Are You A First Time Home Buyer? Read This

As a first time home buyer, there are many things you should know so that you can avoid some unnecessary mistakes. Of course, you don’t need to know everything but there are certain basic things every first time home buyer should know so that they don’t learn their lessons in a hard way. Home buying process can totally be strange to you as a first time home buyer but with the free information available on the internet, there are certain things you can learn without the need to pay for them. If you are planning to buy a home, it is very important that you let the following tips guide you among other things.

  • Set your budget: You need to set a budget for yourself. If you are applying for fha home loan, government sets limits on how much you can borrow. The fha loan limits are set county by county. The type of home you want to buy will also contribute to the amount of fha loan you will have access to. But for private mortgages, there may not be such limits. However, whether there is a set limit or not, you need to know how much loan you can afford. This will even help you to know the type of home you should be looking for. There are single family homes; duplex, triplex or four-plex homes and their costs are not the same. It will be a financial blunder to buy the home you don’t have enough income to maintain. Apart from the monthly mortgage payment, there are other incidental costs such as insurance and property taxes. You can use mortgage loan calculator to help you calculate the mortgage loan amount you will be able to cope with.
  • Check your credit report: It is important that your credit report reflects the best it can be when applying for mortgage loan. You can actually apply for your free credit reports from the three popular consumer credit bureaus through AnnualCreditReport.Com, the only source authorised by law for your free credit reports. You are entitled to a free credit report annually from each of the three consumer credit bureaus. You can get your credit report from three credit bureaus at the same time or at different times. If you actually want to get the true picture of your credit report, it is better to apply for the credit reports from all the credit rating agencies at the same time so that you can be able to compare the contents of the reports. Creditors may not report your credit information to all the three consumer credit agencies. In case of any discrepancy or error, you can easily spot it and report the error for correction. It can be painful to have your mortgage loan application rejected for reason(s) you are not responsible for. Even, if your mortgage loan application is not rejected, you may be charged a high interest rate due to lower credit score as a result of the error in the report. The lower the interest rate on your mortgage loan, the better for you. It will not only reduce your interest expenses, it can help you when it comes to paying back the loan. Less interest rate means that you will be making less monthly payments. This will ease your cash flow.
  • Shop around: No matter how attractive an offer may appear, I usually advise people to shop around. This is not restricted to home purchase. Whether you want to apply for student loan, auto loan or car insurance, you  will be able to get good rates if only you can take time to shop around. Get quotes from at least three lenders. You will be surprised to realise that they don’t offer you the same terms. Interest rate is just one of the things you will need to compare but it is not limited to that. You need to compare other terms and conditions that will apply to the loan.
  • Try FHA Loan: FHA loan might good the first place to start for a first time home buyer. The reason is that, it is good for low income family who may not have substantial amount in their savings account which they can deposit as down payment towards their mortgage loan. This is one of the reasons why people think that FHA is mainly for first time home buyers. FHA loans are insured by the Federal housing Administration and this makes the loans to attract lower interest rates when compared to private mortgage loans. You may want to find out if you meet the requirements.

Read Also: FHA Loan Requirements and How to Apply

  • Get pre-approval: Before you start searching for property, it will be to your advantage to get pre-approval first. Without pre-approval, you may not be taken as someone who is serious or ready for business. Some first time home buyers don’t know why their offers are declined by the sellers. No one wants to waist his precious time on a deal they are not sure whether it will materialise or not. That is why you will see some listings that specifically mention that offers without pre-approval will not be considered. You can see how you can be limiting yourself from some hot real estate deals if your application is not pre-approved. In fact, before writing this article, I received a call from somebody. The person indicated interest in buying a particular product in which I have some knowledge. He wanted me to help him research the product before deciding on whether to buy the product or not. Because there is no commitment on his part, I just referred him to some useful resources instead of me to be the one doing it for him.
  • Choose the right real estate agent: As a first time home buyer, it is actually good to work with a professional. Don’t depend solely on the free information on the internet. You need a real estate agent. However, you need the one that actually understand your needs and will be ready to come down to your level. There are some real estate agents who may not be patient with first time home buyers. If a real estate agent is easily pissed off by your questions; that may not be the right person for you. Besides, you need the person that really understands the real estate terrain very well. As a first time home buyer, you can’t afford to work with an inexperienced real estate agent. It will be like a story of a blind man leading another blind man.
  • Focus on the right thing: Before you start searching for any property at all, you should identify what are important to you. What do you want to see in your dream home? If you go to the market with money in your pocket without having a specific thing in mind to buy, you may end up buying something that you don’t really need. The same thing is applicable to real estate market. Some homes may look very attractive but if they don’t meet your criteria, you should allow them to pass. At the same time, if you come across a home that meets your needs, everything may not appear perfect. You should rank your family needs above physical attractiveness.

