What Every First-Time Homebuyer Should Know?

Your Guide to Buying Your First Home

Buying a home is one of the most exciting and rewarding experiences you may have in your life. However, it can also be a complicated process that requires a significant amount of research, planning, and decision-making. If you're considering buying a house for the first time, it’s important to understand the key factors that will influence your purchase, from securing financing to understanding all the different types of mortgages. This first-time homebuyer guide will help you with the necessary information you need to make informed decisions, feel confident about the process, and start your journey towards homeownership.

1. Understand Your Finances

Credit Score

Before you start looking for a home, it’s important to thoroughly assess your financial situation. A few factors will heavily influence your ability to secure a mortgage and the terms you'll be offered. These factors include your credit score, the amount of money you have for a down payment, and the mortgage lenders you choose.

Your credit score plays a vital role in the mortgage approval process. Lenders use it to assess your financial responsibility and determine your eligibility for a loan. Generally, the higher your credit score, the better the interest rate you can expect on your mortgage. To improve your credit score, pay off outstanding debts, avoid making late payments, and check your credit report for any inaccuracies. Additionally, avoid opening multiple accounts and credit cards at once, and maintain low balances on these cards to help improve your credit score.

If your credit score is lower, you may still qualify for an FHA loan, designed for first-time homebuyers with less-than-perfect credit. FHA loans allow for a reduced down payment and lower closing costs. However, keep in mind that conventional loans may be a better option if you have a higher credit score, as they often offer lower interest rates and fewer fees than FHA loans. Conventional loans are typically preferred for buyers with good credit, as they don’t require mortgage insurance if you can make a 20% down payment.

Down Payment

Saving for a down payment is one of the biggest challenges for first-time homebuyers. The larger the down payment, the smaller your mortgage loan will be, which can reduce your monthly payments and the overall amount of interest you’ll pay over the life of the loan.

Most mortgages require some down payment, but options like VA loans and USDA loans offer 0% down payment options. Additionally, many first-time homebuyers have access to down payment assistance programs that can help ease the financial burden. Keep in mind, a higher down payment may help you avoid paying additional fees like Private Mortgage Insurance (PMI). If you're considering a conventional loan, a down payment of at least 20% can help you avoid PMI and secure a more favorable interest rate.

Down Payment Requirements by Loan Type

• Conventional Loans: Typically require a down payment of at least 5-20% of the home’s purchase price. A higher down payment may help you secure a better interest rate and avoid private mortgage insurance (PMI).
• FHA Loans: A popular option for first-time homebuyers, FHA loans require a lower down payment, often as low as 3.5%, but they may require mortgage insurance premiums throughout the life of the loan.
• VA Loans: Available to active-duty military members, veterans, and some spouses, VA loans typically offer zero down payment with no PMI requirements.
• USDA Loans: Aimed at buyers in rural areas, USDA loans also offer 0% down, but there are eligibility requirements related to location and income.

Gift Funds for Down Payment

Some lenders allow you to use gift funds from family members to cover part of your down payment. If you plan to use gift funds, make sure to provide proper documentation to the lender to show the source of the money.

Down Payment Strategy

If you’re unsure how much to put down, consider factors such as your monthly budget, long-term financial goals, and whether you want to keep some savings for other costs like home maintenance or emergencies. A higher down payment is not always necessary if you plan to keep your monthly payments manageable or use funds for other priorities.

2. How Much Can You Afford?

Knowing how much you can afford is crucial before you start browsing listings. A simple rule of thumb is that your total monthly mortgage payment should not exceed 28% of your gross monthly income. This payment includes your mortgage, property taxes, homeowners’ insurance, and private mortgage insurance (PMI), if applicable.

If you're a first-time homebuyer, there are several budgeting tools available that can help you estimate how much you can afford. You can also consult with a financial advisor or a mortgage lender to get a better understanding of your purchasing power based on your income, debt-to-income ratio, and savings.

