What To Know When Buying Your First Home: A Comprehensive Guide

Buying your first home is an exciting milestone, but it can also be a daunting process. Before you first turn the key to your new home, there are plenty of important factors to consider.

Due to rising home prices since the pandemic, first time home buyers have been forced to remain stagnant, making up only 26% of the home-buying market. Yet, some forecasts project home prices to level out (or climb relatively slowly in comparison to recent trends) in the upcoming year.

If you are one of the many who have been forced to table their home-buying search but are now ready to see what the market has to offer, review these tips and insights to help navigate your journey of homeownership.

1. Assess Your Financial Stability

If you’re thinking about buying a house, you might be researching neighborhoods and how close your favorite grocery store will be relative to your new home, but the first true step of the home buying process is to evaluate your financial stability.

The Down Payment:

1. An easy first step to start your financial evaluation is seeing how much you have saved to put toward a down payment on a house. You may have heard that a typical down payment is 20%, but for first-time home buyers, that number drops to an average rate of 6%.
2. Note that putting down a larger percentage of the expected home price means a reduced monthly mortgage payment since you are paying for more of the home upfront. Plus, a larger down payment often results in a more favorable interest rate, as it signals financial stability and a positive credit history.
3. Bear in mind that opting for a conventional loan with a modest down payment often means you will be required to pay Private Mortgage Insurance (PMI). This insurance is mandated by lenders for conventional loans when the down payment is below 20%, identifying you as a higher-risk borrower. PMI, typically ranging between 0.58% and 1.86% of the mortgage payment (though it may exceed this), becomes an additional monthly cost.
4. It’s important to remember that what may be a comfortable down payment for one person, may not be right for another. Visit a down-payment estimator online to see what you are financially ready for.

2. Mortgage Lender vs. Broker

As you dive into researching your first home, you might come across two distinct options of who to work with when applying for a loan.

1. A mortgage lender is the financial institution that will be loaning you funds for purchasing a house. There are a few different entities that the term lender refers to a conventional bank, a regional credit union, or an online lender.

1. Some benefits of working with a financial institution are that you can establish a relationship with the entity that ultimately will be providing you with the money for your home. This means that you can communicate directly with the lender for all questions and lines of dialogue necessary during the mortgage application process.
2. Exclusively working with a lender to obtain a mortgage loan has its downsides, however, particularly when it comes to the level of comfort you have with organizing your documentation for a loan application, which could drag the process out even longer. In addition, if your credit score is low and you do not get approved by one lender, reapplying for a loan with another lender could hurt your score.

2. The second option is working with a mortgage broker. They serve as connecting agents between you and a lender.

They do a lot of the leg work for you during the application process, such as pulling credit history, and verifying income and employment history; after collecting this information from you, brokers search and apply for home loans for you.

1. Of course, this strategy has its cons. Not every lender will work with a mortgage broker, so there might be lines of credit that you won’t be able to apply for if you go this route.
2. There is of course a brokerage fee: typically ranging from .5% to 2.25% of the loan. Normally, the broker will charge their commission to the lender, but some charge the borrower. Make sure to decipher this before working with a mortgage broker.

3. Debt and Savings:

For many, buying a home means taking on one of the, if not the most substantial lines of credit they will have. Therefore, it is key to manage all debt before taking on a home loan. Does this mean you must pay back all your student loans before you can buy a house? Not exactly.

If you are unsure if taking on a large line of credit for a home is right for you because of student loans, consider your debt-to-income ratio (DTI).

To find this, add up what you pay out per month (car payments, student loans, credit cards, etc.) and divide that total by your gross monthly income, then multiply by 100 and you will get your DTI percentage.

To see if you qualify for a home loan, credit lenders will gauge your debt-to-income ratio and will look at bank statements to determine if you are financially stable enough to take on a significant loan.

1. Typically, a low DTI is 35% or below, whereas the 36% to 49% range means that paying off debt first is likely to help manage a future mortgage payment. A DTI of 50% or above means it would not be financially responsible to take on another line of credit, and many lenders will not confirm the underwriting to close a loan.