Read Also: Current Mortgage Rates and How to Get Low Rates

  • Don’t skip inspection: Everyone is looking for how to cut their expenses. To a first time home buyer, inspection fee is considered avoidable cost. This is a mistake you should not make. You should ensure that you inspect your home before you commit yourself to the closing of the mortgage loan. Some buildings may appear nice outside but if you enter the house, you may discover that there are a lot of leakages. I remember a time when I was looking for an apartment to rent. I came across two buildings. One of them didn’t have enough ventilation and lighting. In fact, if you wanted to enter the bathroom in a broad daylight, you would need to switch on the light. The place was completely dark. Funny enough, it was a new building which would attract anyone at first sight. Supposing I didn’t bother to inspect the house, I would have made payment before I got to know about it. The doors of the second building were totally bad. Though I opted for this second one, I was able to reach an agreement on how the doors would be fixed before I paid. So, before you commit yourself to buying a home, ensure that you inspect the house by yourself and your real estate agent. While you may be focusing at the physical structure, your real estate agent will be able to advise you on some technical areas. This is just an aspect of inspection. The main inspection will be carried out by a professional inspector. At the end of the inspection, he will prepare a report which will be able to guide you on whether you need to continue with the deals. However, this will be your personal decision as no inspector will specifically tell you not to buy a home.
  • Don’t hurt your credit: Pre-approval is not the same as a final approval. After you have found your dream home, your lender will like to carry out your credit appraisal in order to ensure that you will be able to repay the loan. As a first time home buyer, you can be tempted to make a huge purchase in preparation towards moving into the house. Such expenses may include purchase of settee, refrigerators and appliances. If you don’t have sufficient credit, this may cause you to max out your credit. This may lead to the disapproval of your mortgage loan application as the lender may assume that you will not be able to pay back the loan. What should you do instead? You should not make a large purchase before your mortgage loan is approved. Defer all the major purchases till after you must have gotten your loan.
  • Ask relevant questions: Don’t be economic with questions. It is funny to see a first time home buyer pretending to be an expert. Of course, you may appear to be an expert but you will be doing this to your own disadvantage. The seller may even notice your ignorance but he will decide to flow with you. There is nothing to be ashamed about being a first time home buyer. Every expert you see today was sometimes a first time home buyer too. If you don’t understand something, it is better that you ask. This is a financial matter. A simple question can save you some costs.
  • Have emergency fund: Apart from the down payment and other closing costs which you will need to pay, there are other costs you may need to incur apart from your monthly mortgage payments. Therefore, you should not spend all your money on the closing of the mortgage loans. If you do, you may be setting yourself up for default. It is actually good that you have enough money in your emergency fund. If any unforeseen event happens such as unplanned trip or need to pay for medical bills and repairs, you will not be delinquent in your monthly mortgage loan payments. Apart from the purpose of your mortgage loans, having enough savings in your emergency fund is very helpful. It gives you peace of mind.
  • Choose the right mortgage option:  You should align your mortgage loan term to your ability to pay. If you can’t afford to make large monthly payment, it will be preferable that you choose 30 year fixed rate mortgage. But if you can afford to make large monthly payment, you can opt for 15 or 20 year fixed rate mortgage. This alone can help you save some amount in interest payment. The short your loan term, the less interest you will need to pay on the loan. Also, if you are of the opinion that the mortgage interest rates might fall, it may sense to go for Adjustable Rate Mortgage. On the other hand, if there is tendency for the mortgage interest rates to increase, you may want to lock in the low interest rate in fixed rate mortgage. A first time homer buyer can easily understand how fixed rate mortgage work.

Read Also: VA Loans: Eligibility Requirements and Essential Features

  • Choose the right location: Don’t rush into buying a home just because it is very cheap. The location of a property matters a lot. A first time homer buyer can be easily carried away by the cheap price placed on a home. You need to consider other factors such as the likelihood of flood which might necessitate that you pay for additional insurance. You should also consider who will be your neighbours. Is it the type of environment where you will like your children to grow? If you need to pay extra for the security of your family, I think it worth it.
  • Prepare for mortgage insurance: I don’t want you to be caught unprepared. If you are obtaining mortgage loan, you will need to make a down payment except you are a veteran applying for VA loan. In the case of private mortgage loan, you will be expected to make at least 20% down payment. If your down payment is less than 20%, your lender may require that you buy private mortgage insurance (PMI). But I want you to know that you can actually avoid the private mortgage insurance (PMI). If you can make up to 20% down payment coupled with good credit rating, your lender may waive the private mortgage insurance for you. If you are applying for FHA loan, two mortgage insurance premium (MIP) will be applicable to you; the Upfront Mortgage Insurance Premium which is 1.75% of the loan amount and it is paid at closing of the loan and the Annual Mortgage Insurance Premium. As a first time home buyer, you may want to know why the lender will request that you pay insurance premium. The fact that you are making small down payment increases the risk that you may not be able to pay off the entire mortgage loan. Therefore, lender will like to be protected against the risk of defaults and foreclosure, hence the need for the mortgage insurance.

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