by Emily Hechler 
Congratulations! You’re ready to buy your first home! Buying your first home is a major milestone, but it comes with many questions: How much house can you afford? What should you look for in a neighborhood? While friends and family might offer advice, personal finances can be a tricky topic to discuss. That’s where we come in! Here’s what you need to know to find the right home for your budget and to get the mortgage to make it possible.
First-Time Home Buyer Questions
Can I afford a house? Before heading to the credit union to get preapproval for a mortgage, it’s important to consider you current financial status. If you have some money saved for a down payment, you might be able to significantly reduce your monthly costs by saving for another year. Even if the market has low costs and great interest rates, you’ll still have to pay for ongoing maintenance. Make sure you’re confident in your ability to significantly reduce your savings to purchase a home while still maintaining financial stability.
What is my monthly budget? Check out this article as a guide to creating a home buying budget. While you’re here, keep in mind that the more expensive the home, is the more expensive the upfront costs. Here are some common home buying terms you’ll hear as you think about financing your first home.
- Loan term: the length of time you commit to paying back your loan. This is typically 15 or 30 years
- Principal: this is the original amount of the loan before interest rates are calculated in. For example, if you are buying a $300,000 home and make a $50,000 down payment, the principal is $250,000.
- Down payment: the amount of money you pay upfront to buy your home. This goes toward the equity of your home.
- Interest rate: the interest rate is commonly expressed as APR, or Annual Percentage Rate. This is a percentage of the loan that you pay in interest each month.
- Closing costs: additional fees due at the time of closing on a home. These fees pay the realtors, cover property taxes, and more up front costs.
- Insurance: homeowners’ insurance is mandatory in case your house endures significant damage through a catastrophe such as flooding or a fire. PMI, or Private Mortgage Insurance, is a mandatory addition if you make a down payment of less than 20% of the purchase price. You can remove PMI later when you have more equity in your home.
Where do I want to live? You likely already have a general idea of where you want to live. Keep in mind what style of home will suit your needs, such as a single-family home or a condo. Consider the schools in the area and your commute to work. If you are having trouble deciding which area to move to, create a list of pros and cons for each home so you can adequately evaluate your ideal future living conditions.
How do I buy a house? If you’re serious about buying a home soon, get preapproved for a mortgage at Alltru. This will help speed up the process. After you apply for preapproval, get in touch with a real estate agent. They can help arrange tours of potential homes and, once you find the house you want to buy, draft an offer letter to submit to the seller’s agent. This letter outlines key details like the purchase price, closing date, and terms for completing a home inspection or repairs. Negotiations with the seller may follow until both parties reach an agreement. Once you’re under contract, a home inspection and appraisal will be conducted while we work to finalize your loan.
How do I close on a house? Shortly before closing day, you’ll receive a loan estimate and a closing disclosure outlining your mortgage terms and conditions. On closing day, you’ll meet your real estate agent and others to sign your documents, pay your down payment and closing costs, transfer ownership and utilities, and get the keys to your new home.
Closing on a House
As we recently mentioned, a significant portion of the home-buying process happens while you’re under contract, well before closing day. Once you get to closing day, all you should have left to do is to pay your upfront costs, sign your name on several documents, and get the keys to your new home. Here’s what you need to know about the under-contract phrase and the final steps to close on your house.
Closing day is determined in advance. When your real estate agent writes your offer letter for the house, they include the closing date in the document. You need to be ready to spend a few hours in an office to close on your new home. Make sure that you are able to physically and mentally be present, as well as have living arrangements determined for the time leading up to closing day. On average the time between when you go under contract and when you close will be 43 days, but this can vary.
Pay earnest money. Once your offer is accepted, you will pay earnest money within the first few days to the seller. This lets them know that you are serious about your offer since you have money involved. This prevents the seller from trying to sell the house out from under you too.
Complete a home inspection. Depending on your contract, you or the seller may pay for the home inspection. This is a thorough inspection of the house to bring any issues to light. You’ll receive a copy of the report when the inspection is done. You can use any major issues found in the inspection as leverage for the seller to lower the price, make the repairs themselves, or give you credit to make the repairs yourself. Your offer may have included a way for you to back out of the deal depending on what the home inspection revealed.
Purchase home insurance. Home insurance is mandatory when you buy a house. You need to have proof of insurance before you can close on your house. Start shopping for home insurance as soon as you complete the inspection and know you are following through on buying the house. Alltru partners with TruStage Insurance to get you great coverage for a great cost.
Get an appraisal. Most lenders require an appraisal of the property to make sure they are not giving you a loan for more than what the home is worth. They’ll examine the age, condition, upgrades, lot, and other homes in the area to determine what the house is worth.
Gather your documents. During the closing process, you’ll need your ID, income statements, asset statements, and history of residence. As you get closer to your closing date, you’ll get your loan application, closing disclosure, and certificate of occupancy finalized. You likely have a lot of this on hand already if you applied for mortgage preapproval.
Complete your final walkthrough. A few days before you close on the house, you and your real estate agent will do a final walkthrough of the house. This is the last time you will be on the property before you own it. During your final walkthrough, make sure all the agreed upon repairs are appropriately completed and ensure no additional damage was done.
