First Time Homebuyer Guide
Congratulations on taking the first steps towards purchasing your first home! Initially, the process can seem a bit overwhelming. There is an enormous amount of information available & everyone seems to have an opinion- from family members, friends, and co-workers to internet websites and various organizations and entities. The most important information we would have you take away from the First Time Homebuyer guide we’ve put together below is:
Foundation Mortgage is a direct lender and has been assisting First Time Home Buyers since 1998. We’ve seen extreme bubble markets, recessions, and the normal ebbs and flows associated with housing. We specialize in Purchase Mortgage transactions. Our Mortgage Bankers are licensed, experienced, and offer FREE Consultations & Free Pre-Approvals!
Below is a list of steps, considerations & resources to assist you, a first time home buyer, in efficiently navigating the path to home-ownership.
Step 1: Figuring Out If You Are Ready To Become A Homeowner
Buying a home is both an emotional and financial decision. Buying a home for the first time should involve a lot of research and thought. Home buying is one of the most important & infrequent decisions you will make in your life. Below are some things to consider when evaluating whether you’re ready to become a First Time Home Buyer.
Why do you want to buy a home?
The emotional component. Determine why you want to buy a home. If you have partner, have conversations to make sure you understand each other’s motivations – both for today and the future. Some considerations include:
What is it you are looking for in a community?
Would you want to establish roots there?
You should have an idea of how long how are planning on living in the property.
Buying a home is a commitment to live in an area. It’s a good idea to know whether you like the area. Are there other reasons such as: school districts, proximity to work, social areas, services & activities that make it desirable to you?
Think ahead 5 to 7 years. Can you see yourself growing into or out of the area over the next several years?
Consider the type of neighborhood and structures – Single Family Homes, High-Rises, and recreational amenities in the area.
Consider whether you are ready to spend the time required to maintain the property?
Are you looking to establish stability and settle into a place you can design and decorate how you want or prepare to raise a family?
Figure out your prime motivators for buying. Owning a home means different things to different people. Are you looking for your own space to do what you want with? A place to grow a family? Is it financially driven to build equity? How do these questions fit into your mid and longer term financial plan and personal goals? If you are buying with a partner, make sure you understand their motivations as well.
What Financial Considerations Should First Time Home Buyers Evaluate?
There are many financial considerations to take into account when buying your first home. Be cautious if the prime motivator is to take advantage of an investment opportunity and you are planning on a quick flip of a home you can’t really afford or don’t like. Below are several financial perspectives to consider as a first time home buyer:
Rent Vs. Own – Is it cheaper for you to rent or buy?
Use a Rent vs. Buy Calculator to roughly estimate whether it is cheaper or more expensive to buy or rent similar properties.
There are a number of factors that go into your total monthly payment when you own your own home; and we’ll touch on these later, but it’s helpful as a start to look at a Rent vs. Buy Calculator to see generally how much your monthly payment will be.
While Rent vs. Buy Calculators is a good start, it’s important to also realize that there are ongoing costs associated with owning a home that don’t exist when renting. Unexpected Repairs, changes to insurance or taxes, etc. Things happen & you’ll want to consider these unforeseen events in your financial planning.
Rent Vs. Own – Can you afford to buy a home?
This can be a difficult question as there are many considerations.
Start by looking at your current monthly rent payment.
Can you comfortably afford the payment or are you barely scraping by?
Evaluating where you stand in relation to your current rent payment is a good barometer to use when trying to figure out how much of a monthly housing payment you can afford.
What you can qualify for vs. what you can actually afford are two different things. Many borrowers will find that they can qualify for a loan to buy more house than they can afford. Be careful of reaching too far and ending up unable to enjoy your life because all of your income is going into your housing payment. This is called being “house poor”.
Using your current rent payment as a starting point can give you a feel for how much of an increase in your monthly housing payment will be comfortable for you.
Always remember, just because you can qualify for a loan doesn’t necessarily mean that it’s the right thing for you to do.