Paying off debts and maintaining a healthy credit score will help build a good profile when it comes time to apply for a home loan.

4. Income and Employment:

To understand what mortgage you can afford, lenders typically require at least two years of tax returns or pay stubs as proof of stable income.

When you are preparing to meet with a lender to begin your home-buying journey, ensure that you have two years' worth of bank statements to verify earnings. These are the essential documents you should have handy: recent pay stubs, W2, and a 1040 tax form.

When a lender is evaluating what mortgage loan you will qualify for, understanding your gross income – your total earnings before taxes and deductions are subtracted – will give insight into how much they believe you will be able to pay toward a home per month.

Within this stage, it is worth considering your long-term plans for employment and where you see yourself in five to 10 years. Homeownership is a commitment, so bear in mind your future commitment to the respective location.

5. Prequalification and Preapproval:

Those looking into buying a home with a new loan may start to hear the terms “prequalification” and “preapproval,” and wonder what the differences are between them.

1. Prequalification is a preliminary step to help a bank or lender gauge an estimate of how much you can expect to qualify for within a line of credit. The analysis is done by evaluating your financial profile including debt, income, and assets but does not consider your credit report. This process is a free analysis that can be done online or over the phone and does not cost anything to obtain. 
   1. This is where a lender and the potential borrower will discuss the mortgage and loan options you can expect to qualify for.
   2. Once you have obtained a prequalification letter, you can use this as leverage in the buyer market when you are ready to buy a home.

2. Seeking preapproval for a home is a more in-depth application and evaluation process and serves as the definitive procedure to determine your creditworthiness. This process considers your financial background and runs a substantial credit check.

1. At the end of this process, a lender will give you a specific amount of credit you are approved to take on for a home. With this offer, you can see a more in-depth look at what type of interest rate you can expect to acquire for the loan you will take on.
2. After getting preapproved for a mortgage, the buying process becomes a lot smoother as you stand out as a credited option in our current competitive buyers' market.

Once you have gone through these steps, the underwriting and closing steps become a lot easier when you have a house you are ready to close.

6. Programs and Loans:

Whether you are brand new to the home-buying process, or you haven’t owned a home in the past three years, you may qualify for programs and loans to assist your efforts in landing a home.

In February 2023, the Federal Housing Agency (FHA) created a mortgage rate discount for first time home buyers considering applying for conventional loans, such as Fannie Mae and Freddie Mac.

• The discounted mortgage rate is meant for those whose income is at or below the median household income of the region they live in.
• The housing agency eliminated upfront fees on some conventional loans for nearly 20% of home buyers.

The FHA offers a 3.5% down payment loan option. This loan can help you qualify if you have less than stellar credit.

1. Though a lower down payment might be available with some lenders, most require at least 10%- not to mention that a seller who is presented with an all-cash option might be more interested in a higher up-front payment.
2. A federal housing agency certified appraiser must appraise the house you are interested in buying through this loan option.
3. Yet, a downside to an FHA loan comes in the added mortgage insurance premiums, which is a required insurance payment throughout the life span of your mortgage. Conventional loans only require this insurance if you are only able to put a 20% down payment, however, all FHA loans require this added payment.
   1. The premium comes in part from private lenders adding an extra layer of protection against those higher-risk borrowers who take on FHA loans.

Conventional loans are mortgages not covered by a federal agency and are strictly provided by private lenders.

1. These loans typically have more on their requirement list, such as a higher credit score (at least 620), a Debt-to-Income Ratio below 50%, and a significant down payment.
2. The good news for first time home buyers is that you can apply with a 3% down payment, though you will still have to pay for the MIP.

7. Finding Your Realtor and Home Inspector:

When diving into the realm of home buying, a trusted realtor becomes your essential companion. The best practice when you are first starting out is to seek recommendations from friends, family, or colleagues who have recently bought homes.

Online platforms and real estate websites are also valuable resources for discovering reputable realtors. Look for someone with local expertise, excellent communication skills, and a track record of successful transactions.

Before committing to a realtor, schedule interviews to discuss your goals, preferences, and budget.