Pre-Approval Letter

Before you start house hunting, consider getting a pre-approval letter from a lender. This letter shows sellers that you are a serious buyer with the financial backing to make a purchase. A pre-approval letter provides you with a clearer idea of how much a lender is willing to lend you, based on your financial situation, including your credit score, income, and debt. It can also give you an advantage in a competitive market, as sellers are more likely to accept offers from buyers who have already secured financing.

Getting pre-approved for a mortgage doesn’t mean you are locked into a specific lender or rate, but it does give you a solid understanding of your price range and shows that you're prepared to proceed with the buying process.

A pre-approval letter:

• Avoids Surprises: Helps uncover any potential issues with your financing early, so you’re not surprised by loan denial later.
• Improves Your Chances: Strengthens your offer in competitive markets, as sellers prefer buyers who are pre-approved.
• Increases Credibility: Demonstrates to sellers that you are a serious buyer with the financial backing to make a purchase.
• Clarifies Your Budget: Shows you how much a lender is willing to lend, helping you understand your price range.

Monthly Payment Breakdown

Understanding the breakdown of your monthly payment can help you make better financial decisions. In addition to the principal (the amount you borrowed) and interest (cost of borrowing the money), your mortgage payment typically includes:

• Property Taxes: These taxes are assessed by local governments and can vary greatly depending on your location. Property taxes fund public services like schools, roads, and emergency services. Make sure to budget for property taxes when considering your monthly payment.
• Private Mortgage Insurance (PMI): If your down payment is less than 20%, your lender may require PMI. This insurance protects the lender in case you default on the loan. The cost of PMI can vary based on your loan size, down payment, and credit score.
• Homeowners Insurance: Lenders typically require homeowners’ insurance to protect the property from damage due to fire, theft, or natural disasters. The cost of insurance depends on the value of your home, the location, and the type of coverage you choose.

3. Find a Real Estate Agent

Finding a real estate agent who understands your needs is essential for navigating the homebuying process. A good real estate agent will help you find the right house, negotiate the best deal, and guide you through the paperwork and legal requirements.

Your Real Estate Agent Should Be a Trusted Resource For:

• Showing you properties that align with what you’re looking for
• Helping you submit an offer for a property
• Assisting you with negotiating a price with the seller’s agent
• Attending the closing with you to ensure everything is in order

Tips for Choosing a Real Estate Agent:

• Experience: Look for an agent with experience working with first-time homebuyers. They will be familiar with the challenges and can provide expert advice.
• Referrals: Ask friends, family, or colleagues for recommendations. If an agent has helped others buy their first home, they may be a good fit for you. You can also ask your mortgage lender if they have any recommendations.
• Local Knowledge: A local agent will be more familiar with the neighborhood, property values, and any potential issues that could affect your decision to buy.
• Communication: It’s important that your agent listens to your needs and communicates effectively throughout the process. Be sure to choose an agent who is responsive and attentive.

4. House Hunting: Finding the Right Home for You

Once you have your finances in order and a real estate agent on your side, it’s time to start house hunting! This is where the fun begins. However, it’s important to keep a few things in mind as you search for your first dream home.

Keep In Mind Your Wants, Needs, and Must-Haves

Throughout this entire process, remember the true reason you are buying a house. Whether that’s for more space, an open-floor plan, distance from neighbors, or anything else, this will allow you to look for certain features that will make your home-buying decision clearer.

A great tip is to take time to sit down and really reflect on what you need in your future home, and what you are willing to live without. Feel free to share this list with your real estate agent so they are on the same page when searching for a home.

Assessing the Home’s Condition

Before making an offer on a house, it’s important to have a home inspection conducted. A home inspector will evaluate the property’s condition and identify any potential issues, such as structural problems, plumbing or electrical issues, or damage from pests. This step can save you from costly surprises down the road and help you negotiate a better price or request repairs before finalizing the sale.

With that being said, you must plan for unexpected expenses and maintenance costs. When you find a home you love, make sure to budget enough funds to cover property issues that the inspection reveals. If the cost of repairs is over your budget, that may be a sign that you should keep searching for a home that is a better fit for you.

