Essential Guide for First-Time Homebuyers

first-time homebuyers

Deciding to purchase your first home is a significant milestone, and it can pave the way to a more stable and successful financial future for you and your family. However, if you are a first-time homebuyer, you probably have a lot of questions and uncertainties that might be slowing you down in making the final decision.

As a mortgage lender company, we know that purchasing your first home can be a beautiful but daunting project – that’s why we’ve prepared a comprehensive guide to answer all of your questions. 

So, without further ado, let’s get right into it:

1. What are the benefits of being a first-time homebuyer?

Believe it or not, being a first-time homebuyer actually comes with a few advantages that you may have not been aware of. Some of the main ones include:

  • Lower down payments – some lenders can ease your financial burden by offering lower down payments on your mortgage as long as you meet certain criteria. This includes conventional loans, but also specific financial options such as VA home loans and FHA loans.
  • Favorable loan terms – another benefit of being a first-time homebuyer are potentially favorable loan terms, including low-interest rates, flexible credit requirements, rate lock options, and fixed-rate mortgages.
  • Tax benefits – another benefit of purchasing your first home is taking advantage of the tax benefits that the government offers to ease your financial burden. This includes the ability to deduct mortgage interest and property tax payments, as well as negating taxes on the imputed rental value of the property.

Of course, these are not the only benefits of owning your own home. Having predictable monthly payments instead of facing potential rent increases by your landlord, owning an asset that can appreciate over time, and having more security for your retirement are all perks of being a first-time homebuyer.

2. Are you ready to buy a home? Auditing your financial history

One thing is to want to purchase a home, and another is being able to do it. So, are you ready to become a homeowner? Before falling hopelessly in love with your dream home, it is important to assess your finances

In other words, are you in good financial health to take out a mortgage? Keep in mind that owning a home doesn’t only mean making your mortgage payments each month; it comes with constant ongoing expenses as well. 

Here’s how you can audit your financial history and check if you are ready to become a first-time homebuyer:

Review your savings

First and foremost, start by assessing your savings. Do you have an emergency savings account with 3 to 6 months of living expenses? If the answer is no, you may have to re-consider taking out a mortgage.

In addition, be prepared to save for a down payment as well as closing costs. The exact percentages you will get will depend on your qualifications as assessed by the lender.

Check your credit score

If you are looking to become a first-time homebuyer, another important part of your financial audit should be assessing your credit. Having a good credit score (700 and above) may give you more favorable terms, but having a good history of paying your bills on time is also important.

In addition, aim to lower credit card balances, address your outstanding debts, and avoid opening new credits. Keep in mind that the maximum debt-to-income (DTI) ratio is 43%. You can also request a free credit report from major credit bureaus like Equifax and Experian.

Assess your spending

Do you know exactly how much you are spending every month? According to a study conducted by Intuit, 65% of Americans have no idea how much they are spending monthly. 

Keeping track of your finances is essential if you want to become a first-time homebuyer. Knowing where your money is going will help you determine how much you are able to allocate to a mortgage payment. 

Food, utilities, debt, car expenses and entertainment activities should all be considered, among other types of expenses. 

Calculate Debt-to-Income Ratio

As we mentioned earlier, lenders will allow you to get a maximum DTI of 43%, but the actual preferred percentage for most is around the 30% mark. The lower it is, the more likely you are to get better terms on your mortgage.

To determine your debt-to-income ratio as a first-time homebuyer, divide your total monthly debt payments by your gross monthly income, and multiply the result by 100 to get a percentage.

So, if your monthly debt payments are $1,000 and you are earning a gross monthly income of $5,000, your DTI will be 20%. 

Consider your long-term plans

Before you purchase your first home, consider your long-term plans. Do you have any plans of changing your job or moving out to a different city? How about starting or expanding your family?

Ensuring that homeownership aligns with your lifestyle and career goals should be essential before you become a first-time homebuyer

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3. Do you qualify for a mortgage as a first-time homebuyer?

Qualifying for a mortgage as a first-time homebuyer in the USA involves meeting criteria like a good credit score (aim for 620+), stable employment, manageable debt-to-income ratio (below 43%), and saving for a down payment.

Generally speaking, the criteria for a mortgage loan approval can be summed up into the famous 4 Cs:

  • Credit score – lenders run credit score checks before approving homebuyers for a loan. The recommended score is generally 620 or higher. 
  • Capacity for repayment – involves assessing your capacity for repaying the loan through proof of income, how long you’ve worked with your current employer, etc.
  • Capital or cash – having valuable assets, such as retirement funds, stocks, or 401k give lenders a sense of security that they will get their money back.
  • Collateral for reassurance – keep in mind that your new home is the collateral you are giving to the bank, which means the bank can foreclose your house if you are not able to make the monthly payments.

