Buying a home for the first time can be as overwhelming as it is exciting. There are numerous steps and requirements to the process, and at some point you are likely to be scared of making an expensive mistake.
It is therefore important to know the application requirements and benefits of the federal government for newcomers to the home.
Here are seven ways you can prepare if you are buying your first home in 2021.
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1. Determine if you are ready to take out a loan
The typical duration of a mortgage loan is 15 to 30 years – and even if you don’t want to stay that long, buying a home is a huge commitment.
According to Quicken Loans, there are three basic questions to ask yourself in order to know that you are 100% ready:
- Am I ready to commit myself to this house and this city for at least five years?
- Do I have an emergency fund that can cover expenses for at least three months?
- Do I have a stable income?
“If the answer to any of these questions is ‘no’, you may want to wait a moment. Keep saving. Keep researching, ”says Quicken Loans.
2. Know the first-time home buyer privileges for which you will qualify
If you look at the definitions of the Ministry of Housing and Urban Development (HUD), you will see that the term “first of all” includes more people than the name suggests.
For example, you belong to this group if you have not had a primary residence in the past three years.
They also qualify as a First time buyer if, according to the HUD, you are a “displaced housewife who previously lived with a spouse” or you have a mobile home that is not attached to a fixed structure.
These would-be borrowers can get help from government programs, tax breaks, and government insured loans. In addition, they may be eligible for lower down payments and less stringent credit requirements.
3. Check your creditworthiness and your debt-to-income ratio.
Mortgage lenders need to see healthy creditworthiness as evidence that you can make reliable monthly payments. In this case, you must have a decent Debt to Income Ratio (DTI) and a FICO credit score.
Your DTI ratio is the percentage of your income that goes towards paying for car loans, credit cards, and other debts. You must keep it below 43% to be eligible for most traditional mortgages and merchandise interest.
However, both Freddie Mac and Fannie Mae have published guidelines that provide more flexibility for a DTI rate of up to 50%, especially for first-time home buyers.
If in the meantime you have a bad score or missing credit historyYou should consider getting a credit builder loan or a secured credit card. You can also ask a trusted friend or family member to make you an authorized user on their credit card, provided they always pay on time.
4. Find the loan type that suits your housing needs
Do your research on the Types of Mortgage Loans that best suits your financial situation. As a first-time home buyer, you can qualify for government-supported loans that require lower down payments.
For example a FHA loans has lower up-front costs and can be granted to borrowers with creditworthiness as low as 580 and a down payment of 3.5%.
On the flip side, if you want to buy property in a rural area or in a qualified suburban location, you can get USDA loan. Depending on your income, you may be able to get a USDA no down payment mortgage.
Finally, you can get one become Loans with 0% discount if you are a veteran or an active member of the armed forces.
Make sure to ask your lender about the types of credit they offer and the programs that are available for first time home buyers. You can also consider using a mortgage broker, but this will add an additional cost.
5. Pay off overdue bills as you build your rainy day fund
This part can be challenging, but it can be critical to improving your credit score and finding a new home. You have a better chance of obtaining mortgage financing when you have paid off most, if not all, of your existing debts.
Even after submitting your application, avoid new loans and last minute purchases as these could affect your DTI rate and notify your insurer for a possible disqualification.
Instead of taking on new debt, try your best to amass three to six months’ worth of emergency funds. Your monthly mortgage payment may be cheaper than renting an apartment, but you are solely responsible for the upkeep and maintenance of your home.
In addition, if you are considering refinancing your mortgage on more favorable terms in the future, maintaining a good financial position can be beneficial.
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6. Save money on a down payment and closing costs.
The repayment period for conventional loans is typically 30 years, but you need to save on the down payment and fees that you have to pay when you sign the mortgage.
For example, lenders will be more likely to approve your application if they can afford a 20% down payment on the potential property. This is also the minimum amount required to avoid paying for private mortgage insurance.
You should also prepare for the closing costs, which will cover application fees, attorney, your credit report, property appraisal, and home insurance, among other things. These can easily amount to 3 to 5% of the purchase price of the home.
American homebuyers pay an average of $ 5,750 for closing costs, according to real estate data firm ClosingCorp. The amount can be significantly higher in some places like the District of Columbia ($ 25,800) and New York ($ 12,850).
7. Get pre-approval for a mortgage loan
After you’ve saved and prepared the documentation requirements, it can be tempting to start looking for a home right away and skip pre-approval. Don’t miss this step as it has significant advantages.
Pre-approval from the lender shows you exactly how much you can afford. It indicates the maximum credit you can get based on your W-2 income, your bank statements, and your credit score.
Additionally, the seller knows from the pre-approval letter that you can afford their home. In return, you can make a stronger offer and reduce the risk of last-minute surprises with your lender.