5. The Homebuying Process: From Offer to Closing

Once you find a home you want to buy, the next step is to make an offer. Your real estate agent will help you determine a fair offer price based on comparable properties in the area, the condition of the home, and current market trends.

Making an Offer

When you are certain you want to make a purchase on a home, you can submit an offer. Your real estate agent will help determine a fair price for the property based on comparable home sales, the home’s condition, and current market conditions.

Including an earnest money deposit in your offer lets the seller know that you are serious about the offer. If you back out for any reason, you may lose this deposit. Typically, this deposit is about 1-3% of your home's price and counts towards your down payment if the deal goes through.

Negotiation Process

The negotiation process is a crucial step in the homebuying journey. Once you submit an offer on a property, the seller may accept, reject, or counter your offer with changes to the price or terms. If the seller provides a counteroffer, you’ll have the option to either accept it, reject it, or submit your own counteroffer.

Key areas for negotiation typically include the purchase price, closing costs, repairs, and contingencies (such as inspection or appraisal conditions). For example, if a home inspection reveals issues, you may negotiate for the seller to cover repair costs or reduce the sale price. It’s important to work closely with your real estate agent during this process, as they can offer valuable insight into local market conditions, help you understand the seller’s perspective, and ensure that the terms you agree on protect your interests. Effective negotiation requires patience, flexibility, and clear communication to reach a deal that benefits both parties.

If the seller accepts your offer, you’ll move on to the next steps in the homebuying process, including securing financing, scheduling a home inspection, and reviewing the final terms of the contract.

Closing Costs

Closing costs are the fees associated with finalizing the sale of the home. These costs can range from 2% to 5% of the purchase price and typically include lender fees, title insurance, appraisal fees, and legal fees. Be prepared to pay these costs on closing day.

How to Prepare for Closing Costs:

• Set Aside Money in Advance: Since closing costs are typically due on the day of closing, it’s essential to plan and set aside enough funds well in advance. Your lender should provide you with a Closing Disclosure at least three days before closing, which outlines all of the costs you will need to pay.
• Ask for a Breakdown: Make sure to get a detailed breakdown of closing costs from your lender early on in the process. This will allow you to budget accurately and avoid surprises on closing day.
• Use a Closing Cost Calculator: There are online tools and calculators that can help you estimate your closing costs based on your location, loan type, and home price.

Once the closing process is complete, you’ll sign the final paperwork, and the home will officially be yours!

Post-Closing

After closing on your new home, there are several important steps to take to ensure a smooth transition and protect your investment:

• Store Important Documents: Keep all closing documents, such as your deed, closing disclosure, and mortgage agreement, in a safe place. These documents may be needed in the future for tax purposes or if you decide to refinance.
• Review Your Mortgage Statement: Check your first mortgage statement to ensure that all terms, such as property taxes and homeowners’ insurance, have been correctly applied.
• Set Up Utilities and Services: Make sure utilities like electricity, water, gas, and internet are set up. This will ensure a seamless transition into your new home.
• Schedule a Home Maintenance Check-Up: If the home inspection revealed any issues, consider scheduling a maintenance check-up to address any immediate concerns and prevent costly repairs down the line.
• Familiarize Yourself with Your Neighborhood: Take the time to explore your new community. Locate nearby amenities such as schools, medical facilities, and grocery stores to help you settle in quickly.

Conclusion: Taking the First Step Toward Homeownership

The process of buying your first home may seem overwhelming, but with the right knowledge and preparation, it can be a smooth and exciting experience. Understand your finances, work with a trusted real estate agent, and prepare for all the costs associated with purchasing a home to confidently navigate the homebuying process.

Use this first-time homebuyer guide as a resource, and don't hesitate to reach out to experts, such as mortgage lenders, home inspectors, and real estate agents, for advice and assistance. With the right support, you can achieve your dream of homeownership and enjoy the many benefits of owning your own property.

If you are a first-time homebuyer, reach out to the mortgage experts at Union Home Mortgage, where our partners are here to assist you in every step of the way, big or small!

The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above.