Making the decision to become a homeowner can be stressful for many first-time homebuyers. The looming questions of affordability, where to purchase, and job security are all legitimate concerns that warrant serious consideration. The reality is that there’s never a right time or the perfect circumstances to begin this journey, but ultimately, you want to treat house-hunting and the mortgage process as you would other major life events.
Creating a timeline, educating yourself about the market, and understanding your unique financial situation and budget will make the process easier. Here are five key factors every first-time homebuyer must consider when getting a mortgage.
1. Understand the housing market
In a recent S&P/Case-Shiller report, home prices rose 5.2 percent. Even with a stable labor market that supports the price increase, home prices continue to climb faster than inflation igniting competition for fewer available homes. How does this affect first-time homebuyers?
According to Katie Miller, vice president of mortgage lending at Navy Federal Credit Union, the pricing hike "doesn’t necessarily influence the approvability for first-time buyers." In fact, there are some 100 percent financing options available to first-time homebuyers that level the playing field and gives them a chance to participate in the market, Miller says.
Granted, when inventory is low, it does become a sellers’ market making it tougher for buyers to compete, but working with a skilled-lender who can help facilitate the borrower through the process is essential to getting approval.
2. Hire a professional team
When purchasing a home, employing a team of professionals is a major component that could determine the success or demise of your mortgage experience.
A good broker will oversee the entire process and ensure that each element of the transaction goes smoothly from acquiring financing with the right lender to signing documents at the closing table with a skilled attorney, says Collin Bond, licensed associate real estate broker at Douglas Elliman Real Estate.
Bond advises that when applying for a mortgage, make sure that your taxes are filed and organized. Gather your last month of paystubs and make sure you can easily access the last two months of your bank accounts. You should also obtain a letter of employment from human resources, and check your credit history to determine if there are any discrepancies.
The important thing is to remember that you have options and shopping around to compare what different companies are offering is a smart move.
3. Know your personal finances
Understanding your numbers before house hunting could save you from becoming "house poor." Not paying your monthly credit card payment just to live lavishly isn’t a responsible buyer’s move.
It’s relatively impossible to get approval for a mortgage without a good credit score.
According to Bond, lenders consider how much liquidity you have, how much debt you owe, your monthly income, and your credit score when determining how much you can borrow and at what interest rate. For instance, your available liquid assets—those that can be quickly converted to cash—define the size of the down payment.
Most banks require a minimum of 10 percent down; however, Bond suggests putting down at least 20 percent to avoid paying private mortgage insurance. Private mortgage insurance is default insurance payable to a lender, and it can add a few hundred dollars to your monthly mortgage.
Additionally, recurring payments such as mortgages, credit card payments, car loans, and child support, are used to determine your debt to income ratio (DTI). For example, if your mortgage is $4,400 a month, your auto loan is $1,000 a month, and your credit cards total $600 a month, that means your monthly debt payments are $6,000. If you make $18,000 a month, your DTI would be 33 percent which falls within the range where a bank would lend.
4. Beware of credit barriers
The pitfall of not having a credit history is one barrier that could halt or delay the application process. According to Miller, just using a debit card can help you begin to establish a credit history. Frankly, it’s quite challenging or relatively impossible to get approval without a good credit score.
The lender evaluates your work history, job stability, and down payment when determining whether you have the ability to repay. "If you’ve been on your first job for a month, you might want to give yourself a little time to build a savings before jumping right into a mortgage," says Miller.
5. Educate yourself and shop around
There are many moving components involved when taking on this life-changing responsibility of homeownership—and getting educated about the process is your first line of defense.
Do your research to find a mortgage loan officer that understands your family goals and objectives; someone who can be a resource throughout the entire mortgage process. Consumer Affairs is a great place to start; the publication offers thousands of reviews for dozens of different lending companies.
Determining your debt-to-income ratio and understanding how much of a monthly mortgage payment you can afford will keep you from overextending yourself and becoming "house poor."
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