5 Must-Knows for First Time Home Buyers
We are seeing incredibly low interest rates, but before you jump into the house hunting process, here are 5 things you must know about purchasing a property for the first time or if it has been a while since you last bought a home.
The Mortgage
Due to the current situation, interest rates across the country are at a record low with the average interest rate now just 3.23% for a 30-year mortgage term. This means that those who are eligible to qualify for a mortgage at the current rate are likely to pay a lower total amount for their property across the term than if they bought at this time last year.
In the US, the minimum cash deposit required to buy a house is usually at least 5%. But by utilizing the government-backed Federal Housing Association Loan, you could put as little as 3.5% down, although this is likely to limit your mortgage amount. The general rule of thumb to follow is “the higher the down payment, the larger mortgage you can get.”
A standard fixed rate mortgage spreads your interest constantly over the entirety of the loan period. It prevents lenders from hiking up your rate along with the rise of inflation, so you wouldn’t have to worry about the pressure of increased payments later down the line. This can be especially beneficial for those who may have situational and circumstantial changes in the future.
Paperwork
There is a whole host of documentation requirements from multiple parties before a house purchase will go through. One of the initial preparations is knowing your credit score. Once again, this is a factor that can affect your mortgage eligibility. Significant changes to your credit score up to 3-months prior to your house purchase can prevent you qualifying for “better” mortgage conditions. This might include a change of job situation impacting your stability or another large purchase such as a car.
You’ll also need to prove your income by showing paystubs, obtain a proof-of-income letter and your tax returns. Before your search begins you might need:
Application
Letters of professional references
Pre-approval letter from the bank
The pre-approval letter helps the real estate agents involved know that you are qualified to purchase the house you may be touring. Many times, agents may require a pre-approval letter before starting the lengthy purchasing process.
28/36 Rule
Before lenders agree to mortgage terms, they are likely to use the 28/36 rule in order to assess your borrowing capacity.
It states that (after taxes) households should spend no more than 36% of their monthly income on debt repayment and no more than 28% on housing expenses.
This informs lenders on the level of risk as they calculate the likelihood of you defaulting on the loan. They are unlikely to grant your loan if you intend to rely on a higher percentage than these figures to pay your mortgage due to lower stability and affordability upon change of circumstances.
Contact me here if you’d like to discuss and calculate your affordability, as this should factor into your house price budget.
So you’ve found your dream home, what’s next?
I generally recommend that you get pre-approved for a loan before you begin searching for your first home. This allows you to work quickly once you find “the one” and means you can avoid delays.
Imagine another person puts the same offer as you for the house you want, the only difference is that they are ready to complete. It’s a no-brainer for the seller to accept your competitor’s offer above yours if they want a faster sell with a lower chance of complications.
Extra Expenses
Unfortunately, it’s not just as simple as a down payment and mortgage- there are lots of other payments and expenses when you buy a house including, but not limited to:
Earnest money
General Inspection
Survey
Sewer or Termite Clearance
Land Survey
Earnest money is a direct deposit from the buyer to the seller to represent “good faith”. It allows the buyer a little extra time to conduct any appraisals or inspections before the purchase clears. There are many aspects of a home purchase that could go wrong so it gives the seller an added layer of security that you are a serious buyer. If your financing falls through or you just decide you don’t want the house the seller gets to keep the earnest money. If the inspection produces concerns and you back out you often get your earnest money back.
A general inspection is recommended to find any structural damage or unlisted problems with the property. The report usually covers the condition of the heating, air conditioning, electrical and plumbing systems, along with insulation and foundation quality. The cost of these inspections varies on the size of the house and it’s age. You might also opt for add-on services such as a sewer or termite inspection which can further increase the expense.
Finally, first-time home buyers could benefit from a land survey for more complicated properties. These surveys are certainly added expenses, but due to the immense investment of a property, they’re hard to argue against. They inform potential owners about costs and repairs that might arise later down the road, and can help you save money in the long term.
Schedule a call with me at any stage of the process. Whether you’d like to get your finances in order before you start looking at the property ladder, or if you need help with the financial documentation and proof, let’s have a discussion!
This material is for informational purposes only. Independent Financial Group does not offer mortgage services.