A Practical First-Time Home Buyer Guide
The decision to purchase a home is always a big step for anyone, but it’s especially significant for the first time home buyer. In addition to the excitement and anticipation a first time buyer feels about the prospect of owning a home, often there are also some feelings of uneasiness about initiating the mortgage transaction.
We encourage first-time borrowers to do everything possible to self-educate early in your home buying and mortgage lending process. We’ve seen firsthand that when borrowers take time to learn about the mechanics of home ownership and securing a mortgage loan beforehand, they will inevitably have a more positive lending experience.
In addition, Poli encourages first time buyers to elicit the help of one of our highly trained and experienced mortgage professionals as early as possible. Your Poli Loan Officer will help you determine your pre-qualification status, and also guide you through each step of the process, from application to closing. Connect with a Poli Mortgage loan professional today by completing our online form or calling us at 781-232-8000.
The Do’s and Don’ts You May Encounter in a Home Purchase Transaction.
These do’s and don’ts are important to follow just before & during the mortgage process. Once you have closed on your loan, you can return to normal practices!
- Do continue making your rent payments, if applicable
- Do stay current on all your existing credit cards and other liability accounts
- Do keep working at your current employment. (Yes, some people quit their jobs while getting a loan!)
- Do continue using credit as usual (as long as “usual” means paying on time!)
- Do call your lender if you have questions or want to change your finances in any way
- Don’t make any major purchases without discussing it with your mortgage professional first (car, furniture, refrigerator, etc.)
- Don’t apply for new credit (even if you’re “preapproved”)
- Don’t open a new credit card
- Don’t transfer any credit card balances
- Don’t pay charge-offs (unless your lender says to do it)
- Don’t pay off any collections (you guessed it- ask your lender first)
- Don’t close any credit card accounts
- Don’t increase your credit card debt
- Don’t change bank accounts
- Don’t consolidate debt or credit cards
- Don’t take out a new loan (yeah, people have done it)
- Don’t open a new cell phone account – or any new accounts!
- Don’t pay off loans or credit cards unless your lender says its ok
It’s probably becoming clear that the best rule of thumb is “Don’t Change Anything!” unless you talk to your lender first.
First-Time Home Buyers: Tips Before You Purchase
1. Evaluate Your Financial Preparedness
Once you’ve determined you are emotionally ready to take the step of buying a home, the next goal will be determining your financial readiness. Be sure to consider each of the following questions:
- Do you have a steady source of income?
- Do you have good credit history?
- Do you have sufficient funds for a down payment or another source of funds (i.e. family gift)?
- Do you have sufficient funds to cover closing costs and reserves? (if required)
- Have you evaluated how additional home expenses may impact your personal budget?
2. Save For Your Down Payment
In most cases, your home purchase will require a down payment. Mortgage lenders traditionally require a down payment on home loans to qualify the borrower’s investment in the financial commitment.
Poli Mortgage has a number of first-time home buyer programs available offering down payment options from 0% to 20%. These first-time buyer programs include FHA loans, VA loans, USDA loans, as well as other conventional and government mortgage loan programs.
3. Determine if Purchasing a Home vs. Renting is Best For You
In today’s economy, with home prices and interest rates markedly lower than in previous years, it may be more affordable for you to purchase a home over renting.
Some advantages of home ownership include:
-Building up mortgage equity over time
-Deductible mortgage interest and property taxes (check with your tax professional for all available deductions)
-Contributing toward your own mortgage investment versus someone else’s
-Pride of home ownership
-Freedom to make internal and external design choices
4. Determine What You Can Afford
It’s vital to determine the mortgage loan amount you can afford. As a general rule, your monthly housing expense should be between 28%-36% of your gross monthly income. In the mortgage industry this is known as the “front end ratio”. You can use several Mortgage Calculators on our site to help you determine your personal circumstance.
5. Pay Attention to Your Credit Score
A good credit score is an integral part of qualifying you for a home mortgage loan. If you do not know your credit score, your Poli Mortgage Loan Officer can help you by requesting a free credit report for you.
Credit Scores, typically known as FICO scores, are monitored by three national credit bureaus. Scores range from 300-850, with the best score being 850. The higher your credit score, the more likely your lender will approve your loan. Just as important, the higher your credit score, the lower your interest rate may be. Most loan programs require a minimum FICO score of 640. The three credit bureaus most often determine your score based upon the following criteria:
- Your payment history
- The length of time your credit accounts have been open
- The number of accounts you have open and their balances
- The number of credit inquiries
- The types of credit used
When planning a home purchase, it is also critical to follow these guidelines to keep your credit report and rating as stable as possible prior and during your mortgage loan approval process:
- Pay all bills on time.
- Keep your account balances below 30% of your total credit limit
- Limit credit inquiries
- Do not accept cash advances toward your down paymentDo not consolidate your debt
- Do not co-sign for others
- Do not make any major purchases
- Do not open any new accounts
- Do not close unused credit accounts
If you have little or no credit history, you will need to establish credit (more than one line) for at least 6-12 months and show a proven history of making payments on time prior to engaging with a mortgage loan company and/or real estate agent.