A good realtor will offer insights into the local market, potential neighborhoods, and current trends. They should be attentive listeners, understanding your unique needs. Don't hesitate to inquire about their commission structure, ensuring it aligns with your expectations.

8. Selecting a Home Inspector:

Equally crucial in the home buying process is a thorough home inspection. A home inspector evaluates the property's condition, identifying potential issues that might affect your decision.

A good place to start is by seeking referrals or consulting your realtor for recommendations. It is important to verify that your home inspector's licensing is up to date.

Besides gaining basic insight into the home’s structural integrity, by using advanced technology, inspectors can inform you of an in-depth breakdown of issues the house might have.

1. Using infrared lasers and electronic monitors, the inspector can provide you with a valuable read into a house’s internal, nitty-gritty details.

Specifically, you can expect a comprehensive review of the home's structural components, electrical systems, plumbing, HVAC, and more. Accompany the inspector if possible; this is an educational opportunity to understand your new home's inner workings.

The inspector will provide a detailed report highlighting existing problems and potential future concerns. Use this information to negotiate with the seller on necessary repairs or adjustments to the home's price.

If the inspection uncovers a major issue that you deem a deal breaker from buying the home, you can walk away from buying it if you have an inspection contingency in the purchasing contract.

9. Finalizing the Home Buying Process: Navigating Closing Costs

Understanding closing costs can be a confusing task for first-time home buyers, so let’s try to keep this simple.

After researching your next city and finding the right house for you, the last crucial step in your journey to homeownership involves understanding how to finalize the purchase of a home.

You might have heard that closing on a home is another lengthy process that can cost you more than you expected. But if you know what to look out for, the process won’t be so intimidating.

Final closing costs will vary depending on the price of your home, the type of loan you were granted, as well as realtor and home inspector fees.

Both buyers and sellers incur additional expenses beyond a property's purchase price during the closing process. It is important to consider these costs not just as potential fees, but as guaranteed expenses.

On closing day, you can expect to have a few people along for the process. This includes representatives from your lender, title insurance company, an attorney, an escrow officer, and of course, real estate agents: both the seller’s and your own.

Let's delve into this process a bit deeper and demystify closing costs to ensure a smooth transition into your first home.

Here are some closing costs to expect with the purchase of your first home:

1. Loan Origination Fees: Charged by the lender for processing the loan application. This will be a percentage of the overall loan and can range anywhere between 0.5% and 1% of your mortgage loan. In addition to paying for processing the loan, this fee covers underwriting and funding fees. Think of the fee almost as a commission rate for the lender.
2. Appraisal Fees: For those considering a loan through the FHA, an appraisal fee will be required. This fee is derived from the cost of assessing the property's value (inspecting the property and comparing the home’s value to others in the area).
3. Title Insurance: This is a policy to protect against potential ownership disputes or liens on the property if there is an issue with the title. The last thing you want is to be so close to the finish line and have conflicting wills associated with the house, or back taxes on the home that will ultimately make finalizing a mess.
4. Homeowners Insurance: This serves as coverage for potential unexpected damage to the property. The average premium for a Homeowners Policy Special Form 3 (HO-3), which covers structural perils to the home, hovers from $1,200 to $1,400- depending on the state and type of home you are purchasing. Make sure you ask your closing agent what type of coverage is right for you.
5. Property Taxes: Typically, two to three months of property taxes are paid upfront.
6. Attorney Fees: When you hire legal assistance to review closing documents and contracts, you will have to pay a fee. The costs usually range from $500- $1,000 after the process is finalized- make sure to ask the legal expert what they charge for their assistance.
7. Home Inspection Fee: This fee covers the cost of the professional home inspector you hired to identify any potential issues or repairs needed.

Note that you may be able to negotiate with the seller to see if you can share some of these costs or explore closing cost assistance programs.

Always feel free to ask the experts you're working with any questions you may have. Remember, you're paying for their advice, and their role is to guide you through the closing process, ensuring a smooth and cost-effective finalization of your home purchase.

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It's not just about moving; it's also about flexible storage options that make transitioning between moving and settling into your new home stress-free.

Choose U-Box for a game-changing, cost-effective, and enjoyable journey into homeownership.