Contact your financial institution. Since your down payment and other closing costs are a significant amount of money, let your financial institution know ahead of time so they don’t flag you for fraud. They may also have you purchase a cashier’s check or wire the payment to the seller.
Close on your house. Bring the documents we listed with you on closing day and the cashier’s check if you have one. Be ready to sign your name on a lot of paperwork. By signing these documents, you’re ensuring that you are buying the home for a specific amount of money and will make your payments on the mortgage. You’ll receive copies of all of these documents before you leave too. After you sign all the documents and make your payments, you’ll be handed the keys to your new home.
Home Buying Mistakes
We’ve covered a lot of the basics for first time home buyers. Ideally, you’ll have a smooth home buying process. However, challenges may pop up along the way. Many first-time home buyer mistakes stem from simply not knowing what to expect or how to handle certain situations. Here are some mistakes to avoid when buying a house for the first time.
Don’t have too much debt. When you apply for a mortgage, your lender will do a hard credit inquiry. This is a thorough examination of your credit history. This is used to determine if you will be approved for a loan, what amount you will be approved for, and what interest rate you will get. Current loans, such as student loans, auto loans, personal loans, and credit card debt, are all considered. If you have too much debt, you’re at a higher risk for not getting approval or getting a high interest rate. If time allows, focus on paying down your debt a few months to a year before applying for a mortgage.
Don’t neglect getting your upfront money ready. When you apply for a mortgage, your lender will ask what price range of homes you are considering and how much money you have saved to use toward your house. This amount will again affect your ability to get the mortgage amount you want with a good interest rate. You’ll receive different options from your lender based on your financial situation.
For example, let’s say you’ve saved $60,000 and are looking at homes in the $250,000-$300,000 range. You might have two mortgage options: one for $200,000 at 6.49% interest or one for $240,000 at 6.99% interest. If you choose the first option, your down payment will be $50,000. If you go with the second option, your down payment will be $60,000. Even though you can afford the second option, the first choice might be a better fit. It leaves you with more savings upfront, and the lower loan amount and interest rate will save you money over time.
Don’t use your emergency fund for a down payment. An emergency fund should only be used for one reason – an emergency. Buying a home is likely not an emergency. There are exceptions to this, but keep in mind that you won’t have a safety net until you can replenish your savings account. Once you buy your house, you may uncover something that you want to repair immediately, your car could break down, or you could have an emergency room visit. You can’t predict these things, so having an emergency fund intact when you buy your home will help protect you if a situation like this arises shortly after you buy your home.
Ignoring your budget is a bad idea. Part of creating your budget is making sure you stick to spending 28% or less of your gross monthly income on your housing. Don’t assume that a pay raise is coming or a new job is guaranteed. Wait until your higher paycheck comes in to add it to your gross monthly income. Miscalculating how much you can afford to spend on a house can be detrimental for your family. It’s better to stay below your budget than to end up slightly above. You might need to wait a few more months before making an offer. Keep the time of year in mind to help you buy your house at a lower price too.
Buying a Quick Move Home
As a first-time home buyer, building a custom home may not be realistic, and that’s ok. However, if your budget allows, you may be able to buy a “quick move home”. A quick move home is a home that has never been owned before, but it’s ready to move into. Often, they are model homes in new developments or properties that the builder is looking to sell quickly. Here are some benefits of buying a prebuilt or quick move home instead of building a custom home.
You can move in sooner. A major benefit of buying a prebuilt home is that the closing process will be roughly the same as buying a home from an existing homeowner. However, if you buy a quick move home, you can move in as soon as you close. When you build a home, you have to continue paying for your living arrangements while your house is under construction. If there are any delays, this can push your move in date back even farther.
You can avoid decision fatigue. Decision fatigue occurs when you start to get burned out from the number of decisions you have to make when building a home. What if you choose colors and patterns that you hate once they’re in your home? The design choices for quick move homes are made by professionals so you can have peace of mind knowing that the design aesthetics from the paint to the appliances to the flooring have all been thoughtfully coordinated.
You can get a better sale price. Often, a home builder is ready to move on and build a new community when quick move homes go on the market. These homes may have a lower asking price too. Just like if you were buying a home from a homeowner, you can offer lower than the asking price. Builders can offer limited time sales to try to sell the houses too. The best way to find these deals are to visit the websites of home builders in the area, such as Houston Homes, Rowles, and Fischer Homes, to see what they currently offer.
You’re making a wise investment. It’s common for the value of newer homes to increase through the years. This is especially true if your home is in an up-and-coming area. Since quick move homes are in newer neighborhoods, the nearby area will continue to grow too. If you decide to sell the house later, you might have some extra equity built up simply for buying the home when it was new.
Conclusion
Buying your first home is an exciting milestone, and it’s a process you’ll only experience once. If you sell your home to buy a different one in the future, you’ll have a better idea of what to expect since you’ve been through the process once before. You might not remember every detail though, so feel free to return to this guide for helpful tips along the way.
Now that you’re prepared to begin your search, start looking for your dream home! Come to Alltru to get preapproval for your mortgage so we can support you during your home buying journey.