Lenders can evaluate whether you will qualify for a mortgage, but won’t know how the monthly payments will impact things such as how much travel or activities you do & how you spend your leisure money.
Debt Ratio Limits
Debt Ratio – The ratio of your monthly debt divided by your monthly income.
Rent Vs. Own – Opportunity to Build Equity
Historically, the home ownership has been the most successful driver of wealth creation for American families.
Paying money towards a mortgage each month, rather than making a rent payment, builds equity in the property over time.
As time passes and the mortgage balance decreases and the property value traditionally increases you build wealth.
This is often the main driver for people to purchase a home.
Rent Vs. Own – Tax Breaks for Owning Your Own Home
This is often the biggest tax break of home ownership.
Mortgage Interest is deductible!
Since most of your monthly Principal & Interest Payment starts out as Interest, this can add up to a lot of savings!
Any points paid at closing to get a better rate on the purchase your primary residence are deductible (assuming they are reasonable and customary amounts for the area you purchased.)
Property Taxes typically go into an escrow account and are paid out by your lender either semi-annually or annually.
These taxes are deductible for as long as you own your home.
Are You Ready? Employment Stability & Savings Patterns
When you buy a house and commit to repay a mortgage you should consider your long term ability to make your monthly mortgage payments and repay the debt. As mentioned above, you also want to evaluate your ability to absorb potential unexpected costs or emergencies that may arise. Ask yourself some of the following questions to help determine whether you are really ready to commit to a home:
How stable is my job & income?
What is the likelihood you will be able to continue making your mortgage payments over time?
Are you salaried? Commissioned? Do you have an increasing salary structure over time or is it fixed? Do you go through long lulls without receiving income?
What is your savings pattern?
Have you been able to accumulate savings based on your existing rent payment?
Will you be able to continue to do so based on your estimated new housing payment?
How much money/reserves will you have remaining after the purchase down-payment and closing costs are paid?
Are You Ready? Credit Analysis
We will discuss getting pre-approved below, but it is a good idea to get a copy of your credit report and review your scenario with a Mortgage Professional before you get too far along the Home Buying process. It is not uncommon for your credit report to contain errors. Accessing it early gives you time to make corrections to erroneous information & to work with your Mortgage Professional on improving your Credit Score. Higher Credit Scores equate to lower interest rates & mortgage interest savings accumulates over time. Doing some work upfront to ensure you qualify at the best terms possible can really save up over the life of your loan. Being proactive and reviewing your credit and getting pre-approved will but you in a great spot to getting the best terms possible available to your credit situation.
Step 2: Get A Realtor®
Putting together a strong team of professionals will serve you well as a first time home buyer. This is probably the single most important piece of advice we can offer. Buying and selling real estate is complex. Navigating the forms, contracts, timelines, inspections, pricing & negotiations, financing and closing process all require experience. Your Realtor® and Mortgage Banker should be Licensed Professionals, governed by state-laws.
Additionally, while surfing online listings or thumbing through local real estate listing publications is a decent place to start; all properties are unique, and a good Realtor® will have the tools available and local expertise to help you find the best property for your needs & prove to be a valuable advisor when negotiating price and the details of your contract.
How Do You Choose a Good Realtor®?
Foundation Mortgage has had a local South Florida presence since 1998. We can recommend strong local South Florida Realtors® for you to interview.
Often buyers will interview several Realtors® before finding a good fit.
Some questions to consider include:
Does the Realtor® have experience in the local market you are interested in?
How much experience does the Realtor® have?
Ask for a copy of the Realtor’s® current listings and closed sales over the past year.
Look at their marketing, website, online reviews- a simple google search of the Realtor’s® name and company should provide some information.
Discuss your goals and needs – Does the Realtor® listen to you and understand what you are looking to achieve?
Determine your Business Relationship
Get a copy of the Realtor® agency disclosures.
Is the Realtor working as:
A Buyer’s Agent
A buyer’s agent works for you, the buyer.
