First Time Home Buyer: Start Here

Buying a home for the first time can be overwhelming to say the least. There are many steps and requirements throughout the process and it can be easy to make a costly mistake along the way. But, with a little research and the right tools, buying your first home can be both fun and exciting. 

First time home buyers also have unique advantages to make purchasing your first home more attainable. Let’s take a closer look at what you should consider before purchasing, and ways to avoid the challenges many first time home buyers face. 

What makes someone a first time home buyer?

This answer might surprise you. There are multiple conditions that make someone a first time home buyer. 

• Individuals who have not owned a principal or primary residence for three years. 
• Divorced individuals who have only owned a home with a spouse are considered first time home buyers. 
• The owner of a property that was not in compliance with local, state or model building codes. With that, the property must be deemed unable to be brought into compliance for less than the cost of constructing a permanent structure.
• Individuals who’ve owned a home, but your spouse has not, you can purchase a home together as first-time homebuyers.

Questions to consider before you buy

As you consider purchasing your first home, the first step is to determine what your long term goals are. Then, consider how homeownership aligns with those goals. Some first time buyers chose homeownership because they can save money paying a mortgage versus paying rent. Others simply want a place that is their own to create a space they love. 

Ultimately, home ownership is a great way to build equity, and enjoy a sense of independence. But before you commit, there are a few questions you need to ask yourself: 

What do your finances look like?

Before committing to purchasing a home, it’s important to take a close look at your finances. A home loan term is typically 15 or 30-year fixed rates. Even if you don’t plan to stay in that home for more than a few years, this is still a big commitment. 

First time home buyer: Credit Scores

Start by looking at your credit score and calculating your debt-to-income ratio. Your credit score shows lenders that you can reliably make your monthly mortgage payment. Mortgage lenders require a credit score of 500 at the very least. Thus, the better your credit score, typically the better your interest rate. A few percentage points may seem small to some, but a lower interest rate can drastically decrease your monthly payment.  

First time home buyer: Debt-to-Income Ratio

Debt to income ratio is the percentage of your income that goes towards paying debt. This might be your car loan, credit cards or school loans. As a rule, your DTI should stay below 43% to quality for most conventional loan mortgages, and lower interest rates. 

First time home buyers have a unique opportunity relating to DTI. Some lenders allow a DTI of up to 50% for first time home buyers only. Thus, it’s important to research lenders and choose the one that is best for your circumstances. 

What type of home fits your needs?

Often, the home search is the most enjoyable part of the home buying process. You have a variety of options to choose from as a first time home buyer. Residential homes include a traditional single-family home, townhouse, condominium, a duplex, or even a co-operative. Each type of home comes with its own pros and cons. So, before you start your home search, you should consider which option best fits your needs. 

After you’ve decided which type of home you’re looking for, start thinking about what specific features are important to you. For example, how far are you willing to commute to work? For many, this distance helps determine which neighborhoods to focus on. Your list should also include basic needs and wants such as the number of bedrooms and bathrooms. With that, are you willing to purchase a fixer upper, or do you prefer move-in ready and new appliances?

Keep in mind you can’t have it all, but it’s good to have a list of non-negotiables to narrow your search. 

How Much Home Can You Afford?

When you buy a home, there are multiple expenses to consider. As a first time home buyer you may think a mortgage is all there is to it when owning a home. However, when purchasing a home you also need to consider the down payment, closing costs, homeowners insurance and property taxes. 

The down payment is likely the largest up-front cost you face. You are also responsible for paying closing costs. Typically, closings costs are between 2 and 5% of the homes sale price. 

Consider the average property taxes in the neighborhoods you hope to buy in. Shop around for homeowners insurance to ensure you are getting the best coverage, and price for your needs. This is also a good time to consider your budget for maintaining a home, and if you want to consider a fixer upper. 

Pre approval for first time home buyers

To get pre approved, apply for a mortgage and complete the necessary documents. It’s helpful to do your research and shop around for a lender to ensure you are getting the best interest rate. 

Being pre-approved shows sellers you are serious about purchasing their home. It also lets real estate agents know you understand your price range and how much you can afford to spend. 

Who will help you find the right home?

Being a first time home buyer is an exciting experience. But it can also be stressful and overwhelming learning how the home buying process works while also trying to find the perfect home in your budget. An expert real estate agent makes the home buying process transparent and stress free. It’s important to do your research and choose an agent who not only fits your needs, but communicates effectively as well. 

A real estate agent helps you identify homes that meet your needs while staying in your price range. They tour homes with you and can provide insight on local neighborhoods and property values over time. Once you’ve found a home you love, your agent helps you craft a competitive offer and can assist with completing the paperwork for your loan. 

Most agents receive a commission for their work. This is paid from the sellers proceeds and does not cost buyers anything. Trelora is a unique real estate brokerage, in that agents split their buyers commission 50/50 with clients, up to $6,000. That means when you buy a home with Trelora, you’re actually making money. Use this cash to pay your mortgage for a few months, or even buy new appliances!

First Time Home Buyer Programs 

As a first time home buyer, you have a range of options to help you purchase a home. First, there are options available to all home buyers. Second, there are options specific to first time home buyers. Be sure to discuss your options with your lender, and ask what types of programs are available for first time home buyers. Here are a few options to consider: 

State Programs: 

• Many states offer financial assistance to first time home buyers for down payments and/or closing costs
• Eligibility is based on income and the home’s purchase price 

FHA loan: 

• Lowest credit score requirements of all mortgage programs (minimum 580)
• Minimum down payment requirement: 3.5% 
• Low interest rates

USDA loan: 

• No down payment required
• Most affordable mortgage insurance
• Created to help lower-income home buyers
• Low interest rates

Conventional 97 loan: 

• Minimum downpayment requirement: 3% 
• Mortgage insurance can be cancelled once you have enough equity in the home
• No upfront home insurance fee
• Minimum credit score: 620

Home Possible & HomeReady Loans: 

• A conventional loan option that allows first time home buyers to purchase with less money down
• Minimum downpayment requirement: 3% 
• Mortgage insurance can be cancelled once you have enough equity in the home
• Roommate income can help you qualify
• Use gift funds for up to 100% of the down payment 
• Minimum credit score: 620

The Bottom Line

Buying your first home is exciting. While the process can be stressful at times, being a homeowner is rewarding and the investment can provide you with equity over time. 

As you begin the home buying process, remember to do your research. By understanding the process overall you can minimize the stress you experience. Ultimately, once you’ve purchased your first time, you’ll have the satisfaction of knowing you successfully negotiated your way to your biggest asset. Plus, not you get to start decorating!