First-Time Homebuyer's Guide

home for sale signMike Valdez fits the profile of a savvy first-time homebuyer perfectly. A 34-year-old financial analyst from New Rochelle, N.Y., he and his family had grown sick of living the renter's life. So two years ago he decided to test the market and find a townhouse for his growing family. But despite his financial aptitude, he quickly ran into a setback.

"We found a place we liked and ran the numbers," he says, but the young couple soon discovered that they had underestimated the burden of their college debt. They were forced to back out.

Mike's lesson goes to the heart of what every first-time homebuyer needs to know -- buying a home means so much more than paying a mortgage.



Fix Your Credit

The first step toward buying a home takes place months before walking into your lender's office. It's crucial to check your credit score at least three to six months ahead of your mortgage application, says Rod Griffin, director of Public Education at Experian. You can request a free copy of the report from each of the three credit bureaus (Experian, TransUnion and Equifax) at annualcreditreport.com.

Even if you don't have sterling credit (generally a FICO score of 720 or above), the most important thing to do is to take stock of what the figure means. "Every score is educational," says Griffin. "It's more about why the number is than what the number is."

This is especially true since there are different proprietary scales used to gauge credit: the Vantage score, for instance, ranges from 501 to 990, while the FICO score runs from 300 to 850. Make sure to read the accompanying credit report to understand what your score actually means. It's also important to check for errors in the report, which can have a negative effect on your credit, and ultimately, your mortgage rate. One in four reports has an error serious enough to prevent homebuyers from getting credit, according to the U.S. Public Interest Research Groups. So get your reports well in advance of the house hunt.


Prepare for Down Payment and Closing Costs

A generation ago, it used to be the norm to put 20 percent down, but with the market in its current state of flux, many first-time homebuyers are finding ways to pay just 3 to 5 percent of the total cost upfront. Federal Housing Act (FHA) loans increasingly have become a popular option for first-time buyers, says Greg Herb, regional vice president of the National Association of Realtors. These competitively low-interest loans are ideal for buyers with less than perfect credit, and because the Department of Housing and Urban Development (HUD) minimizes the risk of default for lenders on these loans, borrowers are only required to put down 3.5 percent of the cost--a far cry from the traditional 20 percent down payment.

Search Homes for Sale Find a local expert contractor who has been pre-screened by ServiceMagic Still, there are advantages to paying more at the start. A larger down payment ultimately means smaller monthly bills down the line. Also, if you purchase a conventional loan (i.e.: one that is not backed by a federal agency), paying 20 percent or more upfront will eliminate the need to pay Private Mortgage Insurance (PMI) charges. PMI is insurance for your lender that can be paid upfront or in monthly installments, and is designed to offset your lender's risk in the case that you've paid less than 20 percent on your home. It can cost around $55 a month per $100,000 financed. While it's important to note that FHA loans also carry mortgage insurance with a down payment of under 20 percent, their low barriers to own still make them a good choice for first-time buyers.


Figure How Much House You Can Afford

Your debt-to-income ratio (DTI) is the percentage of your gross monthly income set aside for paying debts. While some loans may qualify you for up to 50 percent of your monthly gross income, it's advisable that you use no more than 30 percent, says Joe Adamaitis, a mortgage banker in Sarasota, Fla. Be realistic about how much you can pay, because an unexpected event could tear a hole in a tight budget.

If, for example, you have a $5,000 gross monthly income, Adamaitis gives this scenario: After taxes, you might actually clear around $3,600. If you expect to owe 30 percent of your gross monthly income, that's $1500 a month, leaving you a grand total of $2,100 to live on. At this rate, your 30 percent debt is actually cutting into 42 percent of your monthly income, after taxes. So when calculating your budget, be completely honest about your spending habits, even if lenders say you qualify for more.

Hunt for a House

Finding the perfect home can have a lot to do with finding a compatible real estate agent, especially in today's evolving mortgage landscape. "The person you choose will quarterback the whole process for you," he explains. It's crucial to be in contact with an agent before starting the home search, "because you might be looking at x when all you can afford is y." First-time homebuyers should make it clear what features they're looking for and how much they're willing to spend.

There are, however, certain questions that Fair Housing laws prohibit agents from answering, such as where to find religious centers in the area, the quality of the school systems, and crime rates. Be proactive in speaking with members of the community and inquire about the issues that matter most to you. For parents, search public sex offender registries, which can be found online, to see if there are high-risk areas in the neighborhood. In most states, agents must disclose whether violent crimes occurred on a property within a set number of years, but not so with suicides -- find your comfort level and do your research.


Make an Offer

Sellers can price a property however they see fit, but that doesn't mean homebuyers should pay a ridiculous cost. "Get your agent to pull all the comparable sold properties that occurred in the last six months," says Adamaitis. "How many were short-sales? How many were foreclosures? Then gauge by square foot the comparable cost."


Get Your Money's Worth

At signing, the buyer should demand that the contract be contingent on an objective appraisal of the house, Adamaitis says. Look into the history of the home and make sure there aren't any liens against the property. You should be able to negotiate with the seller to make any necessary repairs to the house before closing on the deal.

Contingencies vary by state, but you should certainly inspect the home for possible lead paint, radon, and structural issues. Depending on which contingencies your state recognizes, these flaws can provide grounds to cancel the contract without penalty, and get back the earnest money deposit you put down at the start of negotiations.


Stay on Course

Beginning to end, you can expect the entire process to last around four to five months, says Herb. Of course, with as much great inventory on the market as there is, it's not unusual for homebuyers to find something within two to four weeks.

On a brighter note, Mike jumped back into the house hunt a little wiser this year and closed on a three-bedroom townhouse for him and his family in about four month's time. The real journey starts at the end of the month, though -- when his first bill arrives in the mail.


