Steps to Buying a Home
So you want to own your own home? Great choice! With the combination of historically low interest rates and current home prices, home affordability is at it's best level ever. Simply put, more people can afford a home than ever before.
You’ll likely find that a mortgage payment is actually lower than what you’re paying in rent! Yet the first time home buyer will be apprehensive. Scared sometimes. But if you take the following steps then buying your first home will be an enjoyable and rewarding experience.
Basics of the Home Buying Process
First, determine how much you can afford. Lenders use debt-to-income ratios, a calculation of a mortgage payment including taxes and insurance divided by your gross monthly income. For instance, if a mortgage payment is $2,000 and your gross monthly income is $6,000 then your debt-to-income ratio is 33%.
Most mortgage programs ask that housing debt-to-income ratios be at or below 40%. It’s important to note here that just because a lender will make a loan based upon a $2,000 house payment, only borrow what you feel comfortable with. You’re not obligated by any means to borrow any amount just because a lender will allow it.
Don’t determine your affordability on your own. In fact, you’ll need to know current interest rates as well as your credit scores. Contact the best loan officer you can find to shepherd you through the process.
Down Payment Options
Most loans require a down payment unless you’re a qualified veteran of the armed forces. If you are a qualified veteran you should first explore the VA loan which requires no money down with highly competitive rates.
You may also live in an area that conforms to USDA guidelines. USDA loans from the US Dept of Agriculure are another option for 100% financing. You do have to live in a Rural area as defined by the USDA and you will have to qualify from an income standpoint, there are certain income limitations to USDA home loans, generally you need to be within a range referred to as Median Income for your area.
You can check USDA Eligibilty HERE then click on "Single Family Housing" on the left.
If you don’t qualify for a VA or USDA loan, you can explore a FHA loan. More first time home buyers use FHA mortgages than any other mortgage as the down payment requirements are as low as 3.5% along with easier qualifying. It is important to note that one of the first steps to buying a home is down payment consideration. However, don’t discount any mortgage program. Conventional loans can require a 5.00% down payment, or less, with certain programs.
There are first time homebuyer programs available that assist in qualifying when you might be having trouble saving enough money for your down payment. Many of these programs are issued by state and local governments in the form of special bond programs designed to help first timers buy their own home. Typically these first time home buyer programs are in the form of a grant or a loan that provides sufficient funds to close on a transaction.
Such programs will most often have income limits in addition to being reserved for the first time buyer and these special programs can vary from county to county and from state to state. Your loan officer will have all the information for these programs and can help you decide if you should explore these options.
One of the most important steps to buying a home is gathering the appropriate documentation:
- Two years most recent filed and signed tax returns
- Most recent 30 days worth of paycheck stubs
- Two years most recent W2s
- Three months most recent bank and investment account statements
- The name and contact information for your insurance agent, we can suggest one if you don't have one already
- Your signed mortgage application and related mortgage documents provided by the us
How does a lender know if you’re a first time home buyer? How does a state agency determine your first time status? Actually they can do it in a couple of ways. Your personal tax returns will show if you’ve reported any mortgage interest as a tax deduction and your credit report will reveal any prior mortgage. One quirk? Lenders can consider you a first time home buyer if you haven't owned a home for the previous three years.
You should also review your credit report regularly. This regular check-up should be part of your financial plan to watch out for any mistakes or errors on your report that could be suppressing your credit score. After you’ve applied for the mortgage, if there are any mistakes on the report you’ll find that your loan officer will be very adept at helping get your credit report corrected.
One final note for first time home buyers? Find the very best real estate agent you can possibly find. As a buyer, it’s the seller of the property that pays for your agent, not you, and you absolutely need an experienced agent to help guide you through the process. Take advantage of that experience. A good agent is there to answer questions, hold your hand and find the best home for your needs.
You can learn more about why a great buyer's agent is a necessity during this process by visiting our company blog specifically: Do I Need A Buyer's Agent?