If you need more information on the 4 Cs, check out this article

4. What are the different types of loans available for first-time homebuyers?

The different types of loans available for first-time homebuyers will depend on the lender, but the most common ones include: conventional home loans, FHA home loans, VA home loans, and Jumbo Home loans.

Conventional loans. This type of loan refers to mortgages that are not insured or backed up by a government agency, as opposed to other types like the FHA. In this case, the terms and conditions are defined by the lenders.

FHA loans. As opposed to conventional loans, FHA loans (also known as Federal Housing Administration loans), are backed by the government. This loan is meant for low-income home buyers, and it usually involves a low down payment.

VA Home loans. Another type of government-backed loan, this option is available to qualified veterans and active duty for all branches of the military. 

Jumbo Home loans. This type of loan, available for first-time homebuyers, allows future homeowners to surpass the financing limits set by the Federal Housing Finance Agency (FHFA). They are typically used for the purchase of luxury homes.

5. What does the mortgage application process look like?

As a first-time homebuyer, you may not have a clear understanding of how the mortgage application process looks like. Here is your step-to-step guide so you can make sure that you are not missing out on any important steps:

1. Get a pre-approval letter

Getting a pre-approval is an essential first step of applying for a mortgage – it helps you determine your current situation, how much you can afford to pay, what type of mortgage is the best for you, and what is the maximum amount of the loan you qualify for.

Start by choosing a lender – if you are looking for a lender that is fully committed to quality customer service and will find the perfect loan for you, Jet Direct Mortgage is the right option. Our team of experts will ensure that your homebuying is as stress-free as possible.

Once you fill out a mortgage application, be ready to provide proof of income, employment history, assets, debts, and other financial details. If your application is successful, the lender will issue a pre-approval letter.

2. Begin your home hunting

Now that you know the maximum amount of mortgage you can apply for after the pre-approval process, you can begin looking for a dream home within your budget. 

Or maybe you already have one – a lot of people start looking for properties before they go through pre-approval. No matter the case, once you have selected the home that fits your needs and desires, the next step is to make an offer. 

You may need to leave a deposit (typically 1%-2% of the sale price) to secure your dream home – but don’t worry! If you end up closing the property, the money will be put towards your down payment.

3. Apply for a loan

The next step that first-time homebuyers will need to make is to apply for a mortgage. The process and requirements may vary by lender, so make sure that you have all the necessary documents ready to provide if needed. 

Some of them include:

  • Employment – including details like the name of the company, your position at the company, the amount of time you’ve worked there, salary, etc.
  • Income – in most cases, you will need to show two years of W-2s, as well as any details like whether you are getting any public assistance or paying child support.
  • Assets – including bank accounts, savings, checking, investments, gifted funds from relatives, etc. 
  • Debts – since you are a first-time homebuyer, you are probably not paying a mortgage yet, but any other debts – like car loans and credit cards – should be provided.
  • Credit card history – if you’ve had any history of bankruptcies, foreclosures and delinquencies, you should make sure that this is disclosed to the lender.
  • Property information – don’t forget to submit information about the property – including street address, type and size of the property, real estate taxes, etc.

4. Loan processing & underwriting

Once you’ve submitted the formal loan application, the lender will begin the processing of your loan. They will verify the documents that you have provided, order a credit card report, verify your employment and bank deposits, as well as hire an inspector for the appraisal of the property.

The lender will also ensure that there are no legal issues with the property. In addition, your application will have to go through an underwriting process – which means that the lender will assess the risk associated with the loan, and determine if it meets the guidelines.

Additional documentation or clarification may be needed depending on the case.

5. Property closing

If your mortgage application is approved, you will receive a “clear to close”, which means that the lender is ready to finalize the loan. In this case, you will be invited to sign all the necessary documents, as well as pay the closing costs.

You can typically expect to pay closing costs of between 2% and 5% of the home’s purchase price, and includes but is not limited to: loan origination fee, appraisal fee, credit report fee, home inspection fees, attorney fees and more.

If everything is in order, you will walk out with the keys to your new home! Congrats!

FAQ

What is the difference between pre-qualification and pre-approval?

Pre-qualification is a preliminary assessment of your financial situation, providing an estimate of what you can afford. Pre-approval, however, involves a thorough examination by a lender, including a credit check and documentation review, offering a more reliable indication of your borrowing capacity. 

While pre-qualification offers a broad overview, pre-approval is a stronger commitment from the lender, enhancing your credibility as a serious buyer in the real estate market.

Is fixed-rate or adjustable-rate mortgage better?

Choosing between a fixed-rate and adjustable-rate mortgage depends on your risk tolerance. A fixed-rate offers stability with unchanging interest rates, ideal for long-term predictability. 

An adjustable-rate has lower initial rates but carries the risk of future increases. Consider your financial goals and how comfortable you are with potential rate fluctuations before deciding.

What is a home inspection, and do I need one?

A home inspection is a thorough examination of a property’s condition, identifying potential issues. It’s crucial for buyers to uncover hidden problems and make informed decisions.