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8 First-Time Homebuyer Questions

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If you’ve never bought a home before, it’s smart to make a list of first-time homebuyer questions so you’re ready for this important financial milestone. Having the answers can help you decide if it’s the right time for you to become a homeowner.

1. Am I ready to own a home?

You’re probably ready to buy a home if you have a good credit score, money saved up for a down payment and closing costs, and make a stable income. However, answering this question requires more than just a knowledge of mortgages, down payments and credit scores. Home repairs and maintenance become your responsibility as a homeowner. Are you ready to get that leaky roof fixed, unclog that kitchen sink or replace that broken dishwasher?

Of course, that also means you can paint the walls whatever color you wish, and don’t have to worry about security deposits for pets or rent increases every year. Your monthly payments will build equity in a home you own, instead of a home your landlord owns. Homeownership provides tax benefits that renting doesn’t. And when you pay off your mortgage, you officially own a home you can pass onto future generations.

2. Can I afford a home?

A general rule of thumb in the mortgage lending world is you can afford a home if your total debt — including your monthly mortgage payment — makes up 43% or less of your before-tax income. In lender language, this is known as your debt-to-income (DTI) ratio. For example, if you earn $5,000 per month, then your total monthly debt, including your new house payment, shouldn’t exceed $2,150 per month ($5,000 x 43% = $2,150).

The 43% DTI ratio rule may be a good measure of the lender’s definition of affordability, but may not match your monthly budget needs. When you’re preapproved for a mortgage, lenders don’t consider:

  • How much your electricity, water or gas bills are
  • How much you pay for car insurance
  • What your monthly grocery bill looks like
  • Soccer camp, ballet lessons, tutoring costs or other extracurricular expenses
  • Savings plans for retirement
  • Future medical bills, like braces or an unexpected injury

3. Is my credit good enough to buy a home?

This question is especially important if you need a mortgage. You can qualify for a home loan backed by the Federal Housing Administration (FHA) with a 10% down payment and a minimum 500 credit score. However, the approval process may be difficult and you’ll pay a much higher interest rate than you would with a higher credit score.

A higher credit score often leads to a smoother loan approval, and a much lower interest rate and monthly payment. Conventional lenders typically require a minimum 620 score, but they’ll likely reward you with a lower rate if your score is 740 or higher.

4. How much money do I need to buy a home?

You’ll need enough money to cover your down payment and closing costs, depending on the loan program you qualify for. Your down payment is an upfront lump sum you pay to a lender to buy a home. Standard loan program minimum down payments range from 0% to 3.5%.

Closing costs typically run between 2% and 6% of your loan amount. They often include one-time lender and title fees related to getting approved for a mortgage, and the ongoing costs of your home such as property taxes, homeowners insurance and homeowners association (HOA) fees.

Loans backed by the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) don’t require a down payment. Conventional loans aren’t insured by any government agency and typically require at least a 3% down payment. FHA loans are available with down payments as low as 3.5%. Most of these programs permit the seller to pay some or all of your closing costs (commonly called a seller concession).

The table below gives you a side-by-side snapshot of the program, down payment requirements and percentage of your loan’s closing costs that can be paid by the seller.

Loan Program Down payment minimum Percentage of closing costs that can be paid by the seller
Conventional 3% 3% (up to a 10% down payment)

6% (10% to 25% down payment)
9% (25% or more down payment)

FHA 3.5% 6%
VA 0% 4%
USDA 0% 4%

5. How long do I plan to live in this home?

This may be an easy question to overlook, but it’s important, especially if you’re taking out a no- or low-down-payment mortgage. Home equity is the difference between your loan balance and the value of your home, and if you buy a home with no down payment, you don’t have any equity in your home at first. A sudden job loss or transfer might force you to sell your home quickly, and you may not have enough equity to cover the 6% you’ll typically pay real estate agents to sell your home.

Try a rent versus buy calculator to experiment with different down payments, sales prices and closing costs to determine if buying makes financial sense based on how long you plan to live in your home.

6. What’s the best first-time homebuyer mortgage for me?

There are many loan programs to choose from. The best one for you depends on your personal financial situation. The table below provides an overview of who typically benefits from each type of loan program.

Loan program May be a good fit if:
Conventional fixed-rate mortgage
  • You want a stable, low monthly payment
  • You have at least a 620 credit score
  • You have stable monthly income
  • You have or can be gifted enough money for a 3% down payment
Conventional adjustable-rate mortgage (ARM)
  • You need a lower payment for a set time period
  • You plan to refinance or sell your home before the teaser rate expires
FHA loan
  • You have a credit score below between 580 and 619 with a 3.5% down payment
  • You have a credit score between 500 and 579 with a 10% down payment
  • You can’t qualify for conventional, VA or USDA financing
VA loan
  • You’ve served in the military long enough to be eligible for a VA loan
  • You don’t want to make a down payment
USDA loan
  • You’re buying a home in a USDA-designated rural area
  • You earn a low to moderate income
  • You don’t have the funds for a down payment

Down payment assistance programs

Local and state housing agencies often offer down payment assistance (DPA) programs that vary based on where you live. You may be eligible for both down payment and closing cost assistance depending on how much you make, the area in which you’re buying and any other criteria set by the DPA program you apply for.

7. How do I get the best first-time homebuyer mortgage rates?

You’ll get the best mortgage rate by shopping and comparing loan estimates from at least three to five different lenders. Be sure to collect quotes on the same day since rates change on a daily basis.

If the home seller agrees to pay a portion of your closing costs, you may consider buying mortgage points to get an even lower rate. One mortgage point equals 1% of your loan amount, and can be used to “buy down” your mortgage rates. Even better: Mortgage points may be tax-deductible.

8. What should I expect during the first-time homebuying process?

There are generally six steps for first-time homebuyers to take when applying for a home loan:

Get a mortgage preapproval. You’ll fill out an online application, the lender will vet your finances, and if everything looks good, they’ll issue a preapproval letter with details about the estimated loan amount and interest rate you qualify for.

Find a real estate agent. Ask co-workers, friends and family members for real estate agent recommendations. A good agent understands the local market, helps negotiate a competitive offer and guides you through the homebuying process.

Get a home inspection. Once you find a home, your real estate agent will usually suggest that you get a home inspection. Even if your lender requires a home appraisal, a home inspection is worth it to check on all of the working parts of the home you’re buying to reveal any repairs that should be made.

Gather your paperwork for closing. Lenders usually need your most recent pay stubs and bank statements, and may ask for letters of explanation or other required documents prior to closing. Respond quickly to documentation requests to avoid delays.

Prepare for closing. Your lender must provide a closing disclosure three business days before your closing. Review the figures and notify your loan officer of any changes before the closing day. You should also schedule a walkthrough of the home before your closing to make sure it’s move-in ready.

Once your loan records, get your keys. After you sign your closing documents, the lender reviews them and sends funds to complete your purchase. Once the title company receives the funds, they send them to the seller and transfer ownership to you, officially making you a homeowner.

 

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