First Time Homebuyer

Buy a Home

First Time Homebuyer

 

Homeownership brings many benefits. When you buy your first home, you’ll become part of a community and experience the security of owning the roof over your head. As a homeowner, you may also be able to:

  • Take control. Avoid rent increases and cancelled leases while creating a home that meets your needs and tastes.
  • Build home equity. Grow your assets with the principal portion of your mortgage payments as your property value potentially increases.
  • Get tax benefits. Deduct mortgage interest and real estate property taxes on your income tax returns. (Consult a tax advisor regarding the deductibility of interest and taxes).
  • Build your credit. Create a strong credit history by making on-time mortgage payments.

 

You as the borrower must show that you are able to repay the loan according to the terms of the financing. Two ratio-based guidelines are used to evaluate your ability to repay.

  1. Debt-to-income ratio – Debt-to-income ratio is the percentage of your monthly income that is spent on monthly debt payments.
    1. Lenders compare your expected monthly mortgage payment (principal, interest, taxes, and insurance) plus other monthly debt obligations to your gross (pre-tax) monthly income.
    2. Mortgage program guidelines vary, but a good rule of thumb is to keep your total debt level at or below 36% of your gross monthly income.
  2. Housing-expense-to-income ratio – Housing-to-income ratio is the percentage of your monthly income that is spent on monthly housing payments.
    1. Lenders also compare just your expected monthly mortgage payment (including taxes and insurance) to your gross monthly income.
    2. Mortgage program guidelines vary, but a good rule of thumb is to keep your housing expense level at or below 28%.

Even if you fall within the 28%/36% guidelines, make sure you’re comfortable making your monthly mortgage, insurance, and tax payments, in addition to all of your other monthly payments. Remember that homes have other costs — such as utilities, maintenance, and repairs — that may not exist if you rent.

There are different ways to estimate a price range that’s appropriate for you. The words prequalification and preapproval may refer to two different services provided by mortgage lenders. While both are useful options for learning your potential purchase price range, it’s important to understand how they differ. Prequalification – If you’re considering buying a home, a prequalification lettergives you a general estimate of the loan amount you may qualify for based only on preliminary information you provide (without obtaining a credit report). Preapproval – preapproval letter empowers you to bid on a home with confidence and lets sellers and real estate agents know you mean business. It’s more formal than a prequalification because it: 

  • Confirms you’ve submitted an application, are credit-checked and have completed the first loan decision phase.
  • States the approximate mortgage loan amount and purchase price range for which you qualify, subject to certain conditions or documentation.
  • Means the lender may offer a loan commitment once all information on your application is verified, underwriting requirements and conditions are satisfied and acceptable property-related reports are provided.
When you apply for home financing, lenders generally use these four main criteria to assess your application. Income – Do you have a reliable, continuing source of income to make monthly payments?

  • Income can come from primary, second, and part-time jobs, as well as overtime, bonuses, and commissions.
  • You may use other sources of income if you want them considered for payment, provided they can be verified as stable, reliable, and likely to continue for at least three years. Some examples include retirement or veteran’s benefits, disability payments, alimony, child support, and rental or investment income.

              Current debts and credit history – Do you pay your bills, loans, credit cards and other debts on time?

  • Lenders examine your payment habits before deciding to loan you money.
  • Lenders also review your credit history and credit score.

It’s a good idea to check your credit history and correct any problems before applying.         Assets and available funds – Do you have enough funds for a down payment (if you’re buying a          home) and closing costs?

  • You may use funds from various accounts including savings accounts, certificates of deposit (CDs), investments, and retirement funds.
  • If you’re buying a home, in some cases, you may be able to use gift funds toward closing costs and all or part of your down payment.
  • Generally, you’ll also need to show that you have additional funds in your accounts to cover several months of mortgage, tax, and insurance payments.

        The property – What is the market value of the property you want to finance? A property appraisal will be ordered to make sure the value of your property meets underwriting requirements.

  • Homeownership is a serious and long-term commitment: financially, geographically, emotionally, and more. Give careful thought to these factors as well:
    • Financial responsibility. You’ll need to pay for utilities, maintenance, and repairs — on top of your mortgage payments, property taxes, and homeowners insurance.
    • Potential risk. Real estate often increases in value over time, but not always. Your property value can also go down.
    • Tighter ties. As a renter, you can pick up and move with short notice. When you own a home, selling it before moving on is more complicated.

A home is probably one of the largest purchases you’ll ever make. Knowing what to expect can help you make informed financial decisions.