Tips & News

If you’re a first-time home buyer and looking to get a mortgage and explore your options for a home in your market, there are a few things you may want to know before getting started.

1. Your Finances Need To Be In Order (Before Exploring Mortgage Options)

First, you need to make sure your finances are in order. Make a household budget, and make sure you understand how much you can pay each month for a mortgage payment. Making a list of all of your assets and debts will help you determine what your budget should be.

You should also make sure that you know your FICO score. Sites such as www.freecreditreport.com allow you to get your free annual credit report.

Once your finances are in order, you can talk to a lender like CSMC Mortgage to get “pre-qualified,” and find out how much money you will be able to borrow based on your income, debt, and assets. This will help you shop for a home that’s within your price range.

2. The Loan Amount You Qualify For May Be Higher Than What You Should Borrow

Just because you qualify for a $400,000 loan doesn’t necessarily mean you should buy a $400,000 house. In most cases, mortgage lenders will let you borrow up to a 43% debt-to-income ratio (DTI).

That means all of your debt payments plus your mortgage can be up to 43% of your total gross income. However, the rule of thumb is to keep your total housing costs below 30% of your total gross income, so bear this in mind when you’re determining how much you can spend on housing.

3. Figure Out Your Down Payment

It’s true that you can get a loan without a 20% down payment. But, this may mean you’ll need to pay Private Mortgage Insurance (PMI), which costs between 0.5% and 1% of the value of your home every year, split apart into monthly payments.

You can only have PMI removed when you reach 20% equity in your home, so you could end up paying thousands of dollars in insurance fees. It may be wise to wait a year or two to save up a down payment, rather than spend money on insurance costs.

4. Understand Your Costs

The down payment isn't the only cost you will have to consider when looking for a home. Here's a look at some of the main costs you will have to cover:

• Down payment: How much down payment you will pay depends on the type of mortgage, the lender, and your finances. Down payments can go as low as 3.5% for an FHA loan. But, if the house you are considering is $350,000, then 3% is $10,500, which can be a considerable amount of money.

• Closing costs: The fees you need to pay to finalize your mortgage range between 2% and 5%. While there are some ways to reduce these costs, such as asking the seller to pay a portion of your fees, you still have to include them in your budget.

• Home repairs: Best case scenario, the house is perfect just the way it is and you don't need to put another cent into it. But, more often than not, you may need to set aside some extra money for repairs or improvements.

5. You Should Still Have 3-6 Months Of Emergency Expenses After Buying A Home

We highly recommend that you have an emergency fund of 3-6 months of expenses put away – even after paying a 20% down payment. It’s not a good idea to spend all of your savings on a down payment.

An emergency fund gives you a bit of cushioning against job loss, unexpected medical expenses, and other events that may put pressure on your finances. Having this buffer in place ensures you’ll be at lower risk of losing your home or falling behind on other monthly payments.

6. Consider Your Lifestyle and Budget

The idea of becoming a homeowner is exciting, but don't let yourself be carried away. Try to keep your needs, lifestyle, and budget into account when shopping around. A big suburban house may look dreamy, but if it also means a longer commute to work, then you may not like it as much as you imagine. Instead, try to consider a townhome that is spacious enough for a family but also provides easy access to amenities. Make sure to consider other costs too, such as homeowners association fees, which may add up in your monthly expenses.

7. Prove That You Are Serious about Home Buying

A pre-approval mortgage letter is an offer from a lender that agrees to lend you a certain amount of money under certain requirements. This letter can show sellers that you are serious about purchasing a home and make negotiations easier.

8. Hire a Professional Inspector

You think you've found the perfect house - it's in the right neighborhood, it's within the budget, and it only needs minor repairs. Before you sign anything, hire a professional to do a thorough inspection of the structure and mechanical aspects of the home. The standard inspection may miss important issues and it usually doesn't test for problems like mold, pest, or radon. This extra step could potentially save you tens of thousands of dollars in repairs.

9. Explore Your Mortgage Options

Knowing what types of loans are out there and understating their advantages and weak points will make it easier for you to negotiate with the lender and find something that fits your needs and budget. When analyzing each mortgage option, you should consider:

• The loan term: A longer loan term has a higher interest rate and higher total cost while a shorter loan term will require higher monthly payments.

• The interest rate type: A fixed-rate comes with a lower risk, but higher costs while a flexible interest rate may give you a lower interest rate to start with.

• Loan type: Each loan type is designed to fit a certain situation. An FHA loan, for example, has a low down payment and are often a good option for first-time homebuyers who may not have enough saved for a large down payment.
  

Don’t be overwhelmed by the various options. An experienced loan officer will be able to explain which types of loans you qualify for and guide you towards the option that may best fit your needs.

Are you a first-time home buyer? Need to know more? Click here for more information from CSMC Mortgage, and learn everything you need to know. Ready to get pre-qualified for a loan? We can help with that, too. Just contact us online or give us a call at (805) 212-7710 to speak to one of our team members.