Still trying to decide which is right for you? Here are some AOL Real Estate guides for first-time homebuyers:


More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.

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maria elena

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July 18 2011 at 11:13 AM Report abuse rate up rate down Reply
jdunmoyer

I am a first time home buyer just in the market. I assumed everyone got pre-approval first. It never occured to me
not to. Many of these articles seemed to be based on it. After pre-approval, it sounds like I'm all set then. One thing that does give me pause, is that I was always under the impression that realtors worked for the seller, not for the buyer. But I'm not sure if that is from the old days or still applies.

June 20 2011 at 7:47 PM Report abuse rate up rate down Reply
larry

Thanks to CountryWide Home loans, AIG, Morgan Stanley, Bank of America, Fanny Mae and Freddy Mac, who can get a home mortgage loan anymore ???

June 20 2011 at 6:03 PM Report abuse rate up rate down Reply
dnmbear

I'm a Texas realestate agent, and can tell you, if you are buying a new home, be sure and have a good credit standing of at least 720, or better. Banks like to "play" with people who have weak credit. Pay all your bills on time, every time, and you might have a better time in the marketplace! Banks are not "returning the favor" with credit for almost everything! The current "credit squeeze" makes a lot of people victum, but nothing can be done to make a bank fund a home! Besides good credit score, you must avoid purchaseing cars, boats, airplanes, and the like when "waiting for funding" for a home. They now check your credit transactions just before " closeing", and this trips up the deal with a "no funds for you senero!" It has happened to some of my clients, even though they were warned in advance! People don't listen! Had a couple not pay rent for quite a few months, and bank caught them at that game, and "bingo", no funding for a closeing! Watch what you do, cause nowadays, a "hangnail" can hang you with your House Deal! When dealing with an experienced agent, take um at their word! They have seen a lot, and their exp. can save a lot of tradgy. Find a good agent, and stick with them, as a lot of "pitfalls" can be avoided! And of course, I say to you, GOODLUCK in your new adventure!

June 20 2011 at 4:03 PM Report abuse rate up rate down Reply
henriques8

I could write everything about my road to home-buying, and it would be a great lesson for first-time buyers, but I'll just write the most important part that made my homebuying a success. I knew only some of this information before I started the homebuying process, and I'll tell any first-time homebuyer that if you try to buy without being informed, it'll probably be more difficult than you think it will. You definitely have to choose the right people in order to get the right place. Once I learnt that fact, my homebuying process was way easier. I thank God for the realtor I found (Thomas Curry at EWM), because he explained everything about how the process works, and he told me the magic ingredient for the best deals, "FHA does renovation loans." Before that, people only told me that the foreclosure properties I liked couldn't pass FHA inspection. Only Thomas told me how to get the type of FHA loan that would allow my modest loan to buy big. That's a very important part of first-time homebuying in a foreclosure market. It's important to get what you want, where you want it, because as my realtor always said, "It's not the realtor that lives there after the closing, so go for what you want. It's your money." This might sound corny, but I must add that prayer played a role in my family's home search as well. Keep God with you and He'll guide your family to the right home.

June 20 2011 at 3:24 PM Report abuse rate up rate down Reply
boydbaby55

Excellent advice for any homebuyer and most especially young "first time" homebuyers.

June 20 2011 at 2:06 PM Report abuse rate up rate down Reply
GLORYBEE

Although there are many great tips in this article, I feel it lacks some objective information that is crucial to many buyers looking for their new home! Buyers' agents need to educate their customers on the priority of needs, wants, and "extra features" , especially in this market! An FHA loan is a great financing option for many buyers in certain price ranges, however they need to understand that the loan conditions for the property are much more stringent, thus many foreclosures and short sales will not qualify for FHA financing ! In addition, agents should be very careful about quoting loan and credit conditions to buyers, ALWAYS refer them to a mortgage professional for prequalification before showing them properties!

May 03 2011 at 10:53 PM Report abuse rate up rate down Reply
dnmbear

Just as aircraft need permission to land at the airport, you might see how much you can qualify for in a home loan from your bank, or credit union. Also take a look at the "closeing costs" as some deals with homes do differ greatly. Remember that buying a home is the biggest expense most people ever undertake, and its not as easy as some think. Your credit score is very important, and can stop financing wit some institutions very quickly. Also, if trying to get a loan, one thing savy real estate agents will let you in on, is to never buy a car, boat, or anything of a big expense, because this will mess up your income to expense ratio. This will stop a home loan "in its tracks", which is easy to find out. I am a real estate agent, and had a couple that decided to not pay rent in the apartment they were renting, and the mortgage loan bank checked their credit, just before "funding" for their new home, and they lost the financing through the bank. Had another couple who were in the final stage of closing, and they went out and bought a new car, and they lost their chance at a very good finance rate! This stuff is seriouse, and ruins a lot of peoples futures, to say nothing, and doesn't help their credit rating! Also,watch it with yearly taxes, and fund an "escrow account", as this is really not an option. Failure to pay propertyu taxes can get you in "A HELL OF A MESS!, so watch it. I know, because I am a real estate agent.

April 22 2011 at 2:40 PM Report abuse rate up rate down Reply
Greg

Being a Realtor I understand the buying/ selling process pretty well and I would encourage any buyer to first select a good local Realtor and soon afterward an established local lender. Once you do that you are well on your way to home ownership

April 20 2011 at 2:00 PM Report abuse rate up rate down Reply
Barbara Woodham

It's best for your client to get a FULL Pre-Approval before looking for a home. Call me and I will be happy to help. 904-219-4276 or 1-88-251-2247. www.bwoodham.primelending.com

April 18 2011 at 12:33 PM Report abuse -1 rate up rate down Reply