Buying a Home: A Guide for First-Time Homebuyers

Buying a home for the first time can be a daunting task. Many first-time homebuyers have no idea where to begin and how to get the best home for their needs. This guide will give you all of the insider information you need to know to get the most out of your first-time home purchase.

Know the Market

The first thing you need to know when buying a home is how the market "looks." Are interest rates lower than usual? Is there a surplus of homes for sale in your intended neighborhood? Are there shortages that are driving up the price of homes?

What is the location like? If you were planning to buy in New York City prior to the pandemic, you would have found high prices, real estate shortages and tough lending criteria. During the initial lockdowns, businesses shuttered, offices went remote and Broadway went dark, making New York's real estate worth far less than it had been in years past.

Before you start looking for a home, find out what market conditions are so you will be in the best possible place for potential negotiations.

Your Credit Matters

Your credit score is a huge determining factor in your ability to buy the home you want. There are five "Cs" that lenders will evaluate to decide how much of a loan you qualify for. Those five Cs are character, capacity, capital, collateral and conditions.

Character---the lender will check to see that you pay your bills on time. This is one of the weightiest factors in your creditworthiness, so it pays to check your credit to ensure that you're properly credited for your payments

Capacity--typically measured by income and employment, this is the measure of whether you have the ability to pay the mortgage and your other debts. Lender will look at your debt to income ratio to see how much of a credit risk you are. The DTI measures what percentage of your income will go to paying debt. The lower the ratio, the better.

Capital--lenders typically don't want you to empty out your bank accounts to buy a home. They want to see that you will have additional capital after the purchase of a home. This capital is necessary as a cushion should you lose your job. Your lender will want to know that you have an adequate cash reserve to cover a few months of mortgage payments.

Collateral---in the event that you can't repay the loan, the lender wants to have some tangible asset that can be sold to recoup their losses. In the case of a mortgage, the collateral is the house itself. Before you receive any money from the lender, they will order an appraisal and inspection on the house to make sure it is worth the asking price and the amount they are going to lend.

Conditions---the overall market will play a role in what your lender is willing to risk on the purchase of your home. In a "buyers market" where there are many homes on the market, you will have more wiggle room when it comes to asking for exactly what you want.

You can ask the lender for lower interest rates and additional concessions. If the lender sees that the market may not be doing well, they may be reluctant to loan higher amounts. Keep these factors in mind when thinking about your first time home purchase.

Get a pre-approval for a set amount prior to searching for a home. This will put you in a better negotiating position and help you move faster if there are multiple bids on the house you want.

How Poor Credit Affects Your Home Purchase

If you have less than perfect credit, you can still buy a home but the terms will look much different than the buyer with good credit. First, you may have trouble finding a lender. Conventional lenders, like those at the major banks, require higher scores to approve buyers for mortgages. While there are lenders who will loan you money, you will end up paying more in interest than those with high scores.

On a $200,000 loan with a 3.3% interest rate, you will pay $115,327.76 on a 30-year mortgage. If your credit score is low and you have to pay a 5.3% interest rate, you will pay $199.819.35 in interest. That's more than $84,000 more in interest. Getting your credit score as high as possible before you buy is key to getting the best rate for your loan.

Your Down Payment: Practical Considerations

Most experts will tell you that it is standard to put down 20 percent of the home's price as a down payment. This will give you more "skin in the game" and make you a safer bet for most lenders. In addition, your monthly mortgage payment will be lower, and you will not have to pay for private mortgage insurance (PMI) to make up the difference if you put down less than 20 percent.

On the other hand, if the 20 percent figure will leave you without a cash reserve, you will not be in a better position to get the best possible rate on the loan. Another drawback of a large down payment is that it may take you longer to get the house you want, as you will need time to save up for the payment.

Some lenders will allow you to buy a home with as little as 3 percent down, but experts warn against this. They caution that such a small down payment will mean that you ultimately pay more in interest down the road.

Hiring Your Realtor™: Some Tips

As a first time homebuyer, it can be a challenge to understand the inner workings of the real estate market and how to get them to work to your favor. Hiring a real estate agent to handle the transaction is the best way to get the best deal on a house.

Ask friends or family for recommendations on good agents first. A second factor to consider when hiring your agent is their company and the company's resources. An agent who works with a reputable company, like The Kay-Grant Group in Scottsdale, Arizona, will have access to better resources and training, and may have better insider information about the markets to guide you.

Finally, it might help to have an agent who lives in your intended area and knows a lot about the community, schools, crime and home values.

Don't Go Over Budget

So you've gotten your credit sparkling, found an agent and saved for your down payment. You have a comfortable savings cushion and you've found your dream home. Only, it's $20,000 more than your budget. But it's perfect and you've already envisioned yourself sitting at your dinner table with your family in this new home. Stop.

Take the emotion out of the purchase. Your dream home will feel that way for the first few months, then it becomes like any other large purchase. Don't stretch yourself thin to buy a home. Think about the things you will need to maintain it. The furniture, the lawn care, the maintenance. It's better to find a home in your budget and make it into your dream home later.

Summary

Buying a home for the first time can be daunting. There are so many factors to consider and steps to take before you turn the key in your new front door. By understanding what it takes to become a first time homeowner, you will be well on your way to enjoying the home of your dreams.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes