home inspection certificate. Be sure to get copies of every document you sign so you can review these later. Once you’ve settled up with those closing costs and signed, you’ll get your keys and can start living your new life in the home of your dreams.

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