By Francisco Lugo III, Licensed Real Estate Consultant
Buying your first-home can be a scary experience, but it doesn’t have to be. With thoughtful planning and preparation, these five areas to consider when purchasing your first-home can serve to make this next step in your life an enjoyable experience.
From traditional to conventional loans, there are many ways to finance the purchase of your first home. First thing to note is that financing is unique to individual buyers and what works for one buyer may not be the most appropriate for others.
The Federal Housing Administration, better know as FHA, offers FHA loans. The Administration’s primary goal is to stimulate the housing market through accessible and affordable loans. FHA loans have made a name for themselves as a resource for first-time homebuyers; however, it should be noted that FHA loans can be used for subsequent home purchases as well. A couple of restrictions on FHA loans is that they may not be used to finance the purchase of an investment property or a second home (e.g. vacation home).
FHA loans generally require a low down payment, credit standards are not as stringent as conventional loans and borrowers can use a co-borrower to help qualify for a loan. These loans are also backed by the government as borrowers will be covered through the FHA’s home loan insurance program.
Contrary to FHA loans, conventionally financed loans are not guaranteed or insured by the government. These loans are generally offered through private lenders and may conform to guidelines established by Fannie Mae and Freddie Mac (both government-sponsored entities that buy mortgages from lenders and sell them to investors). If loans do not meet Fannie Mae and Freddie Mac guidelines, the loans will be referred to as “jumbo” loans.
Conventional mortgages that do not meet minimum down payment requirements, generally 20%, may be subject to Private Mortgage Insurance (PMI), which is an added monthly payment first-time homebuyer should be aware of. PMI will insure the mortgage should there be a default on the loan.
VA loans are mortgage loans guaranteed by the United States Department of Veteran Affairs. If you have served in the military, this may be an attractive financing option as a significant portion of your loan can be guaranteed up to a certain limit. Veterans eligible such financing should consult with a certified mortgage lender to understand the limits that are applicable in their desired location.
As you can see, there are multiple options available to first-time homebuyers. Nevertheless, it is always best to consult with a certified mortgage professional when weighing your financing options.
Note: this is not an exhaustive listing of financing options and a certified mortgage professional should be consulted when considering financing options.
Many first-time homebuyers make the decision to purchase a home and are confronted with the reality of credit and how it plays into qualification for financing. If you are having thoughts, whether near or in the future, your credit should be a key area of focus as this could mean the difference in obtaining favorable lending terms.
You’ll want to ensure you pay attention to your credit score. Stellar credit scores range from 760 to 850 and can offer you significant leverage in striking mortgage terms. Another area to keep tabs on is your debt-to-income (DTI) ratio. DTI is your total monthly debt payments divided by your gross monthly income. Each lender has their own lending standards, but a general rule is to keep your DTI to 36% or less. A higher DTI is an indication to lenders of your ability to manage your finances. Generally, a higher DTI is viewed by lenders as higher risk, which may materialize into higher interest rates on your mortgage loan.
Many first-time home borrowers draft a savings plan designed to cover the down payment for their home purchase; however, buyers should be aware of other added cost involved in purchasing a home. Aside from the down payment, buyers can expect to pay other closing costs such as title search fees, origination fees, loan discount points (if applicable), courier fees, property taxes, survey fees, etc. A general rule of thumb for closing fees is that they may likely be 2 to 5 percent of the purchase price of your home.
Wants vs Needs
It’s important to lay out your wants versus needs when pursuing your first home. It’s rare that buyers will find a home that meets each and every want and need, so it’s best to enter the homebuying experience with tamed expectations. Try putting together a list or wants and needs, then challenge yourself as to whether a want is really a need and vice versa. This exercise will help in developing a list that can serve to be a key resource as you decide on your first home.
Crossing over from renter to buyer? An important consideration when making this decision is to align the end date of your lease with your closing date. If this is not possible and your lease is due to expire, you should contact your property manager/landlord 30-45 days in advance of the lease expiration date to find out if month-to-month or partial-month leases are available.
Francisco Lugo III is a licensed real estate professional based out of Madison, New Jersey. Do you have questions about real estate? If so, Francisco can help as you consider your real estate transaction. Click here to contact Francisco.