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What Every First Time Home Buyer Should Know 

 February 3, 2022

By  Lora Keller

Need An Appraisal For A Property In Southwest Florida? Call (941) 743-3700

Anytime you go through something new there are going to be things you don’t know. Situations that you simply cannot predict. 

The truth is that buying a home can be somewhat complicated if you have never done it before. That’s why we’ve come up with a quick tip guide that can help you. 

Before you start looking at houses on listing websites, here are some things that every first-time home buyer should know and look out for. 

What’s Your Credit Score and What Is on Your Credit?

The COVID pandemic has complicated things in everyone’s lives, and your credit is no exception.

Now, if you want to buy a home, you are going to need a higher and more stable credit score.

You might be asking yourself “But why?”

Why do you need a good credit score?

Why does your credit score even matter?

What affects your credit score anyway?

Let’s break it down quickly and simply for you.

Why Your Credit Score Matters

Most people already understand what a credit score is so let’s start with “why does it matter?”

Well, any mortgage lender is going to want to know that you generally pay your bills and that you do so on time and in full. Why would they want to lend you the money to buy a house if they aren’t confident that you will pay them back? That’s just bad for business.

So in order to make sure you are trustworthy enough, they will want you to have at least a decent credit score. 

But who decides what is good enough? Well, they do. The mortgage lenders decide what they will require your minimum credit score to be. And not all mortgage lenders are created equal. 

Private lenders can be pickier about who they approve or deny. And most first-time homebuyers don’t know what to expect when they apply for their first loan. 

If a conventional loan just won’t work for you then you need to look into other loan options (which we will circle back to).

What Is on Your Credit?

Now, you need to understand what is on your credit. And we’re not talking about going to Credit Karma and looking at your credit score. We are talking about a real credit report. This is what a lender is going to be looking at when making decisions about your loan. 

Once a year you can get a free credit report from all 3 credit bureaus by going to the Annual Credit Report website and requesting them. And when you get your credit report you’ll notice some of the different things that affect your credit. 

You can probably guess the first one but we’ll still list it just to be safe. 

Outstanding Balances/Debt

If you don’t pay your bills those bills turn into debts. But you already knew that. 

So what debts should you pay off first to increase your credit score? Credit card debt is a biggie. If you have any credit card debt that is still outstanding then it is going to hit your credit the hardest. 

But the good news is that if you start paying off your credit card debt it will also raise your score more significantly than other debts.

If you don’t have any credit card debt then maybe you need to start building more credit to help raise your score. It is hard to say where you should start because everyone’s credit situation is different. 

You should talk with a credit specialist to be sure that you are doing everything you can. But at the very least no more missing payments on your bills.

Work on Your Credit and Start Saving

If you want to prepare for buying a home, then working on your credit and saving for a down payment on a house is going to be important. 

Work on Improving Your Credit

We already talked about paying off your credit card debt to help you improve your credit score. 

But what if you don’t have any credit card debt?

If you don’t have any credit card debt then maybe you need to start building more credit to help raise your score. It is hard to say where you should start because everyone’s credit situation is different. 

You should talk with a credit specialist to be sure that you are doing everything you can. But at the very least no more missing payments on your bills.

Why Saving Is Important

When you start looking into buying your first home, you will realize there is a lot more to it than you thought. That includes unexpected payments. 

Most importantly, you will need money for the down payment. And your down payment amount is subject to change. If you have a lower credit score, typically your down payment will be higher and vice versa.

The down payment will fluctuate depending on what the price of the home you want to buy is because it is based on percentage. So you could potentially need to pay 5% down on the home or 10% down. It really is up to the house you want to buy, the lender, and your credit. 

Figure Out Your Budget

Next on your list is going to be figuring out what your budget is. One of the biggest things that every first-time home buyer should know is that your budget is everything. 

It will determine not only what houses you can realistically afford, but it will determine what neighborhoods you can look for a house in. Your budget is crucial.

What Can You Afford Without Breaking the Bank?

The last thing that you want to be is house poor. If you are a first-time home buyer you might not know what that phrase means. 

