So, you're finally ready to pursue purchasing your first home - GREAT! Your on your way to establishing a major asset that should serve you well towards building wealth. Home ownership is typically most people's primary investment asset. The sooner you are able to buy that first home, the more that asset will open doors for wealth building opportunities in the future.
Question is, what do we mean by that? The housing market has been especially volatile over the last twenty plus years. Housing values have fluctuated during that period, however the values have always greatly increased. Like mutual funds, IRA's, stocks and bonds, building wealth over time is the principle. Owning a house typically increases wealth potential exponentially over other investments - and for good reason. We have had two major increases to home values since the start of the 2000's where home prices have tripled.
The point is, it is hard to predict if housing values will increase at these levels in the future. However, if you are feeling discouraged by what you're currently seeing with the market and thinking that investing in a home or real estate is too risky - you'd be wrong. Buying a home at a young age is still considered the best asset you can obtain for building your future wealth.
Who Qualifies As A First-Time Homebuyer?
According to the U.S. Department of Housing and Urban Development (HUD), a first-time homebuyer is defined as "someone who has not owned/occupied or had an ownership interest in their principal residence for three years prior to the purchase of the new property. If you’re buying a home with someone who has previously owned a home, but you have not (or vice versa), you still qualify as first-time homebuyers."
So, this definition says you don't have to be a "first and only time" home buyer. Let your loan officer know if you fall under this criteria. It can save you a lot of money.
Do You Know if You've Already Established Credit or Don't Know What Your Current Credit Score Is?
You Are Entitled to a Free Annual Credit Report From Each of the Three Primary Credit Reporting
Agencies - Equifax, Experian, and Transunion - Through AnnualCreditReport.com.
Establishing a good - not necessarily stellar - credit score is the first step and paramount to taking advantage of some of the numerous first-time homebuyer programs available. Hopefully you are in a position where you have demonstrated consistent responsibility in making payments on your car, credit card or other loans on time. There are programs out there that will accept a credit score as low as 500, however this is not a given and you can expect to pay a higher interest rate. Ideally, you would want a credit score at minimum in the upper 600's. This is important! If you haven't built adequate credit or need to improve it, this has to happen first.
For those who haven't built credit, start with applying for a credit card designed for new credit holders. For those who already have bad credit, these options are good for you, too. However, just know that with strict terms and high interest rates, these cards are unfavorable if you are not using them responsibly. Ideally, these should be used sparingly to ensure paying the balance off each month. The 20%-plus APR's offered is not something you want to leave a balance on. Their only purpose should be to establish or build an acceptable credit score to obtain a home loan.
Many local banks offer credit builder loans for a car or other purpose with reasonable rates. Check with your bank to see what they may offer.
Car dealerships also offer no or low credit purchase plans. However, you're considered a no-credit-history risk. Typically, loan terms will be stricter and interest rates will be higher.
The goal is obtaining a credit card or loan and demonstrating the making of payments on time. This will quickly establish or increase your credit score. Once this is accomplished, you can then take advantage of several programs designed to get you into your first home. From here, get with a mortgage loan officer to discuss your options. Based on this discussion, and if they are looking out for your best interest, they will recommend the best loan program you qualify for and fits your financial situation.
Your mortgage loan officer will then provide a pre-qualification letter that determines the home loan limit they are willing to provide you based on your income and assets. Basically telling you how much home you can afford. With this letter, I can then get to work to finding that first home meeting your criteria and within the mortgage loan amount you are qualified for.
Buyer's Agency Agreement
It costs a home buyer nothing to be represented by an exclusive real estate agent in a home purchase. The seller pays a percentage-based commission - typically 6% of the property's closing sales price. The seller's and buyer's real estate agents are then compensated by a split of that total commission at closing.
The agent shown on the front yard sign of a home you are looking at is, by default, representing the seller - not you. Although a REALTOR® can handle both sides of a transaction (dual agency), it is typically not to your benefit to do so. You greatly reduce your negotiating power when a listing agent has financial and other information about the buyer during the process. The dual agent has an incentive for also receiving the full sales contract commission in this role. It is required to be split with the buyer's representative agent, otherwise.
An important step in the buying process is to hire a real estate agent that will represent you as a buyer by signing a Buyer's Agency Agreement with the agent of your choosing. Please know, you cannot sign with more than one. It is always a good idea to find a real estate agent that represents your side of a home buying transaction by signing a Buyers Agency Agreement.
First Time Homebuyer Programs
Federal & State Programs to Make Homeownership a Reality!
Steps To Buying a First Home
Step 1: Building Credit & Down Payment
An established credit score of 620 or higher is ideal for qualifying for a new home loan. Although many first-time homebuyer loans are designed to help reduce or eliminate a down payment and work with low credit scores, it is still important to show you have savings and an acceptable credit score when attempting to buy a first home.
Step 2: Mortgage Loan Prequalifying
Consult with a mortgage loan company to determine the best First Time Homebuyer loan program available for you. A good loan officer will dig into finding the best home loan program that fits you.
Your mortgage loan officer will provide a loan prequalification letter that sets the limit of the loan they are willing to provide to you based on your assets, savings and income.
To get a general idea of what your house payments will be, use this handy mortgage calculator.
Here are a couple of trusted mortgage loan officers I recommend calling to get pre-qualified:
Step 3: Buyer's Agency Agreement - It Costs You Nothing To Be Represented Exclusively As a Buyer by a Real Estate Agent!
An important step in the buying process is to hire a real estate agent that will represent you as a buyer by signing a Buyer's Agency Agreement with the agent of your choosing.