Buying your first home, and getting a home loan for the first time, can be an overwhelming process. Lenders simply don’t dig into the details of your financial life in quite the same way when you’re taking out student loans or even financing a car.
But you’ll no doubt be borrowing serious money to finance your home purchase, and lenders want to make absolutely sure you’re good for it — and that the home you’re buying is worth the amount of money they’re giving you to buy it.
For novice home buyers, knowing a few factors are always helping you pick up the first property.
6 Factors Which Every First Time Home Buyers Must Know
Before you ever sit down for a conversation with a mortgage broker, you need to be prepared to have a mortgage.
You should know what your options are — there are plenty of loan types that require lower down payments than the conventional 20 percent. And before you go into the mortgage process, you should know what to expect.
Read on to learn more which you must know as home buyers.
1. Prepare to Have a Mortgage Before You Ever Talk to a Lender
As home buyers, you won’t be able to get home loans with bad credits, no savings, and inconsistent income, so get your financial house in order before you apply to buy a real house. You should have regular, full-time employment.
If you’re self-employed, you may need to provide more documentation to a lender to prove your creditworthiness, but it’s still possible to get a home loan. Any additional income you can add to your application, such as from a part-time job or side hustle, will improve your chances of qualifying for a loan.
If you need to take a side job to help save for a down payment, you can — once you close on your house, you’ll be free to quit the side job.
2. Measure Credit Score Before Applying For The Home Loans
You should also clean up your credit, if it needs it, before talking to lenders. Most won’t give you a conventional loan if your credit score is lying under 620.
You can get an FHA (Federal Housing Administration) loan with a score as low as 500 if you’re able to put down 10 percent. But the higher your credit score, the better your interest rate will be, so pay off outstanding debts, dispute errors on your report, and remove collections reports from your credit history.
Then you can figure out how much for houses you can afford as first-time home buyers and how large of a mortgage payment your budget can sustain.
3. Explore Multiple Market Available Options
Traditional wisdom holds that you need a down payment of 20 percent to buy a house, but that’s no longer true — and you shouldn’t spend years stashing money into a low-interest savings account just to have a higher down payment. Instead, exercise your options. You can get an FHA loan with just 3.5 percent down.
As home buyers veterans, you could get a Veterans Administration (VA) loan with no down payment at all. If you want to get a mortgage in an expensive urban area like Washington DC, one of these mortgage programs could make buying your own home accessible. If you want to buy in a rural area, you still have more options — you can get a USDA-subsidized mortgage with no money down.
4. You Should Know What to Expect from the Mortgage Process
The mortgage process begins when you get pre-approval letters from at least three lenders. Going to multiple lenders gives you a chance to shop around for the best interest rates and lowest closing costs.
Lenders will have to run a credit check in order to give you information about loan rates and eligibility amounts, but if you get all your pre-approval letters within the same 30-day period, it only counts as one hard inquiry on your credit report.
Once you have your pre-approval letters, you’re ready to show sellers you mean business. It’s time to pick out a house and make an offer. Once you have an offer accepted, then you’ll officially submit your home buyers’ mortgages applications with the lenders of your choice.
5. Submit Latest Tax Return And Bank Statement
You’ll need to provide lots of supporting documentation: two years of W2s and tax returns, recent pay stubs, recent bank statements, and documentation declaring the source of any recent large deposits to your bank accounts or any cash gifts you received to put toward the down payment.
You should receive a loan estimate from your lender within three days of submitting your official application. The loan estimate should lay out your loan amount and borrowing costs, including interest rates and closing costs. And it should tell you which closing costs can be shopped around for the home buyers.
6. Show Your Trustworthiness For Borrowing The Money
With your loan application submitted, you’ll go through the underwriting process. This is where the lender goes through your financial life with a fine-tooth comb. They’re making sure you’re a sufficiently low-risk borrower and that the house you’re buying is actually worth what you’re paying for it.
This process can take weeks or months, and you may need to provide additional documentation to address any issues that might come up. You’ll also have a chance at the beginning of the underwriting process to perform an inspection of the home you’re buying and negotiate with the seller for any repairs that need to be completed.
At the end of the underwriting process for the home buyers, you’ll finally be ready to close. You’ll meet with the seller and their agent, a real estate attorney, your own agent, and representatives of the bank to sign your mortgage documents. Don’t be afraid to ask about anything you don’t understand. Once you sign the closing documents and hand over a cashier’s check for your closing costs, you’ll receive the keys and be ready to take possession of your new home!