If you have poor credit (a score of 640 or less), you will need to work to improve your credit score. Your Poli Mortgage Loan Officer can provide advice on how to improve your credit score, and if needed, refer you to a credit repair company.
First Time Home Buyers: Understand The Process
Gather Your Documentation
Mortgage lenders typically require a set of certain core documents and information. It will help if you can have the following documents in hand to expedite the process:
- W2 forms for each applicant for the past two years and/or two years of federal tax returns (all pages and schedules) if an applicant is self-employed
- 30 days of the most recent and consecutive pay stubs, which include year-to-date earnings
- The last two months of checking and savings account statements
- A fully executed (signed by all parties) copy of your Purchase & Sales Agreement (when available)
Obtain a Pre-Approval Letter
Requesting a pre-approval letter is an important step in your new home purchase process. Generally, a pre-approval letter can be issued within a couple of days after you’ve submitted all required documentation. The letter will indicate the loan amount you are eligible for, and will also qualify you as a serious buyer in the minds of your realtor and potential sellers, which gives you greater purchasing power.
Shop for Your First Home
Your pre-approval establishes the preliminary mortgage value you qualify for, so now you can prepare a property wish list before enlisting the help of a realtor. Start with a price range you would like to see homes in and also include your geographical area(s) of interest. Additionally, make sure you note the home features you would like in your new home, such as the number of bedrooms, a fireplace, a pool, etc. You will also want to identify up-front what features you deem “must haves” and which items you may be willing to compromise on.
As you consider the price range you want to shop in, remember to include other home-related expenses in your budgeting. Often, new home owners will want to make minor updates, add personal touches and furnish their new home immediately upon closing their loan. Be sure to consider what level of reserve you may need for these types of post-ownership investments.
Make sure to bring a camera as you visit homes and take notes. Educating yourself about the housing market and home values prior to meeting with your real estate agent will also arm you with insight on what inventory is available within your price range. The more information and knowledge you have ahead, the more time and potential money you will save as you follow the steps to locate your new home.
You will want to find and work with a good realtor. Someone you feel comfortable with, whom you feel has your best interest in mind. Attend open houses, search the internet, and visit specific homes with your realtor.
As soon as you find a home you are interested in your agent can help you evaluate similar homes in the area. You’ll want to know what these comparable homes have been selling for or are currently valued at. It’s also important to know how long these homes were or have been on the market, along with any pro’s and/or con’s your realtor knows about all of the comparable homes. Never forget, you are your realtor’s customer, and they should be willing to provide you with all the information you need to see prior to making any commitment.
Make an Offer
Once you have successfully completed the above steps, and you have found a home, now is the time to make an offer to purchase. Your realtor should make you aware of the seller’s needs (i.e. a need to close quickly), so you can consider them in your price negotiations.
Review and Sign a Purchase and Sales Agreement
The real estate Purchase and Sales Agreement is a contract between the seller and the buyer. Key information contained in this agreement identifies the parties involved, the property and the purchase price.
In addition, the Purchase & Sales Agreement includes two critical pieces of timing information. The first date identifies the time of the commitment, sometimes called the contingency date. This is the date the buyer must have approval from their lender. The second critical timing item is the closing date.
Both of these dates are determined by the buyer and seller of the home, along with the real estate agents, and/or representing attorneys. The Purchase and Sales Agreement represents a meeting of the minds, but it is also a legally binding contract which should be reviewed by your attorney.
Order a Home Inspection
It is extremely important to have the home you are interested in inspected by a professional. Your Purchase and Sales Agreement will generally have a contingency clause stating the offer to purchase is only valid with a home inspection. The hired home inspector will evaluate all critical elements, such as the condition of the home and how safe it is. The inspection review and report cover all structural and mechanical facets of the home to determine if it is constructed well. With a contingency in place, if there are any egregious problems, you are able to cancel the agreement or renegotiate.
Complete the Mortgage Process
Since you’ve already submitted most of your key documentation for pre-approval, your mortgage loan application has already begun working its way through our system. Now that you have decided to make an offer on a home and it has been accepted by the seller, it is time to work with your Poli Loan Officer to finalize the completion of your mortgage transaction. At this time, your Poli Mortgage Loan Officer will need you to submit your Purchase and Sales Agreement, and any other additional documentation they specify as needed.
Most likely, during your initial conversation(s) with your Poli Loan Officer, you discussed the loan program which will best fit your financial/mortgage requirements. This is the time to confirm the loan program you’ve decided upon and also discuss the current interest rate with your loan officer, so you are ready to lock your loan rate in when the time is right.
Close Your Loan
Your Poli Loan Officer will let you know when everything will be ready to close on your home. We believe you should have representation of an attorney at your closing, and you can bring your own attorney, or we can secure a reputable attorney to attend on your behalf.
Prior to your closing, you will receive a settlement document (known as HUD1) which details all the closing costs, credits and how much money you will need to bring with you to the closing appointment. You should review this document prior to your formal closing, so you are prepared. Typical closing costs include the appraisal, title insurance, documentation fees, loan origination fees, recording fees, survey fees, and others. Additionally, there are pre-paid items (also known as escrows) which must be paid at the closing. Escrows could include pre-paid interest, homeowners insurance, taxes, and mortgage insurance (as applicable).