Being house poor is not a good situation to be in. That is when you max out your home budget or go over what your home budget should be. 

Then every month after you pay your mortgage you are left with very little for the rest of your monthly expenses. After paying all of your bills you want to still have money for food, going out with your friends or family, gifts for loved ones, or spending money for special occasions. 

If all of your money is wrapped up in your house and monthly mortgage payments, you won’t be able to do other things to enjoy yourself or with your family. So first and foremost, you need to figure out what budget works for you.

What Are Your Loan Options?

There are many different loan types for homebuyers but they are all different. So how do you know which one is going to be right for you? 

What should a first-time homebuyer know when looking into their loan options?

Types of Loans

If you are ready to buy a house and will need a loan, you should look into what loan type will be best for you. But how do you know what to choose?

There are several standard types of loans as well as government-insured loans that you may qualify for. All of them are a little different and aim to benefit people in different financial situations. 

Conventional Loans:

First, you have conventional loans. And the name says it all. These types of loans are a more standard type of home loan from a mortgage lender. 

For a conventional mortgage loan, there are several different requirements you will need in order to qualify. 

Now, each lender is going to be a little different but for the most part, you will need a credit score over 600 and your debt to income ratio (DTI) will need to be less than 50%. 

But like we said, all mortgage lenders are different. Some will require a higher credit score or work with you if your score is rising. However, aren’t required to give you a loan. So if you don’t qualify or if you just barely qualify, they might still deny your loan request. 

Jumbo Loans:

A jumbo loan is also a loan from a regular mortgage lender, however, there are some differences. 

This type of loan is for people who are looking to buy more expensive property. Hence the name jumbo loan. 

For obvious reasons, if you are asking to borrow more money to buy a more expensive property, then the mortgage lender will require more from you. 

Instead of a credit score of 600, you will need a credit score over 700 (usually) and a much lower debt to income (DTI) ratio. Not only that, but lenders prefer a larger down payment for jumbo loans as well. 

Because of all these requirements, jumbo loans are more difficult to qualify for. The good news is that most Americans won’t need to qualify for a jumbo loan if they are simply looking for a mortgage loan to buy their first home. 

Types of Government Loans

For some people, getting a conventional loan from a mortgage lender might not be your best option. That is why there are government-backed home loans. 

However, these loans still have requirements that you must meet in order to qualify for them.

Federal Housing Administration (FHA) Loans:

The Federal Housing Administration offers loans to those who have a credit score of at least 580 with only a 3.5% down payment. 

Don’t panic. 

If your credit score is lower than 580 you can still qualify for an FHA loan. They will just require a higher down payment on the house at around 10%. 

They will however need to know what your debt to income ratio is. Usually, the max DTI for this type of loan is going to be around 55 %.

United States Department of Agriculture (USDA) Loans:

The United States Department of Agriculture offers loans for families who would not otherwise be able to buy a house. The thought process behind this is that if they offer loans to people and families in need, it will help to strengthen the communities these people live in. 

There is a catch though. The USDA loans are only for homes in certain areas. And when we say “certain” we mean rural. This type of loan is really meant for those who live in farming communities and some suburban communities. 

There is another catch as well. Your debt to income ratio needs to be 40% or lower. That’s even lower than what most conventional loans require. 

Department of Veteran Affairs (VA) Loans:

The biggest requirement for a VA loan is that you must be a veteran. These loans are meant to help our veterans buy homes even if they wouldn’t qualify for other types of loans. 

VA loans are pretty helpful because they don’t require a down payment on the home and your debt to income ratio can be on the higher side and you can still qualify. 

Look at More Than One Lender

If you have read the entire article then you have heard us mention a few times that not all lenders are equal. You need to look into several lenders and see which one is going to be right for you. 

One lender might require too high of a credit score for you to receive a loan. But another lender might be willing to work with you. So if you are told no or you are denied a mortgage loan, remember the world isn’t over. 

Just continue to work on your credit score and paying off debt while also looking for a lender that’s right for you.

Lora Keller

CertResRD3931


Lora Keller 

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