First Steps

Pre-purchase homebuyer education helps you get to closingBuying a home is one of the most serious and important financial decisions most consumers make in a lifetime. Your home is your family’s haven, as well as being the biggest asset in your portfolio. A good purchase can set you up for financial success, while the wrong mortgage can put your credit and your financial future at risk. It’s important to have a thorough understanding of the process to help you make the right choices, especially for first time homebuyers! This helps avoid problems and minimizes stress.

If you’re getting ready to purchase a new home and you have questions, our HUD-approved housing counselors can provide the information you need to make informed decisions as you move forward. Call Consolidated Credit at 1-800-435-2261 to speak with a HUD-certified housing counselor for free.

Getting Ready to Buy a Home

If you’re thinking of buying a home, you should start by thinking about your situation. Purchasing a home before you are ready can put your financial future at risk. You can seriously damage your credit, face foreclosure and even end up in bankruptcy if you buy more home than you can afford.

Being able to answer the following questions will make the process easier as you start to look for your new home:

  • Is it the right time for you to buy a home?
  • How much can you afford to pay for a monthly mortgage payment?
  • How much space do you need?
  • What areas of town do you like?

After you answer these questions, you can make a “To Do” list and start doing casual research. Talk to friends and family, drive through neighborhoods, and look in the “Homes” section of the newspaper.

Is it the Right Time for You to Buy a Home?

This question involves making a careful assessment of your financial stability.

To help find out if you’re ready to buy, ask yourself the following questions:

  • Do I have a steady source of income?
  • Have I been employed on a regular basis for the last 2-3 years?
  • Is my current income reliable?
  • Do I have a good record of paying my bills?
  • Do I have a lower number of outstanding long-term debts, such as car payments?
  • Do I have money saved for a down payment?
  • Do I have the ability to pay a mortgage every month, plus additional costs?

If you can answer “yes” to these questions, you are probably ready to buy a home.

How Much Can You Afford to Pay for a Monthly Mortgage Payment?

There are several ways to avoid overspending on a property. First, it can be helpful to speak with a credit counselor or housing professional prior to getting in contact with lenders to assess the applicants’ finances, make any last-minute changes to their spending patterns and analyze their credit standing. This process may help boost borrowers’ chances of securing financing because it allows them to reverse poor behavior or correct inaccuracies on their credit report that may lower their loan approval chances.

Second, consumers should get pre-approved for a loan. During this process, lenders will tell consumers the maximum amount they may borrow based upon their debt-to-income ratio. However, buyers should be careful and understand the calculations lenders have used to come up with this figure. Most banks will set the debt-to-income ratio based on gross (pre-tax) income at 45% to 50%, but spending this amount on a mortgage does not leave a great deal of income for savings, building retirement funds, covering bills and accomplishing other financial goals. According to the FHA, your monthly mortgage payments should not exceed more than 29% of your gross income.

For this reason, homeowners should understand that although they may qualify for a large loan, it may be more financially beneficial to purchase a home for less than this amount. In the world of mortgage lending, your mortgage payment combined with non-housing obligations should not exceed more than 41% of your income, although we recommend for consumers to keep their debt-to-income ratio below 36%. It’s important to note that your lender will also consider the cash you have available for a down payment and closing costs, as well as your credit history when determining your maximum loan amount.

Lastly, consumers should focus on saving as much as possible for the down payment, preferably 20% or higher. Putting down at least that amount will exempt owners from being forced to purchase private mortgage insurance. Further, the more individuals put down during the purchase, the lower their mortgage payments will be going forward.

Determine Your Housing Needs Before You Start Your Search

Your home should fit the way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities. For example, while you may be able to afford a 6-bedroom house if you only have three people in your family do you really need three extra rooms of space? Or will your family get much use out of a pool? If not, buying a home with a pool is going to be a big unnecessary expense.

Every household has different needs when it comes to a home, so you should really think about what you want before you start to look. Put together a list of needs and wants in your new home, prioritizing the “want” list so you know the hierarchy of what you want to look for. Anything on the “need” list should be considered a deal-breaker if a home you’re considering doesn’t have that feature.

Here are some things you should consider before buying:

  • Are there enough bedrooms and bathrooms? Are there too many?
  • Do all the appliances and mechanical systems work? What are the things that will need to be replaced?
  • Will your furniture fit?
  • Do you like the floor plan? Does it make sense for your family?
  • Is there enough storage space?
  • Imagine the house through each season, in good weather and bad weather. Will it be structurally sound, year-round?
  • Brainstorm potential problems so you can ask your real estate agent and your future neighbors. Is there noise from the highway or high school football stadium down the street? What is the neighborhood like at night? How are the schools? Is there public transportation nearby?

Though this is far from a comprehensive list, it’s a good starting place if you are looking to buy your own home. And remember, this is your home, so don’t be in a rush to buy — the average homebuyer looks at 15 houses before choosing the one they want to buy.

Selecting the Right Real Estate Agent

It’s not necessary to work with a real estate agent when you buy a home, but it can make the process a lot easier – especially if you are a first time homebuyer. If you prefer to work with an agent, start by asking family and friends if they can recommend someone that they’ve worked with before. If you can’t find agents that way, look online through independent third party review websites and social media sites. Compile a list of several agents based on what you find and talk to each before you choose the agent you want to use.

You want an agent who listens well and understands your needs, and whose judgment you trust. The ideal agent knows the local area well and has resources and contacts to help you in your search. Overall, you want to choose an agent that makes you feel comfortable and can provide all the knowledge and services you need.