A Seller’s Agent
A seller’s agent’s first duty is to the seller.
A transactional agent is loyal to the transaction & doesn’t necessarily represent you. This can be an important distinction in the rare occurrence a problem arises in the process.
Listen to your gut.
What to Expect From Your Realtor®?
Establishing appropriate expectations as far as what services your realtor will perform is vital.
What type of information pertaining to market information and historical data will they provide?
How will they show you listings?
How will they get you familiar with the area, properties, and price points?
Will they setup automatic updates for you when new properties become listed or price points change that meet your criteria?
How will they negotiate your offer and contract details when you get to making an offer?
Step 3: Get Pre-Approved For A Mortgage
Most Sellers will not accept an offer without a Pre-Approval Letter & many realtors won’t take you on house-hunting tours without you first being able to demonstrate that you have been Pre-Qualified or Pre-Approved for the price range you are looking to purchase in.
Selecting a Professional, Licensed, and Experienced Mortgage Banker who is willing to step you through a FREE, thorough Pre-Approval Process is imperative.
A thorough Loan Pre-Approval is the most prudent step you can take to ensure a successful process.
Predicting accurately the financial details for your transaction is determined by the quality of your Mortgage Pre-Approval process. Your down payment requirements, monthly payment, and closing costs, are all determined by the type of loan and terms you qualify for. Cutting corners at this step can cause significant changes to your numbers at closing.
Getting Pre-Approved Offers The Following Benefits:
Realtors more willing to spend time with you, knowing that the transaction is more likely to close.
Sellers more likely to accept your offer
You’ll have a more accurate idea of the finances of the transaction:
Loan Type and Program you Qualify For
Principal and Interest & Total Monthly Housing Payment
Smoother Process From Contract Signing To Closing
Knowing what you’ll need to do to get financing approval for your loan.
Pre-Qualification Vs. Pre-Approval
We cover this in greater detail in our Pre-Approved Vs. Pre-Qualified Things To Know . In short, many first time home buyers, and people in general, confuse getting pre-qualified with getting pre-approved for a mortgage.
A Pre-Qualification is a short phone call where you discuss your income, asset, and credit situation verbally and the mortgage agent then issues a pre-qualification letter.
A Pre-Approval requires you to submit paystubs, W2s, Tax Returns, Bank Statements, Credit Report and complete an full application. This information is then reviewed by an Underwriter and program underwriting standards are applied to determine whether you qualify or not for a loan.
A Pre-Qualification is worthless. The verbal numbers that are provided can differ greatly from the actual numbers an Underwriter will use to calculate your income, assets, debts and credit. by an underwriter.
For Example: A potential borrower is employed by a family member and currently earns $5,000mo. This amount is given during a pre-qualification for a loan. It turns out that because the borrower works for a family member, and the borrower is applying for a Fannie Mae loan that for underwriting purposes the income needs to be averaged over the past 24 months and the allowable income is only an average of $3,500/mo.
The scenario resulted in a borrower having to apply through the FHA Loan Program which has less stringent Income vs. Debt requirements and substantially changed the borrower’s monthly payment.
A thorough Loan Pre-Approval Process will include a discussion on:
Your Plans – Short and Long Term for the house.
Your financial goals with the financing.
How much risk or safety you are looking for in a mortgage.
Speak with one of our Licensed Mortgage Bankers for more information on the following Loan Types and Programs.
The different Loan Types you are eligible for:
The risks and benefits associated with different types of home loans
Fixed Rate Mortgages
Adjustable Rate Mortgages
Special Considerations associated with certain property types:
Foundation Mortgage offers FREE Pre-Approvals!
We believe strongly in working with our borrowers up-front to get a clear understanding of what programs and options you will qualify for & what the expected monthly payment and closing costs of your transaction will look like.
Don’t cut corners! Get Your Free Pre-Approval Today!
Step 4: Shopping For A Home
Armed with a Realtor® who knows your local market, and a strong Pre-Approval letter and grasp of your budget, you are ready to start seriously shopping for homes!
