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Home Buying 101

A guide for the first-time homebuyer

Becoming a homeowner is one of the biggest decisions — and investments — you can make. Looking for a house, knowing if you’re ready to buy, and even the steps to take when buying a house can be overwhelming.

That’s where a guide comes in. You can avoid stress and live well as you turn your dream of buying your first house into reality.

This first-time homebuyer’s guide will help walk you through the process of:

  1. Getting your finances in order
  2. Finding out what you can afford
  3. Applying for a loan
  4. Shopping for a house
  5. Making an offer

Preparing for your first-time home purchase

The pre-work you do before buying a house can really make your home work for you later. Home ownership is a huge investment that can tank your budget if you let it. Doing your research first can help you combat common home-buying myths and build a stronger foundation for your future.

Financial health

It’s time for a financial checkup! From getting your credit score in shape to trimming down your budget, flex that financial muscle in preparation for this big investment.

If you don’t already have a budget, use Numerica’s Budgeting Workbook to set one up. This is a great way to determine how much you can afford for your new home. 

Not sure what your credit score is? You can pull your credit reports once a year for free from the top three credit reporting agencies. While other websites offer free credit score checks, these official reports are what your lender will be looking at. It’s smart to get an accurate credit score when you’re preparing to buy a home.

If your credit score is looking good, work hard to keep it that way. Avoid the urge to apply for a store credit card or make a big purchase if buying a home is in your near future.

What happens if you have bad credit? If your score is on the low side, follow some of these steps to get your credit score in check. Keep in mind bad credit doesn’t necessarily mean you will be denied a loan. However, it could mean a higher interest rate, leaving you paying more per month.

Keep in mind some financial institutions, like Numerica, are committed to serving people, not credit scores. Don’t hesitate to reach out to your favorite branch to ask for guidance. We want to help you fulfill your dreams of being a homeowner.

Find out how much home you can afford

We all like to have formulas, but figuring out how much you can afford to spend on a mortgage is more than a simple calculation.

Instead of asking yourself how much you could afford for a house, start by weighing how much you should be spending. Sure, there are a lot of budgetary factors to consider in addition to a mortgage — property tax, insurance, utilities, etc. But you also need to weigh your own comfort level. If you land on a monthly payment number that feels like too much, trust your gut.

One of the best ways to process the question of home payment affordability is to talk with an expert. One of Numerica’s Home Loan Center team members can help you determine the right price range for your budget.

Don’t forget the additional expenses

Type of mortgage. The mortgage you choose will affect your monthly mortgage payment. Finding the best mortgage for your budget is the job of your lender with input from you. Numerica offers several types of loans to fit your needs.

Private mortgage insurance (PMI). Many first-time homebuyers believe they have to put down 20% on their new home. This is not always the case. A large down payment helps lower your monthly payment and can help you avoid paying private mortgage insurance. The annual cost for PMI is typically 0.5 to 1 percent of the entire loan amount.

Closing costs. Fees and taxes associated with the purchase of a new home include:

  • Loan origination fees
  • Discount points
  • Appraisal fees
  • Title searches
  • Title insurance
  • Land surveys
  • Taxes
  • Deed-recording fees
  • Escrow fees
  • Home inspection
  • Credit report charges

These can total 3 to 6 percent of your new home’s purchase price. To get a little more familiar with closing costs, check out home-buying myth No. 5. Closing costs include an earnest money deposit (usually 1 percent of the purchase price).

Homeowners insurance. Insurance can cover damages or losses to your home as well liability for injuries or accidents that might occur on your property.

Homeowners Association dues. If you’re thinking of buying a new home, you may need to budget a line item for HOA, or Homeowners Association. Many housing developments put HOAs in place to help share collective costs like maintenance or snow plowing. Costs can vary drastically depending on where you live and the neighborhood amenities.

Applying for a loan

Before you get ready to start your house hunt, apply to be prequalified for a loan. This helps you learn how much a loan may be approved for, which is a simple way to start narrowing your home search.

Prequalification also helps you know the types of home loans you might be eligible for. Don’t confuse prequalification with preapproval. Prequalification is a ballpark figure; preapproval accompanies the mortgage application for the specific home you want.

Either way, the lender will need information about you to begin a loan process. Plan ahead and refer to Numerica’s Mortgage Loan Application Checklist to begin tracking down documents that may be required.

How do you prequalify to buy a house?

Give us a call at 800.433.1837 or visit a nearby branch. If you’re not a Numerica member, come in and get to know us.

What is the prequalification process?

The prequalification process helps to determine your possible loan amount and starts with you providing your income, debt, and assets to your lender. The lender then provides an approximate amount you could qualify for. Keep in mind this is not an in-depth look at your finances and doesn’t consider your credit score.

Does prequalifying affect my credit?

Nope! Prequalifying is what is known as a soft pull and will not affect your credit score.

Start your house hunt

Armed with your budget and prequalification, you’re finally ready to begin your house hunting! This tends to be the most exciting part of the process. So hit the street, internet, and open houses to see your options.

Should you use a real estate agent?

As a first-time homebuyer, a real estate agent can be a tremendous resource. This professional helps to find a house within your criteria, walk you through the purchase process, and negotiate on your behalf.

This is the perfect time to turn to family, friends, and colleagues. Get referrals to real estate agents they have used, and ask them about the process.

When is the best time to buy a house?

The best time to purchase a house is when you’re financially ready. In general, most homebuyers purchase houses in the spring and summer. While there might be less competition in late summer or fall, there is also typically less inventory.

Making an offer

Making an offer goes something like this:

  • Your offer is submitted to the seller
  • The seller either accepts, declines, or counters
  • You negotiate or walk away
  • Your offer is accepted
  • You sign a purchase agreement

What happens between making an offer and closing?

Home inspection. Home inspectors examine the home from top to bottom looking for structural issues, mold, asbestos, roof life, electrical, plumbing, etc. Inspections should take 2-4 hours.

Home appraisal. Appraisers look at total square footage, renovations, location, etc., and determine the value of the house as collateral for your lender.

Most lenders will not give a loan for much more than the house is appraised at. If a house appraisal is less than what it is being sold for, you might have to come up with the difference.

Welcome home

Closing on your first house is a very exciting time. While most of the closing consists of sitting around a table and signing a mountain of documents, nothing feels better than grabbing your keys and knowing the house is yours.

Here’s the legal stuff: All loans subject to approval.

This article is provided for educational purposes only and is not intended to replace the advice of a financial advisor, loan representative, or similar professional. The examples provided within the article are for example only and may not apply to your situation. Since every situation is different, we recommend speaking to a professional you trust regarding your specific needs.

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June 22, 2024