Starter Homes 101: What You Need to Know for Your First House
Whether you’re transitioning from renting to owning or moving out on your own for the first time, buying your first home is a huge life step. Congratulations! While your starter home may not be your “forever home,” it’s where you’re putting down your roots right now, so finding and financing the right property and making it yours is important. Here’s what you should know as a first-time home buyer when it comes to finding the right property and financing your starter home.
Key players in the home buying process
As a first-time home buyer, you probably have a lot of questions, that’s totally normal. The good news is that you’ll have some go-to industry experts on your side to answer your questions and walk you through the home buying process. The key players in the home buying process (other than you, the buyer, of course) are your mortgage banker and your real estate agent. Your mortgage banker will be your main point of contact for all things regarding your mortgage loan. They will help you complete your mortgage application, determine how much of a loan you qualify for, gather important documents, help you choose the right loan product, and guide you through the mortgage process. Your real estate agent will help you find your starter home, put in an offer and negotiate the purchase price. Both your mortgage banker and real estate agent should be knowledgeable and experienced professionals, so you should be in good hands from start to finish as you buy your first home.
Finding the perfect property
The first important thing to do when you’re ready to buy a home is to choose the area you want to live in, whether that’s a city, certain neighborhood, or as specific as the exact street. You’ll hear it over and over again—location, location, location. Falling in love with the house may be the only thing on your radar, but you should also consider the surrounding area. What is the school system like? Is it close to shopping, dining, and activities? It’s also important to remember that, since this is your starter home, eventually you may rent out or sell this property. So, while it may not be for a while, you should also consider the resale value of the property. Other than narrowing down the location, you can create a new home wishlist. This will help you decide and separate what you need in your new home and what you are willing to compromise on. Making a home wishlist includes things like number of bedrooms, bathrooms, but also things like having a yard, granite counter tops in the kitchen, or updated bathrooms.
Financing your starter home
When you apply for a mortgage loan, your mortgage banker will ask for information in order to determine how much you qualify for. They’ll want to verify your source of income, look at your assets, and examine your credit score and payment history. They’ll need things like pay stubs, W-2 forms, and bank statements to get started. You can evaluate your finances before you talk with your mortgage banker to see where you stand. Calculate your debt-to-income ratio (DTI), which your lender will do, too. To figure out your DTI, divide your total monthly debts by your household’s gross income, which is income before taxes. When you multiply this number by 100, you get a percentage — your DTI. Different loan programs require DTI’s under a certain percentage. So, the lower the percentage the better. You can also check your credit score. Your credit score, which is calculated based on your credit report, affects your interest rates and the type of loan you qualify for.
Your credit score is made up of five parts: your payment history, outstanding balances, length of credit history, types of credit used, and number of credit inquiries.
The higher your credit score, the better (they range from 300 to 850). You can pull your own credit report for free from each of the three credit bureaus once a year atannualcreditreport.com. If your credit score is not quite where you want it to be, there are ways to build credit. You can also talk to your mortgage banker about how to build your credit.
Other tips for first-time home buyers
Be aware of extra costs during the home buying process. When you’re buying a house, your costs will be laid out in your loan estimate, including closing costs. In fact, in many cases the seller will cover some of the closing costs. But there are other costs that may come up. For example, you will have to have a home inspection. Your mortgage banker can help you estimate your other costs.
Have some money saved for unexpected costs of homeownership. Do you have enough saved if the dryer stops working a few weeks after you move in? While your home warranty may help with some of those things, it’s a good idea to have some money set aside in case of emergency.
Don’t be afraid to ask questions. Your mortgage banker and real estate agent are there for you! If you have questions or concerns, don’t hesitate to go to them. Buying a home is a big decision and it’s normal to get a little confused. Even experienced home buyers ask plenty of questions.