7 Tips for First-time Homebuyers

Buying a home is one of the most important investments you’ll make, and if you’re a first-time buyer, the process can be overwhelming. Learn about each step in our First-time Homebuyer Guide, then follow these tips for a smooth transition.

1. Why buying a home can be a smart move

Besides being part of the idyllic American dream, owning a home provides security while building equity. Your home is an asset that grows with each monthly mortgage payment that you make. Making renovations and repairs as needed also ensures that the value of your home remains competitive with the current market. If you decide to move, you can sell your home at a higher value and use those funds for the next home purchase.

2. What lenders look for in first-time homebuyers

To become a homeowner, lenders look at your financial stability and credit history to see how well you manage your finances. However, first-time homebuyer programs offer customized down payment options and more flexibility than conventional home loans. To find out if you meet these requirements, ask a lender for a pre-qualification. This informal review of finances provides lenders with important insight into a borrower’s income, credit score, and assets, without requiring documentation. Read Pre-qualified vs. Preapproval When Buying a Home to learn about the differences.

3. Calculate how much home you can comfortably afford

Lenders review the following factors during preapproval: your income, cash reserves, debts and expenses, and your credit score. Your debt-to-income ratio (DTI) determines your maximum loan amount, and lenders aim for spending less than 36% of your income on total housing costs. This includes the mortgage, property tax, home insurance, and additional costs. Use an online mortgage calculator to determine your target purchase price or monthly payment. Read more in How much house can I afford?

4. Get familiar with key terms

Any important financial purchase involves extensive paperwork with industry jargon that makes the process even more confusing. Here are a few common terms you’ll hear throughout the process:

• Annual Percentage Rate (APR) – The interest rate represents the annual cost of your mortgage as a percentage, while the APR includes the interest rate and other costs, like origination fees, mortgage insurance, or points.
• Appraisal – This report should be conducted by an unbiased appraiser to determine the home’s value based on an inspection, the values of comparable properties in the area, and the current market.
• Closing Costs – Typically 3-6% of the loan amount, these are expenses paid by the homebuyer when closing on the loan and include lender’s fees, title fees, appraisal fee, discount points, insurance, property tax, and interest.
• Down Payment – The up-front payment when purchasing a home is the down payment. It ranges from 5 to 20%, but lenders require additional Private Mortgage Insurance (PMI) on conventional loans if the down payment is less than 20%.
• Loan to Value (LTV) – Calculated by dividing the mortgage loan amount by the home’s value, this ratio determines the risk a lender faces. Mortgages with LTVs over 80% (less than 20% down payment) may require PMI. Homebuyers have a better chance of getting approved with a lower rate when they offer a larger down payment at closing, lowering the LTV.
• Preapproval - Lenders offer a preapproval amount based on your creditworthiness that’s valid for 90 days. An important step in the homebuying process, a preapproval shows you’re a serious buyer and speeds up negotiations when you’re ready to close.
• Principal - This is the amount of the home loan before interest, insurance, and taxes. 

For more key terms, read 15 Mortgage Terms You Need to Know Before You Apply.

5. Protect your investment with a home inspection

A home inspection provides a thorough report to reveal any critical structural issues or necessary repairs. Hire an unbiased, licensed inspector to examine the electrical, plumbing, heating and cooling, roof, foundation, other structural elements, and more. Even newer homes may have concerns that are invisible to the untrained eye. Older homes that appear charming may have additions or repairs made without a permit. The home inspection reveals safety concerns and other questions a homebuyer needs to know before closing.

As a long-term investment, a house should bring stability and safety, not money pit nightmare scenarios. When inspections uncover non-critical problems, seller concessions assist the buyer and seller to reach an agreement that’s favorable to both parties. These options include negotiating the purchase price, asking the seller to pay for repairs or closing costs, or a home warranty.

6. Plan for ongoing and unexpected homeownership costs

Homeowners expect recurring costs besides the mortgage, including property taxes, insurance, utilities, and potentially homeowner’s association (HOA) fees. Unexpected expenses are more difficult to budget for, like broken appliances, repairs from storm damage, and other maintenance. Even fun expenses, like renovations and upgrades, increase your home’s value but require financial planning and budgeting. Learn more about what expenses to expect in The Joys and Woes of the Homeowner.

7. Choose the right lender to guide you through the process

You’ve checked all the boxes and you’re ready to shop for your new home. Most homebuyers reach out to a realtor to narrow down homes that are available in their ideal neighborhood and within their budget. Real estate agents or realtors also have access to new home listings and other information that’s not always available to the public. However, a realtor is not required, and you can save on commission costs if you’re confident in searching for your home and negotiating the purchase yourself.

When you’re ready to make an offer, you’ll need to find a lender who is knowledgeable about the various loan types and terms. A mortgage loan officer answers questions about the loan application, guides you through the preapproval, and determines which loan and interest rate meets your needs. Your lender also reviews your financial situation to calculate the down payment, closing costs, and other expenses so that you’re confident at closing.

Buying your first home doesn’t have to be overwhelming if you have the right team to support you throughout the process. Texell Home Loans offers expert advice and will answer your questions, walk you through the paperwork, and guide you all the way to closing. Visit TexellHomeLoans.com or call 254.774.5104 to get started.