The basics of buying a new home
If you are a first-time homebuyer, the process of purchasing a house can seem daunting. Even when you have figured out where you want to live and what kind of amenities you want, navigating the financial needs, like determining your down payment and figuring out which loan is right for you, can become overwhelming. However, it doesn’t have to be. Here is a guide to help you understand the initial financial process of buying your first home, including insights from what a lender may be looking for from you.
Talk to a bank or mortgage lender
Meet with a trusted lender with a good reputation to find out how much house you can afford and what type of loan is best for you. A lender can help answer your questions and pre-approve you for a loan. Being armed with how much you can spend before you start the search can save you time and disappointment. You don’t want to fall in love with a house only to realize it’s outside your budget.
A lender may look at these four factors (“The Four C’s”) before you are approved for a loan:
1. Capacity: Your ability to repay the loan.
Your lender may look at the following factors:
- Housing ratio: Your total monthly payment divided by your pre-tax monthly income.
- Total ratio: The above housing payment, plus any liabilities appearing on credit reports (any other loans you have including student loans, car payments, etc.) or payments deducted from your paycheck (garnishments, child support, allotments).
2. Credit: Predicts your future payment likelihood by reviewing past factors.
FICO scores (your credit score) determine interest rate and loan options available to you. Your minimum FICO score for a Federal Housing Assistance (FHA) or veteran’s loan, for instance, is 600. The minimum score for a conventional loan is 620.
3. Cash: Money needed for the closing and cash in reserves.
Remember, the closing is not just the amount of the down payment, but also your closing costs and escrow reserves. “Cash reserves” refers to the amount of money you will have available after your loan closes. Some loan scenarios require that you have two or more months of your total house payment in reserve.
4. Collateral: Otherwise known as the appraisal of your home.
The appraised value is based on several factors, including:
- Recent closed sales in the area
- Size, style, and condition of the home
- Location, district, and view
- Cost to rebuild (if rebuilding is necessary)
Once you have determined what you can afford, and you are pre-qualified for a loan, you can meet with a real estate agent and begin your home search. If you don’t already have a real estate agent, you could ask your family, friends or lender for recommendations.
Also remember, buying your first home can be a good investment. Over time, home prices tend to rise. When it comes time to sell your first home, you will usually end up selling your home for more than you initially paid.