Budget → Location → Neighborhood → Size & Property Type → Condition
Budget – By this point you should have a comfortable feel for what you can afford. This will help your realtor narrow the list of properties down for you to visit during your house-hunting tours.
Location & Neighborhood – Based on your conversations and considerations discussed in Step 1, your realtor will show you homes in your budget in the communities & neighborhoods you are interested in.
Size & Property Type – Based on your budget, your current & future needs, and value, you and your realtor will determine which property type and size of home will best suit all your personal and financial considerations & needs.
Condition – As you hone in on particular properties, make sure you pay attention to the condition of the home. Is it move-in ready? Will you need extra money to pay for work to bring it up to the condition you need? How is in comparison as a value to other similar properties in similar/better/worse condition?
Step 5: Making An Offer
Once you’ve found your home, you will need to make an offer. Here are several items to assist you when it comes to deciding on how much to offer for your new home & evaluating the Purchase Contract.
Compare the listing price to the listing price of other comparable homes.
Compare the list price to the most recent closed sales of similar homes.
Pay Attention to the any unique items with the Property
Short Sale – Foreclosure
Find out the sales history of your property.
Was it recently sold?
If it was sold within the last 90 days it may impact the financing – speak with your Mortgage Banker.
Get information regarding Taxes, Insurance and HOA dues (if any) and review them with your Mortgage Banker to make sure you understand the proposed monthly payment.
Note that property taxes are those paid by the current owner. If that owner has the property homesteaded your taxes may increase once the sale is recorded the following year. Speak with your Mortgage Banker to be sure you understand your total payment well.
Have your realtor ask the Seller what their current insurance is and whether you can speak to their insurance agent to get a quote for your annual insurance costs.
Don’t forget about HOA dues! If your home is a part of a community you may have additional monthly Homeowner Association Dues to consider.
Consider Asking For A Seller Contribution to your Closing Costs
It is not uncommon to negotiate with the seller to pay part or all of your closing costs. Depending on whether it is a buyer or seller’s market, you may be able to decrease you amount of out of pocket costs.
Click here for more information regarding Seller Credits to Closing Costs.
Know Your Contract Details, Dates & Deadlines
Review the Contract Dates with both your Realtor and Mortgage Banker. Make sure all
three of you are on the same page. You don’t want to have to renegotiate these items after it is already signed.
Amount of Your Deposit
This is the amount of money you are putting into escrow to secure the contract. It represents your commitment to the transaction and the amount you could risk if it does not close.
Deadline to Apply for Financing
Home Inspection Deadline
The home inspection is something you arrange (often a professional referral from your realtor or mortgage banker) to find out whether there are any deficiencies in the property that the seller should repair or that you need to know about before committing to buy the house.
Inspections usually cost a few hundred dollars, depending on the size and type of the property & region you are buying in.
If you are buying a Single Family Home, a 4 Point inspection can also lower your insurance payments.
Appraisal Completion Deadline
The appraisal is an independent evaluation of the value of the house. It tells you and your lender how much the property is worth.
The appraisal is obtained to get an independent verification that the property is worth what you and the seller have agreed to.
Financing Contingency – Mortgage Commitment Date
If you are dependent on getting approved for a loan, this will be the most important date on your contract.
Make certain that the contract contains a Mortgage Commitment Date.
It is very important that you DISCUSS your Mortgage Commitment Date with your Mortgage Banker PRIOR to signing a contract.
The Mortgage Commitment Date is the date you need to have your loan approved by.
Once you provide a mortgage commitment to the seller, the contract becomes “Firm” and your deposit could be at risk of you don’t close & the loan is denied.
Step 6: The Loan Process & Closing
Now that you’ve signed a contract, you’ll need to go through the Processing & Underwriting of your loan. Click Here to Visit Our Overview of the Purchase Loan Process From Application to Closing for detailed information on the loan process and Helpful Hints for Closing.