Owning a home is a major milestone many Americans expect to achieve in their lifetime. It’s not simply about having the ability to stay in one place for years – it’s also about taking advantage of the incentives to homeownership, including the financial security to make a major investment and see it grow over time.
Even the millennial generation, which has been slower to become a major part of the homeowner pool than previous generations, now makes up 37% of recent homebuyers, the largest share of the market, according to the National Association of Realtors’ 2019 Home Buyers and Sellers Generational Trends Report, published in April.
Following a decline in homeownership after the Great Recession, the homeownership rate nationwide was 64.1% as of the second quarter of 2019, according to the U.S. Census Bureau. While homeownership has not returned to its historical peak of 69.2% in 2004, it is edging upward again after hitting a 50-year low in mid-2016 at 62.9%.
While buying a house for the first time may be intimidating, no homeowner started the process feeling confident every step of the way. Here’s what first-time homebuyers need to know.
Are You Ready to Become a Homeowner?
Long before you start looking at houses, you must be sure your finances are in order. The process of saving and making strategic financial decisions to ensure your credit history is more appealing to a lender can take more than a couple months if you haven’t already been working toward buying a house.
“I would say a year plus – and make sure you’re saving toward that goal over a period of time,” says Amin Dabit, vice president of advisory services for Personal Capital, an online financial advisory and wealth management company.
1. Credit history. Run a credit report on yourself – which is free to do once a year and doesn’t affect your credit by going to annualcreditreport.com and receiving a report from each the three major credit-reporting agencies – and focus on the areas you can improve. You may have credit card balances to pay off, or a few missed student loan payments from a couple years ago. You may also simply need more time to pass from a recent borrowing mistake. The more time that passes from the last blemish on your credit report, the less likely a lender is to consider it a red flag to give you a loan.
2. How much house can you afford? How good your finances look from a mortgage lender’s perspective isn’t the only thing to examine. You should also look at savings that can be used toward a down payment and determine how much you’d be able to afford on a monthly basis for your principal mortgage payment, interest, taxes and insurance, which Dabit recommends calculating as 28% of your gross income. “That’ll help you figure out how much you can borrow and sustain long-term,” he says.
3. Savings for down-the-road expenses. You also have to take into account maintenance and other potential costs that may come up as a homeowner. If you live in a particularly competitive or pricey market, such as San Francisco or the District of Columbia, it’s reasonable to expect your monthly costs to be higher than 28% at the start.
4. Who should you consult? Once you’ve examined your financial history and expected future cash flow, it’s time to start talking to the professionals who will be able to help you throughout the process of buying a house.
A natural start is with a real estate agent. Once you’ve found an agent you can trust, he or she can help you find a financial advisor if needed, a loan officer connected with a lender, a real estate attorney, a title insurance representative, a home inspector and many more faces that will be part of your transaction.
“The agent’s really the core source of all those, or at least can be,” says Josh Heyer, a licensed real estate salesperson with Triplemint, a full-service brokerage in New York City.
Approach the process as assembling a team of people who will help you achieve homeownership. With each person, you want to feel confident that the professional will work in your best interests. Heyer recommends not only speaking with multiple professionals regarding your mortgage and home inspection, but also interviewing several agents at the start.
“I want you to be comfortable with me throughout this entire transaction, and I would rather you meet with a variety of agents first to make sure that I am the one you want to work with going forward,” Heyer says.
What Mortgage Options Are Best for You?
When it comes to finding a mortgage, explore options with different lenders and the various products offered. Major banks, credit unions and nonbank lenders offer a variety of options to better fit your specific needs as a homeowner.
The key to figuring out which program is best for you is determining how much cash you have for a down payment. By putting 20% of the home price down or paying for private mortgage insurance for a smaller down payment, you can qualify for a conventional mortgage.
Alternatively, you can put less money down with other options, like an FHA loan through the Federal Housing Administration, which requires less money down and a less impressive credit history but typically comes with a higher interest rate. Veterans are able to take advantage of VA loans, backed by the U.S. Department of Veterans Affairs, which require no money down but have additional fees.
There are many loan product varieties, and your interest rate can be fixed, most commonly in the form of a 30-year, fixed-rate mortgage, or adjustable, known as an adjustable-rate mortgage, which remains fixed for a specified number of years before changing gradually toward the industry rate.
In finding the mortgage product that works best for your financial situation, it’s essential to prequalify or get preapproved for a mortgage amount. This will let you know how much your lender is willing to loan you to buy a house.
But don’t take that maximum approved number as the price you should pay for a house. “In most cases, you shouldn’t borrow the maximum amount that a mortgage lender tells you (that) you can borrow,” Dabit says. Otherwise, you may find yourself having to skimp on other typical expenses, like food, for a few years or more.
Originally published here.