Buying your first home or any home is exciting, but it can also be confusing. Here are the steps of the process and special tips to make sure your experience is a positive one.
This part is a lot of fun. Figure out where you want to buy, then look at tons of listings online. Note how long properties stay on the market and changes in asking price.
Online platforms like Zillow will show you trends for the markets in which you’re browsing, analyzing foreclosures and demand to determine whether it’s a “buyers’ market” or “sellers’ market.” You can also see what the property sold for in the past and its projected future value.
The more you look around, the better idea you’ll have of what’s available and how competitive the market is.
2. Figure out what you can afford
The first thing you should do is calculate your debt-to-income ratio.
- Generally, your mortgage payment should equal no more than 28 to 33 percent of your gross income. Add up your salary and any other sources of income to calculate your gross income.
- Your total debt (your anticipated mortgage amount + your car loan + credit card balances + other debts) should not surpass 36 percent of your gross income.
After you do the math, try a test run. Log your expenses for two months and at the end of the month see if you have enough to pay your estimated mortgage (with taxes and insurance rolled in). Remember your rent money can count toward the estimated mortgage expense!
If you come up short, or would have to discontinue contributing to retirement or other key savings accounts, consider targeting a lower price point.
You can also use one of Lafayette Federal Credit Union’s Mortgage Calculators to play around with different numbers and virtually test drive different budgets.
3. Get pre-qualified and pre-approved
Getting pre-qualified is easy – provide your basic financial information to a mortgage loan originator and they’ll be able to tell you how much you’re eligible to borrow. You’ll need to tell them:
- Your income
- How much you have in savings
- Other investments you have
When you’re ready, you can get pre-approved by providing your W-2 statements, paycheck stubs and bank account statements so your lender can verify your financial situation.
4. Find a real estate agent
Real estate agents show you properties that interest you, answer your questions, handle settlement paperwork and act as liaisons between you and the seller. Legally, they can play one of three roles: seller’s agent, buyer’s agent or dual agent. It's important to know the difference.
Seller’s agents are hired by the homeowners or developers. They represent the sellers, but will help buyers interested in their properties. They will answer your questions about the property honestly, but they are NOT obliged to help you get the best deal when it comes to contract negotiation.
A "buyer’s agent” will try to get you the home you want at the best possible. Your agent can show you any property for sale and will tell you things a seller’s agent won’t, like whether the seller is willing to accept a lower price and how long the property has been on the market. To find a good agent, ask friends, relatives or coworkers for referrals.
Dual agency occurs when the buyer's agent and the seller’s agent are affiliated with the same real estate company. The amount of confidential information that can be revealed to either the buyer or the seller is limited unless both parties agree to disclose this information.
5. Find the home you want and make an offer
To focus your search, make a list of wants and needs to share with your agent. Consider:
- How many bedrooms and bathrooms you need
- Whether you need a garage, a yard or a certain number of parking spots
- Preferences that aren’t requirements
Rank the preferences in order of importance, then look online to see if the homes that meet your needs and address some preferences fall within your budget or whether you need to reconsider. As your tour homes:
- Be open-mined and look at several options
- Don’t look for your dream home – find something that meets your needs
- Remember that some things you don’t like can be fixed easily and others can’t –your agent will help you identify quick fixes and more substantial projects
- Consider the home’s resell value and how long you expect to stay there
Make a list of pros and cons for each home that you like. Consider the neighborhood, your commute to work, the quality of nearby public services and schools, the accessibility of grocery stores and other necessities, whether the neighbors seem friendly and whether there’s adequate parking.
Once you’ve found the home you want, talk to your real estate agent and make your offer.
6. Get a home inspection
After you and the sellers have agreed on a price, it’s time for you to take a closer look at the property. Your agent should be able to recommend an inspector or you can find one yourself – just make sure they’re a member of the American Society of Home Inspectors (ASHI).
The inspection will cost you between $300 and $600. The inspector will look for flaws in the structure, electrical systems, appliances, etc., and write up a report and estimate the cost of repairs. It’s smart to be present for the inspection so you can get clarification and details around any issues.
You may want to hire separate inspectors to check for radon, lead, asbestos, carbon monoxide or termites. If the home is older, or the home inspector raises flags, you may want to consult a structural engineer. After your inspection(s), present the report(s) to the seller. He or she may agree to fix these items, give you money to repair them yourself or offer to sell you the home "as is.”
7. Select your loan type + your lender
Different lenders will offer different loan programs, so take the time to select the lender with the program that best fits your needs.
The most common type of mortgage is a fixed-rate mortgage in which the interest rate and monthly payment amount remain the same throughout the loan period. Regular fixed-rate mortgages terms are usually for 15, 20, 25 or 30 years.
Adjustable-rate mortgages (ARMs) are 15 or 30-year loans with monthly payments that change over the term of the loan due to changes in the interest rate. The primary advantage of an ARM is a low initial interest rate.
Other common types of mortgages include FSA loans and VA loans, which are underwritten by the government.
When evaluating lenders, compare the programs they offer. Look for the best rates and lowest fees, and make sure to find a lender who is easy to work with because you’ll rely on them to complete the loan package in time for your settlement date!
Lafayette Federal Credit Union has a program especially for first-time home buyers that’s a great option for those just starting out. It includes:
- Lender credits that reduce your closing costs
- Rate discounts that save you money long term
- Up to 90% Loan To Value (LTV) without requiring private mortgage insurance (PMI)
- A minimum down payment of just 3%
- Loans up to $636,150
- No points charged!
8. Have the home appraised
An appraisal determines the value of the property. The appraiser will create a written report for the lender and you'll be given a copy at your loan closing. Usually the appraiser will inspect both the interior and exterior of the home but in some cases, only an exterior inspection will be sufficient.
After the appraiser inspects the property, they will compare the qualities of your home with other homes that have sold recently in the same neighborhood. The appraiser will try to compare the major components of these properties (i.e., design, square footage, number of rooms, lot size, age, etc.) to the components of your home to come up with an estimated value.
Your lender will coordinate all of the paperwork involved in your purchase. They’ll work with a title company to make sure that the sale goes smoothly and meets legal requirements.
10. Find a Title Company
Rates vary among title companies and it is important to get a few quotes. Title companies like credituniontitle.org can provide competitive pricing to meet your financial needs. Be sure to read up on Owner’s Title insurance so you understand the importance of this policy.
On the day of closing, you’ll sit down to sign the documents required to complete the purchase. There are also costs associated with closing, and these will typically add up to anywhere from three to 10 percent of the value of your total mortgage loan.
The seller may pay some of these fees and some may be discounted if you are a First Time Home Buyer; others you will be responsible for. Your lender may also finance some, or even all, of your closing costs. Closing costs can be divided into three categories: lender fees, prepaid expenses such taxes and insurance, and settlement costs. Lafayette Federal Credit Union has compiled a complete list of closing costs you might encounter here.
If you’re in the process of buying a home, make sure to reach out to the Loan Officers at Lafayette Federal Credit Union and review the programs they have to offer. Lafayette Federal Credit Union offers fixed rate loans, FHA loans, VA Loans and First Time Home Buyer Loans. To learn more, visit https://www.lfcu.org/personal/borrow/first-mortgages. Lafayette Federal Credit Union is Proud to Be an Equal Housing Lender.