There’s No Place Like Your Own Home: A First Time Buyers Guide

If you’re reading this, chances are you are thinking about buying your first home or are in the process of doing so. Buying a home is a major life moment and a significant financial purchase. It can be scary, but it doesn’t have to be. The key to the process is education and preparation.

When preparing to buy a home, you will have questions about what it will take to secure your first place. Is it the right time? How much money do you have to save for a down payment? Will you qualify for programs to help if you don’t have enough? So many questions. Here are the answers.

Are You Prepared to Purchase Your First Home?

Before you start looking at dream home listings online, ask yourself some tough questions about your finances. Buying a home is all about the Benjamins, as in plenty of $100 bills, so take time to determine if you are fit to buy in the first place. 

Here’s a checklist of things to review:

Your credit score

Checking your credit score can jump-start or put the brakes on your home-buying goals. If your credit score falls in the lower end of the credit score range, you will likely have to do some work to repair your credit before you move forward. Lenders will look at your credit report to determine if you qualify for a mortgage loan, how much house you can afford, and what interest rate you will receive. If your credit score is too low, you will either not qualify for a loan at all, and if you do, your rate could impact your affordability. Simple steps like paying your bills on time, keeping your debt low, and paying off debt outright can significantly impact your score. 

Check your debt-to-income ratio

Debt-to-income ratio, also known as DTI, is a portion of your gross monthly income that you use to pay off your debts. It shows how much you owe each month compared to your monthly income. Unlike your take-home pay, lenders use your DTI to measure your ability to manage more debt while still keeping up with all of your other payments. There are two types of DTI: front-end and back-end.

Front-end DTI includes all of your regular monthly home-related expenses, such as your rent and renter’s insurance. Back-end DTI considers all of your front-end DTI expenses, plus your monthly debt payments, including student loans, personal loans, car loans, and minimum credit card payments.

Requirements can vary, but lenders generally want your back-end ratio to be no higher than 36%. To calculate your DTI ratio, contact your Total Credit Solutions advisor.

What Does It Cost to Buy a Home?

It’s no secret that owning a home comes with expected and unexpected costs. Here’s a list of expenses to keep in mind:

1. Down payment

A down payment is a percentage of your home’s purchase price, ranging from 3.5% to 20% of your loan amount.

2. Closing and moving costs

Closing costs generally equal 2% to 5% of the home’s sale price. You pay these costs when you go through the final document and ownership transfer portion of the home purchase.

Some of the usual expenses to ‘close’ the sale include an Appraisal fee, which covers the cost to have a certified appraiser determine the value of the home you are buying. Another closing cost fee is the Home Inspection fee, which a professional does to ensure the home you are purchasing does not have unknown problems. You can also expect other costs: application, credit report, recording, document preparation, and title insurance fees.

3. Mortgage payments

Mortgage payments are the amount of money you pay every month to pay your mortgage loan. It is typically made up of four parts:

  • Principal (goes toward your overall loan amount)
  • Taxes (property assessments collected by your local government)
  • Interest (the cost you pay to borrow the money)
  • Insurance (provides financial protection from risks)
4. Homeowners insurance

This insurance protects against fire, wind, theft, or other hazards to your home. You may be required to get flood insurance as well, depending on where you live.

5. Mortgage insurance

This insurance protects your lender if you fail to pay your mortgage. Not all homebuyers will be required to get mortgage insurance. It all depends on the amount of your specific down payment and other circumstances. 

6. HOA fees

Homeowners Association or HOA fees are required for some residences. The fees, usually monthly, pay for community amenities like gyms, landscaping, and swimming pools. HOA fees vary based on the type of ‘extras’ your community comes with.

7. Repairs, maintenance, and utilities

Unlike renting, when you own a home, you are soley responsible for making repairs. If you have flood insurance or live in an earthquake-prone area, those repair costs are generally covered by homeowners insurance. However, you will need to prepare for expenses that can happen at any time, such as a leaky faucet, broken dishwasher, or water heater replacement. Also, you need to pay for maintenance and utilities, such as cleaning your rain gutters and gas, electricity, and water.

In addition to the costs above, it’s a good idea to have at least three-to-six months of an emergency fund to cover expenses in case of a job loss or other event that may impact your finances.

What You Need to Know About Loans, Programs, and Grants

If you check your finances and come up short, don’t give up hope of homeownership yet. You may qualify for state and federal government and nonprofit programs to help make your purchase possible. Here’s a quick list of the types of loans and programs that are available:

  • Conventional mortgages. A government agency does not back these loans. Specific loans backed by Fannie Mae and Freddie Mac require a minimum down payment of just 3%.
  • Government agency—insured loans. Insured by the Federal Housing Administration (FHA), this type of loan requires a minimum down payment starting at 3.5%. There is no minimum down payment required for loans insured by the Department of Veterans Affairs and the Department of Agriculture.
  • Secondary loan programs. Certain states offer a second loan to help homebuyers with a small down payment and also closing costs.
  • Down payment grants. Programs like the National Homebuyers Fund provide up to 5% of the loan amount to low-and-moderate income buyers. Grants do not have to be paid back.

Are You Eligible?

To find out if you qualify for first-time buyer programs, take the question to the internet. Search for “first-time homebuyer programs” and “homebuyer programs” in your state. From there, you should find your state’s Housing Finance Agency to get you started.

Buying your first home is an exciting journey. Being informed about how the process works, where to get support if you need it, and what to expect can make the process easier to navigate.

Ready to buy a home? Schedule a free consultation and ask the experts for financial advice before your purchase.