Setting a budget
Before you can really get into the home-buying process, you need to figure out how much you're able to spend. Creating an accurate and manageable budget is critical, and there are three main factors to consider:
Your biggest monthly cost will be the mortgage payment, but you'll also need to factor in property taxes, mortgage insurance, home insurance, any new bills that arise with home ownership, plus all your existing expenses.
The exact amount you need for a down payment will depend on the type of loan you get. First-time home buyers using an FHA loan only need to put down 3.5 percent of the total purchase price. For a conventional loan, you'll typically need to put down at least 10 percent to avoid paying private mortgage insurance, which is an added cost on top of your mortgage payment. No matter how much your loan requires, remember that the less you put down up front, the more you'll pay each month for your mortgage and mortgage insurance.
Generally, closing costs are 2-5 percent of the overall purchase price. Closing costs are paid at closing, so make sure you have enough money in your account to cover the full amount.
Tip: Many real estate companies offer an online mortgage payment calculator tool so you can get a better sense of what your monthly payment will is based on your down payment, taxes, and home insurance.
The easiest way to figure out how much house you can afford is to meet with a financial specialist from the Credit Union of Texas. They can look at your unique financial situation and help you develop a budget based on your goals and earning potential.
Dealing with debt
Many people put off buying their first home because they're afraid their debt will keep them from getting a loan. Indeed, debt is one of the biggest factors for loan officers who are reviewing your mortgage application. However, just because you have debt doesn't mean home ownership is impossible. You simply need to make sure your debt is manageable.
As a general rule, your total debt shouldn't be more than 36 percent of your gross monthly income. To calculate your debt to income (DTI)ratio, add up all your monthly bills (including your estimated mortgage payment), then divide by your gross monthly income.
So, if your monthly bills total $2,000 and your income is $5,000, your TDI is 40 percent (2,000 ÷ 5,000 = .40).
If your DTI is above 36 percent, you may need to pay down some of your debt before buying a home.
If you have questions about your debt, meet with a CUTX financial specialist. They can review your financial situation and create a plan for eliminating your debt while accomplishing your home-buying goals.
How to Calculate Your DTI
Take the sum of your Mortgage payment + Home insurance + Mortgage insurance + Other loan payments, then divide that number by your gross monthly income. That's your DTI.
Getting a loan
Unless you're one of the extremely rare first-time buyers who can pay cash for their home up front, you'll likely be getting a mortgage loan. There are many different types of mortgages, all with their own unique benefits and terms. Here are some common loan types:
The most common type of loan, these usually require at least a 10 percent down payment.
FHA loans are popular with first-time buyers because they require a much smaller down payment (only 3.5 percent for people with good credit) and have less restrictive eligibility requirements.
If you were in the military or are looking to buy in a rural area, you may be eligible for VA or USDA loans. Ask your loan officer if you qualify for any specialized loan programs.
The loan and terms you end up getting will be based on your credit history, debt, current assets, and your income level. Lending specialists at the Credit Union of Texas can help you determine which loan is right for you and answer any of your home financing questions. We'll work to get you the best terms and rates possible, and we'll be there to help you throughout the home-buying process.
Tip:Getting your loan pre-approved and making sure your financing is in place before you start the house hunt can help the buying process go faster when you find the right home.
House hunting can be the most exciting part of the home-buying process, but it can also be the most exhausting. Touring homes can quickly go from fun to burdensome and keeping everything organized as you tour and make offers can be a headache.
Here are some tips to make sure your house search doesn't become a chore:
Set your criteria
Decide which home features are “must haves” and what is merely dream home material. Dividing your needs and wants helps you focus on the things that are most important and attainable.
Narrow your search area
Limiting your house search to one neighborhood or area of town can help reduce your options and make the search more manageable.
Find a real estate agent
You can always represent yourself, but as a first-time home buyer, there are likely aspects of the process that are not familiar to you. An agent can find listings hidden from the public, making the hunt easier while also ensuring nothing gets missed during the buying process.
Tip:If you elect to work with a real estate agent, try to avoid dual agency — when the buyer's agent also acts as the seller's agent — as it can prevent you from getting the best deal possible.
During a long search, homes can start to blend together. Take notes and pictures to keep your thoughts organized.
Making an offer
When you find the home of your dreams, don't wait too long to make an offer. Tell your real estate agent right away so they can get things started on their end. They'll make sure the seller is still taking offers, confirm your loan pre-approval, and formulate a strategy for your offer.
Your real estate agent should share their strategy with you, including the results of their comparative market analysis (CMA). They can explain how they arrived at the final price point, and what contingencies they want to include.
The offer amount is ultimately your decision, but you don't want to insult the seller by going too low or get in over your head by agreeing to pay too much. This is why it's so important to work with a real estate agent you trust. They can help take the emotion out of the process and write an offer that works best for you.
If your offer is accepted, you're ready to move on to the home inspection phase. If not, let your real estate agent handle any negotiations. They're experts at dealing with these situations and getting the best deal for their clients.
Tip:After you've made an offer, consider writing the seller a personal letter about why you want the home. An emotional appeal can make all the difference in securing the house you want.
Inspection and closing
You found the house you want, and your offer was accepted. Congrats! You're almost there!
However, before you sign any closing documents, you'll need to have a home inspection completed. This inspection will help you identify any small issues you may want to negotiate with the seller, or it can uncover major issues that cause you to back out of the deal altogether.
Ask to tag along with the home inspector as they compile their report. It's a great chance for you to learn about your new home, including how to address ongoing maintenance issues or any long-term repairs that may be needed.
Closing day is when all parties (buyer, seller, real estate agents, lenders, etc.) come together to finalize the sale and make everything official. Be prepared to read through lots of paperwork so you can look over all the contract details. If you're working with a real estate agent, they'll be able to explain each step of the process and help review all final documents.
You'll need to pay your down payment and any closing costs as well. Closing costs are the total fees charged by all the involved parties, and your financial specialist should send you a statement detailing the costs before you reach the signing day. Closing costs are generally 2-5 percent of the overall purchase price, so budget accordingly.
Tip:Many agents and lenders won't accept cash or personal checks for closing costs, so remember to bring a cashier's or certified check instead.
Items to bring to closing:
- Photo ID
- Proof of home insurance
- Payment for closing costs/down payment
You did it! All your hard work during the home-buying process paid off, and you're now the proud owner of your very first home. It's a milestone worth celebrating, and you should certainly be proud of what you've accomplished.
When moving day comes, and you can finally unpack your things, remember that you're not just getting a new house, you're also getting a new community. It's important to make connections with your neighbors to truly make your new house feel like a home.
Here are some ideas to help you get acclimated to your new neighborhood:
- Take time to introduce yourself to your new neighbors
- Try a local café or restaurant close to your new house
- Spend time in your yard, so neighbors have a chance to say hello
- Go for a walk around your new neighborhood
Ready to take the leap and buy your first home?
As a true community partner, the Credit Union of Texas is excited to help with all of your home-buying and financial services needs. If you're looking to buy a home, call us at 972-705-4845 or schedule a visit with one of our home loan specialists today and let us help you find the home of your dreams.