First Time Home Buyer Guide

Buying a home for the first time? There are lots of things to be in the know about before you close the deal.

Credit

As a first time home buyer, having good credit and responsibly-managed finances are key to getting approved for the best mortgage possible. If you do not have good credit, you must start repairing it before you begin looking for a home. The LRRC offers these important pointers about improving your credit:

  • Establish lines of credit with at least two of the major credit card companies.
  • New credit usually takes about 6 months to register as credit history.
  • Keep the balance of each credit card at no more than 25% of the credit limit.
  • Even small purchases help you build a credit profile.
  • Pay at least the minimum balance each billing cycle.

Budgeting

Another important step to take before buying your first home is to set a household budget. A budget is a pledge you make to yourself to balance and take control of your finances. Your budget should be based on what your income, expenses and savings will be as a homeowner. The 4 basic steps of budgeting are:

  1. Calculate your monthly income.
  2. Determine how much money you want to put into savings every month and subtract it from your income.
  3. Calculate all your expenses and subtract the total from your income.
  4. Make sure that your expenses and savings don’t exceed your income.If they do, figure out how you can close that gap and adjust your budget accordingly.

There are various types of expenses, and all of them must be accounted for in your budget. There are fixed expenses, such as your monthly mortgage payment. There are variable expenses, like utility costs, which fluctuate by the month. Other standard homeowner expenses might include landscaping, snow removal, and minor home repairs. You also need to budget for the occasional unexpected major expense, such as replacing an appliance, repairing the roof, or fixing the heating/air conditioning.

How do you close a gap between your income and expenses? The best method is to find ways to cut costs. Tips for reducing your expenses include avoiding impulse shopping, maintaining home appliances and systems, and comparison shopping.

Where Do I Want To Live?

Finally, you are ready to start thinking about buying a home. If you have not
yet done so, you should obtain preliminary pre-qualification before you start
shopping for a new home. The pre-qualification is not a loan guarantee; it is
an initial estimate from the bank as to how much a first time home buyer can afford to borrow.
This information will help you to understand your limits and set realistic
goals in your home search.

Armed with the results of your pre-qualification evaluation, you can begin
hunting for your new home. The first decision that you must make is where
you are going to live. A variety of factors should go into this decision. You
should choose a town and neighborhood based on your family’s needs, so a
lot of research is necessary before you settle on a location of your new home. You will want to
ensure that the neighborhood is safe and sanitary. If you have or will have
school-aged children, make sure that the local schools are in line with your
needs. Public transportation and job opportunities are examples of other
issues to think about when considering where to move.

It is also important to buy a house in an area where home values are rising.
Buying a house with a strengthening market value will increase your equity,
which is the value of your home minus however much you owe the bank. A
home located in an area with rising property values is also less likely to see
its worth drop after you move in.
Once you settle on a location, you must decide what type of house you need.

This decision may involve any number of factors, from the style/layout of the
house to the number of bedrooms and bathrooms. This step requires you to
consider your budget and what you can realistically afford. Depending on
your financial situation, it is likely that you will have to settle for something
other than your dream home. Keep an open mind throughout the process of buying a first home
and make sure to distinguish between your family’s needs and wants.

Shopping for a Home

You are now ready to begin house-shopping. As a first time home buyer, you need to look at homes in your desired
area that are within your budget. There are many house features that you may
want, but you probably will not find an affordable home with all of them.
You need to decide which aspects of your dream home are most important
to you and prioritize accordingly.

Once you decide which house to buy, it’s time to make an offer and reach
an agreement with the seller. After you settle on a price, the first order of
business is to have a home inspection conducted by a licensed inspector. If
the house is deemed to be in good condition, you are ready to move forward.
You need to hire an attorney to help draft the contract of sale.
Many people only hire a home inspector after signing the contract of sale,
but housing counselors recommend having the home inspected beforehand.
If you choose to sign on the house prior to inspection, you should make sure
that the contract has the proper contingencies built in.

