8 Tips For Buying Your First Home
So you’ve decided to buy your first home. Congratulations! Selecting a place for you and your family to put down roots is an incredibly important life decision – and one of the biggest financial steps you can take. Although that may sound daunting, it doesn’t have to be if you break it down into small, simple steps. These 8 first-time homebuyer tips can help you navigate the mortgage process and stay informed every step of the way.
1. Maintain Stability
If you can help it, try not to change jobs or apply for new credit in the months before applying for a mortgage.
First time homebuyers are not experienced so many times they make the mistake of changing jobs or processing a car loan while they undergo the mortgage application process without telling the lender, which can cause last minute problems.
2. Determine Your Maximum Monthly Payment
This is all about understanding what you can afford. In addition to building savings for a larger down payment, consider the amount you are most comfortable paying per month toward a mortgage. And remember – you’re likely to have new and sometimes unexpected expenses as a homeowner.
Ask yourself how much house you need based on current living accommodations. Boneparth suggests asking yourself, “Could I pay the rent for a larger apartment today and feel comfortable, or would I have to cut on spending in another category?”
3. Factor In Your Student Loan Debt
Carrying student loan debt? You’re not alone. When it comes to mortgages, in addition to your outstanding debt, it is important that you can afford the estimated payment and that you have saved enough for a down payment. Don’t be discouraged – if you have student loan debt, home ownership could still be within reach.
Student loan debt gets factored into your debt ratio, which banks and lenders use to determine eligibility when issuing standard mortgages, according to Douglas Boneparth, CFP with Longwave Financial in New York.
“When it comes to student loans and other debts, lenders typically want liabilities to total no more than 36 percent of pre-tax income,” says Boneparth.
4. Get Your Documents in Order
It’s time to organize your pay stubs for the last 30 days, your bank statements for the last two months, and both your tax returns and W-2 forms for the last two years.
5. Get Pre-Approved and Ask About Upfront Fees
Now that you’re clear on how much house you can afford, you’re ready to get pre-approved for a mortgage. Ask your bank or lender to pre-underwrite your income, assets and liabilities to help you determine how large a loan you’ll qualify for. “This will ensure that a mortgage staffer will review your application documents and not just take the income that you stated to make a pre-qualification or pre-approval,” says Matt Hackett, operations manager with Equity Now, a direct mortgage lender.
Also consider requesting information about upfront fees before applying for a loan so you’re not surprised later. The only fee you should pay out of pocket during the loan application process is the appraisal, which varies by geography. Expect to pay in the range of $300 to $600 dollars.
6. Decide on a Long or Short-Term Mortgage
Prepare yourself for the home-buying process by deciding whether you’re setting down long-term roots or are buying this home as a starter.
If it’s likely to be more temporary, consider an Adjustable Rate Mortgage (ARM), which has a fixed interest rate for a period of time (5 years, 7 years, 10 years) and them adjusts yearly thereafter. For a long-term home, however, a 30-year fixed rate loan might make more sense.
7. Apply for a Mortgage Loan
After you submit your application for a mortgage, request a formal Loan Estimate from the lender or banker. An email with an estimate isn’t enough.
“An official loan estimate is important. In some cases your data is processed without being treated as an application because they don’t want you to shop around for the best rate,” says Hackett.
A Loan Estimate defines the terms of your rate, the fees and type of loan you’re securing. “The loan estimate is only provided after making an application, it is not provided at pre-qualification or pre-approval, which take place before a property is located to be purchased,” Hackett says.
8. Request a Timeline From Your Lender
Request a timeline with a listing of deadlines that all parties must adhere to for the filing of documents, such as the mortgage commitment and closing date.
“There’s a schedule of timelines in a purchase contract that have been laid out, so make sure the bank or lender you’re working with is aware of those and can meet them. Otherwise you could be subject to penalties or even lose the contract,” Hackett says.
Buying your first home is a big decision but knowing what to expect before, during and after the process can help you make solid decisions along the way. Learn more about first-time home buyer resources from Santander.