5 tips for first-time home buyers
5 tips for First-Time Homebuyers
Introduction
First-time homebuyers can be overwhelmed by the process of buying a new home. Educating yourself is the best way on the steps involved in buying a home, then start saving money and planning ahead of time. Look for tips that will help you get started!
Before you start the home-buying process, you need to determine how much you can afford.
Before you get into the home-buying process, finding out how much you can afford is crucial. The following questions will help you identify how much money you need to make a monthly mortgage payment:
- What is your current monthly rental payment? If it’s more than $2,000 per month, that’s probably too much for a first-time buyer who wants to buy—especially if they plan on saving up for a down payment.
- How much do you want to pay in monthly mortgage payments? Experts recommend limiting this number to no more than 25% of your gross monthly income. However, I think this recommendation is not valid in this crazy house market.
Lenders evaluate you based on your debt-to-income ratio, or DTI.
- The lender evaluates you based on your debt-to-income ratio, or DTI. This is the total monthly debt payments ratio to your gross monthly income.
- The higher your DTI, the more difficult it will be to qualify for a mortgage. Your lender will look at several factors when determining whether or not they think you can afford a home payment and all other expenses:
- How many years of employment history do you have? (If this is very low, lenders will likely ask that you put down 20% initially.)
- What is the maximum housing expense percentage that they’re comfortable with? (For example: If they require 12%, only 12% goes toward housing each month.)
- What are all of these other expenses? Do they seem reasonable and realistic (i.e., do they include things like food)?
Shop around for mortgages.
You need to shop around for a better mortgage deal. While shopping around for mortgages is essential, feel free to share the best deal you have so far(be truthful). It’s common practice for lenders and brokers to offer different rates and fees depending on the borrower’s circumstances (i.e., their credit score, employment history, and debt-to-income ratio). So if you’re offered a 6% interest rate but know someone else who got an even lower rate with similar financial information, ask why they offered such a better deal. If you’re not satisfied with the response—or if there isn’t a reason given—ask if there is any way they could do better by offering lower closing costs or other incentives within their control.
Don’t be afraid of shopping around either: The more open you are about knowing what interest rates are out there today will give your broker enough confidence in working with you that they may feel comfortable giving away some discounts without compromising his bottom line.
Research and compare government-sponsored first-time home buyer programs.
- Research and compare government-sponsored first-time home buyer programs.
- Check with your local government, real estate agent, bank or mortgage broker, employer, credit union, and financial institution for any available resources.
- Find out what “closing costs” are before you start looking at homes. Closing costs include such items as taxes, title insurance, and legal fees that are required when purchasing a home.
- Get a rate lock in writing from the bank or lender before making an offer on the house. If rates go up after you’ve found the perfect home but have yet to lock in your interest rate, you could lose thousands of dollars when buying your home!
Prepare for the typical home buying costs: Down payment, inspection fees, closing costs, home insurance cost, private mortgage insurance, etc.
These fees can add up quickly. Make sure you know what you’re getting into and have extra money saved to cover them before you start looking for a home.
Here’s a rough estimate of what your closing costs could be:
- Down payment: 5% of the purchase price (if you’re buying a $500,000 house, that would be $25,000)
- Closing costs: 2% to 3% of the total amount of your loan
- Points: 1 point = 1% interest rate reduction on your mortgage (so if you were paying 3.5%, this would reduce it by 0.5%)
Buying your first home can be a smooth and rewarding experience if you prepare yourself.
Buying your first home can be less stressful if you prepare yourself ahead of time. Your lender will want to make sure that you’re financially stable before they approve a mortgage for you, so here are some tips on what they’ll be looking at:
- Credit score: Good credit before applying for a mortgage loan is crucial. A higher credit score will help you to get approved for a home loan with a favorable interest rate. Most lenders use the FICO® Score from one of two companies: Equifax® or TransUnion® (each company has its unique scoring formula). If your credit report shows late payments, low limits on credit cards, and high balances on other accounts—or if any collections are reported against your name—it could negatively affect whether or not the lender approves your application.
- Employment/income verification: Your lender wants proof that you can afford the home-buying process by verifying how much money comes into and goes out of your account each month through paycheck stubs, tax returns, T2 Summary, and Notice of Assessments (if applicable). Bank statements are also accepted as proof of income if they show consistent monthly deposits and regular withdrawals like rent checks going out each month.
- Loan application process timeline: The average closing time frame depends on which financial institution you deal with. However, most financial institutions require between 30 and 45 days from starting until closing.
- CMHC FEE: If you pay less than 20% downpayment, you need to pay the CMHC fee. This fee covers part of losses incurred when borrowers default on their payments until their loans have paid off in full—but only after reaching the 80 percent loan-to-value ratio limit set forth by federal law.
Conclusion
The main takeaway is that preparing and educating yourself on home-buying is a smooth and rewarding experience. Many resources are available online to help you with your search, so don’t be afraid to use them! If you’re committed to buying your first home but need help figuring out to start, consult an agent who can guide you through each process step.
Recent Comments