Choosing a Mortgage

Congratulations! You have found your new home. However, the work is far
from done. You still need to shop for the right mortgage. As we mentioned
earlier, you may qualify for a First-Time Home Buyer loan. These special
mortgages can provide several benefits, including reduced interest rates and
down payments. Another advantage of getting an FTHB mortgage is that
lenders will not expect you to have a stellar credit rating to qualify. They
assume that as a first time home buyer, you likely do not have a very high
credit score.

You (and your co-borrower, if you have one) will meet with the bank’s Loan
Officer to discuss your situation. You will be required to bring along documents
that prove your income. You will also have to authorize the bank to
verify your finances through a third party. The bank will pull your credit
history and review all your income and debts. If the bank is satisfied with
this information, you will be pre-approved for a loan. The bank will then
have an appraisal done on the home to determine whether the purchase
price is consistent with the home’s value. Before you close, you will receive a
commitment letter from the bank as well as approval to close on the home.

Closing Costs

You will need money for closing costs and the down payment. With an
FTHB mortgage, your down payment could potentially be as low as 3-5% of
the purchase price. It is important to note that the down payment cannot be
cash; it must be paid with traceable funds. Some lenders will require part of
the down payment to be from your own money, while others allow all of it
to be a gift from a relative. Some banks require the relative to be an immediate
family member. Your down payment does not disappear when you pay
it – it is a payment towards your house and gives you immediate equity in
the home.

As a first time home buyer, it is important to make sure that in addition to your down payment, you also
have money for closing costs. Closing costs typically range between 2-7% of
the home purchase price. They include title charges, payments associated
with the loan, and various other costs.

If you are rejected, the bank has a legal obligation to tell you why. Common
reasons for rejection include high debt, low income, poor credit, or a low
appraised value of the home. To avoid being rejected for a mortgage, plan
ahead to ensure that you won’t have any of these issues.

Walk-Through

Before closing on your new home, it is important to walk through the
house and thoroughly examine it for any potential issues. Conduct the
walk-through with a fine-tooth comb to ensure that you do not miss any
potential issues. The sellers may be breathing down your neck as you inspect
the house, but don’t worry about them. It is your right and responsibility to
make certain that the house is in good condition. Once you close on the
home, all issues will be your problem. It is therefore important to identify
any problems before closing.

Closing

Closing day is when the seller receives the check and turns over the property’s
deed to the buyer. It is also usually the day that the seller moves out
and gives the keys to the home buyer. You will sign many documents at
the closing, and it is important to understand what each one is. Review the
documents for technical accuracy before signing. You will also be given a lot
of documents at the closing. You may want to scan these documents and/or
put them in a safe deposit box. You should not rely on the township or the
bank to save them.

Be a Responsible Homeowner

You are now home! By purchasing your first home, you have not merely bought your
family a place to live. You have also made a huge investment in your financial
future. In order protect your investment, you should:

  1. Maintain your home. Keep it safe, in good condition, and energy efficient.
  2. Be involved in your community. Getting to know your neighbors and having good relationships with them are key to your family’s happiness in your new home.
  3. Continue to manage your money wisely and replenish your savings.
  4. Be prepared for all unexpected home maintenance costs. Remember, you are your own landlord now.

It is important to become knowledgeable about your home’s mechanical
systems and the maintenance required for their optimal performance. You
should perform routine inspections of all systems to ensure that they are
working properly.

Benefits of Homeownership

The most significant advantage of owning your own home is the investment
you have made. Every time you make a mortgage payment, your equitythe
share of your home’s value that you own- increases. Your equity also
increases when your home’s value rises. Your home is your greatest asset.
The growth of your equity provides security that can help you pay for a college
education, start a business, or save for retirement.

Another important benefit of home-ownership is the tax benefit that comes
with it. As long as you itemize deductions, you can deduct your mortgage
interest and real estate taxes from your federal and state income taxes.
Although there are no guarantees in life, once you are a homeowner you’re
generally an owner for life. A well-maintained first home usually leads to
a better second home. In addition, owning and properly maintaining your
home provides a sense of security and accomplishment.

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