FIRST TIME HOME BUYERS 101 | THE PATH TO HOMEOWNERSHIP
Are you committed to achieving the American dream of homeownership, but don’t know where to start? Or maybe you think it’s too difficult to buy a house? Well, this article is for you!
MORE SIMPLE THAN YOU THINK
Some people believe buying a house is more difficult than it actually is. They think they need a ton of money to make it happen. In reality, this couldn’t be further from the truth. You don’t have to be rich or wealthy to own a home. You just need to be committed to the process.
If you can save up just the minimum down payment required, we can get you into a home you will love. The requirements all depend on the loan type, but for the sake of keeping this article simple, let’s review a quick example:
You want to purchase a $250,000 house in the Houston region.
The type of loan you are going with is a conventional loan.
You are a first time homebuyer, so with this loan type, the minimum down payment is 3% of the purchase price.
$250,000 X .03 = $7,500
$7,500 is your minimum down payment required to purchase a new home.
Not bad huh?
Now, there are other costs associated with buying a house called closing costs. However, we can write up an offer to where the seller will help out with those costs so that you are not paying for them out of your pocket. But we are going to keep it simple for now. Let’s keep moving!
The first and most important thing you need to do before you start searching for a home is talk with a local mortgage lender to get your pre-approval. There are a ton to choose from, so if you need any recommendations, go to our homepage and click on get pre-approved. From there, it will take you about 5 minutes to fill out an application and my lender will reach out to you. Once you get a pre-approval letter, it will state what price range of houses we can shop for.
I do want to reiterate how important this step actually is. You NEED to get this done before you shop around for a house. How would you feel if you fell in love with a house only to find out that you can’t qualify for it? It’s not a good feeling, I promise. You’re going to need it to make an offer anyways, so go ahead and get that out of the way now.
One thing to know when you buy a house is that it takes time. It’s not something that happens right away. There are too many moving pieces like inspections, negotiations, appraisals, etc..
The average time it takes to close on a house is usually 30-45 days once you have a signed contract with a seller.
Different loan types each have their own requirements when it comes to minimum credit scores to qualify. But I will list out the requirements for the 3 most common loan types below.
- FHA – minimum credit score of 580 or better
- Conventional – minimum credit score of 620 or better
- VA – no set standard by the VA, but most lenders want to see a minimum credit score of 580 or better
Another thing that lenders take into account is your debt-to-income ratio or DTI. Just like credit scores, each loan has their maximum DTI standard and hopefully you are within the range to qualify.
Things do change however, so it’s best to speak with a lender on what the current requirements are.
Most lenders want to see that you have been employed for the last 2 years with your current employer (or an employer in the same industry) and will need copies of your tax returns.
Don’t take offense to this though. Put yourself in a lenders shoes for a moment, they are about to take on risk and pay for your house – someone they don’t even know. They just want to do what they can to minimize any risks associated with lending money.
There may be some exception to the 2 years and some lenders operate differently. So whoever you decide to go with, make sure you ask them any questions you have.
INTEREST RATES – WHAT’S YOURS?
There are too many variables for any lender to just start spouting off interest rates to consumers without having any solid information on them. They may be able to give you best case/worst case scenarios, but having something concrete to give you will depend on your credit score, DTI, down payment, and length of the loan. See how it could be difficult to provide you with an exact interest rate without knowing all of those things?
Historically speaking though, interest rates are still at an all-time low, which increases affordability for buyers. So, if buying a house is even a thought in your mind, go ahead and apply now and see what your interest rate is. It’s basically free money right now before rates rise again, so don’t wait too long.
Yes, you read that right. A down payment can be gifted to you from anyone. All you will need is a gift letter from them saying that the amount they gave you does not need to be returned and it will need to be traceable from their account to yours. This can be done by a wire, personal check or cashiers check from their account deposited into yours.
This is especially helpful for first time home buyers who don’t already have a house to sell and use the equity for a down payment. A good example of a gifted down payment is mom or dad helping out their son or daughter with the down payment. That’s amazing!
When you buy a house, there are other costs involved like I mentioned earlier. This can add up to quite a bit. Sometimes $5,000-$6,000. But don’t panic, we can help. We can write the contract a certain way where the seller will contribute to your closing costs. For example:
Asking Price: $250,000
Your Offer Price: $250,000
Sellers Contributions Towards Buyers Closing Costs: $5,000
The sellers net is exactly the same as if we wrote up the offer at $245,000 and no contributions towards your closing costs. Of course this is just an example and all depends on circumstances like competition, multiple offers, etc… Confused? Don’t worry, we will explain this again when we find a house you want to make an offer on!
Also, you can check out the video we made about closing costs for more information on this topic.
YOU HAVE A SLIGHT ADVANTAGE
As a first time home buyer, you do have a slight advantage over other buyers. You don’t have a house to sell first! Most seasoned home buyers need to sell their current house first in order to qualify for another mortgage. Meaning they will have a contingency in place within their offer that says the offer is terminated if they can’t sell their house first.
Because real estate has so many moving parts and there are too many variables at play, you can see why a seller would be hesitant to accept an offer with that type of contingency versus your offer that is very straight forward and less of a risk.
Buying a home for the first time can seem like a daunting task, but it doesn’t have to be. My advice? Save for a down payment and let us worry about the rest.
I know the world of real estate can seem confusing which is why we love to meet potential home buyers and new clients at our Home Buyers Consultation. This is done either via zoom or in person. Click here to see what our Home Buyers Consultation looks like or click here to get one scheduled!