Thinking About Buying Your First Home, Where Do You Start?

It is not uncommon for a Mortgage Professional to receive a call from a first-time homebuyer, and the conversation starts with, "…  I don’t know what to do, or where to go, can you help me?"  That is exactly where we are going to start.  What are the first things a first-time homebuyer should do when preparing to buy their first home?

PRIDE OF HOMEOWNERSHIP

You have to make the cognitive decision to become a homeowner.  You should not make the decision to buy a home just because it is a good idea, or because all of your friends are doing it.  Not even because your parents say it is time, or it is a good investment.  Becoming a homeowner brings with it the wonderful pride of homeownership; however, one must be willing to accept the responsibilities of homeownership also.  To help with this process, it is a good idea to ask friends and family, who are homeowners, what surprised them about becoming a homeowner?  This question may be of more assistance to you than any other you may ask.

Once you are sure you want to become a homeowner, the next thing is to speak with a Mortgage Professional, and get pre-approved.  The pre-approval process entails completing the mortgage application process, as if you had a sales contract already, and your are evaluated for credit, income, and assets.  The pre-approval process is a helpful tool for you, the lender and your Realtor.  We will discuss Realtors in the next article.

GETTING PRE-APPROVED

The lender is able to evaluate you, and determine your buying power, based on the 3-C"s, Credit, Capacity, and Cash.  You gain knowledge from the process as to how much house you can buy, and what costs may be involved with your purchase.  From your pre-approval, your Realtor will know the price range of homes to show you, what mortgage program for which you have been approve, and also, your Realtor is able to negotiate from a position of strength, because you have been pre-approved.

The lender will pull a "Tri-merge" credit report, which includes your credit data and credit scores from all three Credit Repositories.  The Credit Repositories, commonly called credit bureaus, consists of TransUnion, Equfax, and Experian.  However, if you do not have traditional credit, you may still be able to qualify with "non-traditional credit".  Non-traditional credit consist of your monthly expenses, such as, rent, utilities, insurance, phone, cable, etc.

“Credit” refers to your credit history.  So many people concentrate on the “credit score,” however, the credit score is just a summation, or indicator of your credit history.  The better you are at managing your financial affairs, and not maxing out your available credit, the better your credit scores will be.  Every consumer is able to check his or her credit report free, once a year, through AnnualCreditReport.com.  The main question the lender has to answer is,”…is this applicant more likely to pay his or her mortgage, and on time?”  The only way they can evaluate you is through your credit history, traditional, or non-traditional. 

"Capacity" is just a fancy way of saying you make enough money to meet your obligations, including a proposed house payment.  To determine this, your DTI (debt to income ratio, as a percentage of your gross monthly income) will be evaluated.  There are two numbers in your DTI the lender must evaluate; the first is your "front-end” ratio, the percent of your gross income used in making your total house payment, known as PITI (principle, interest, taxes and Insurance).  The second number the lender has to evaluate is your back-end ratio, which is the percent of your gross income used by making your PITI payments, plus your other monthly installment and revolving debts all together. 

"Cash" refers to the available funds you have for any required downpayemnt, payment of closing costs, and resevers – if needed.  Reserves is the amount of money you have remaining, after closing on your home, stated in the terms of months.  For example, if you have a $500 a month mortgage payment, and after closing you had $1500 in the bank, that would three months of reserves.

SELECTING A LOAN OFFICER

How do you select a Mortgage Professional?  Not only would you ask friends, family, and co-workers for a recommendation; you would also check the Better Business Bureau and other resources in your area.  Try to get three to four names of Loan Officers, and then call them up.  During the call, you want to interview the Loan Officer to see if you and they are compatible. 

You want to say the same thing to each person, and see what type of response you may receive.  No, not “What are your interest rates?”  It would not matter what the rates were at that moment, why?  Because you do not have a contract, and you have not done any paperwork with the Loan Officer, so you could not lock a rate, even it was zero.  Now at the end of the call, you can say, “If I was locking today, and I qualified for your best rate, what would it be?”

When you call, tell the Loan Officer that you are “interviewing Loan Officers” and you received their name from someone.  The main thing is to get a feeling for the LO to see if you would be comfortable working with him/her.  Ask questions about how long they have been in the business, about their training, and if the specialize in any particular mortgage.  For the most part, they will all be qualified, and know their stuff.  What you are listening for is how they answer the questions, and if they seem to be open with you.  Based on the result of the interviews, you make an appointment with the one you like to be pre-approved.

In the next article, we will discuss how to prepare for the pre-approval appointment, what to take, what to expect, and selecting a Realtor as your Buyer’s Agent..  As a first-time homebuyer, you now know what to do first.