Buying a home can be one of the most exciting decisions in life. It is also one of the most significant financial decisions most Americans will make.
To get the most out of the experience, it’s good to know a few things before contacting real estate agents or hiring movers.
In our guide to buying a home, we’ll look at the key parts of the home buying process such as
- How do you know how much you can afford?
- What about hidden costs?
- How do I pay for my dream home?
How much can you afford?
Before attending open houses, it’s important to consider how much you can comfortably afford to spend on a house. Let’s look at what you need to consider when calculating your new home’s price range.
What is your debt-to-income ratio?
Your debt-to-income (DTI) ratio is the term used to represent how much debt you’re currently carrying in relation to your monthly income. Your DTI looks at debt from all sources, including credit card debt, car loans, student loans, personal lines of credit, etc.
Mortgage lenders use your DTI to estimate how much additional debt you can afford for monthly payments. While many lenders prefer a DTI ratio of less than 36 percent, some loans offer more flexibility to borrowers.
For example, FHA loans—mortgages backed by the Federal Housing Administration—have a maximum DTI ratio of 57%.
How much down payment do I need?
A bigger down payment generally means a smaller monthly mortgage payment.
While some loan programs set a minimum down payment requirement or offer zero down payment options, you can always opt to put more down.
Larger down payments can also increase the equity you’ll have in your home and eliminate the need for mortgage insurance (with a down payment equal to 20% of the home’s selling price).
What role does my credit score play in buying a home?
The better your credit, the more chance you have to save money because lower mortgage interest rates typically go to borrowers with higher credit scores.
Two of the most important (and easiest) methods of achieving good credit are having a bank account and paying all your debts/ bills on time.
But if your credit is less than perfect, don’t worry.
Mortgage products like FHA, VA, and USDA loans—government-backed loans—can often result in low-interest rates for borrowers with struggling credit.
Don’t forget insurance costs
If your down payment is smaller and less than 20% of your home’s purchase price, you’ll have to pay additional insurance costs.
Private mortgage insurance (PMI) protects mortgage lenders and mortgage brokers when borrowers default on home loans.
PMI rates are calculated using several factors, such as the amount of down payment and credit score. Most borrowers pay PMI monthly, however, some mortgages include an additional upfront mortgage fee.
Are there hidden costs associated with a mortgage loan?
Buying a home involves several additional costs you may not have considered as a first-time homebuyer.
In addition to your down payment, you’ll want to set aside a little extra to cover costs such as these.
The term closing costs refer to expenses—in addition to the home’s purchase price—that are part of buying a home. They can include:
- Lawyer fees
- Loan origination fees
- Home inspector
- Home inspection or appraisal fees
- Title searches
- Title insurance
- Property taxes
- Credit report fees
Closing costs don’t include additional expenses associated with new homeownership but these should also be considered when considering the overall cost of buying a home.
Examples of these additional costs include moving costs, travel, homeowners insurance, utility installation fees, any immediate repairs you plan to make, etc.
Understanding your finance options
One of the best ways to understand your home financing (or mortgage refinancing) options is to meet with a licensed mortgage lender.
And because mortgages can have different requirements or limits depending on where you live, it’s important that you discuss financing with a lender for your state.
At Assist Home Loans, we can walk you through the loan options you have available for buying your first home in Colorado.
Unless you plan on buying your first home for cash, you’ll need to arrange for financing. The best way to do that is to start with mortgage pre-approval.
Next, you’ll discuss mortgage options to find the best option for your situation at this stage. Common mortgage products include 15-year or 30-year fixed-rate mortgages, FHA loans, USDA home loans, or VA loans for qualified military service members, to name just a few.
Mortgage pre-approval takes less than an hour and helps you firm up your budget for buying a home. Once you find your dream home, it’s time to officially process your mortgage application.
Keeping your financial situation consistent between your mortgage pre-approval and mortgage application is important. It’s good to avoid taking on new debt or changing jobs until your home closes to make the process as smooth as possible.
Changes in your financial picture, credit score, or employment could mean changes to your mortgage eligibility, interest rate, or term.
Your licensed Assist Home Loans officer will review financing options with you and then forward your mortgage to the underwriter who reviews your mortgage application.
The underwriters may request other financial documents before approving the application.
Once the mortgage application is finalized, and purchase requirements are met, you’ll sign closing documents and pay closing costs.
Final steps—the walk through
This is when all the work has been done, all the papers signed, and the money paid.
It’s now that you’ll take one final walk through your home to ensure everything is in order, that any requested repairs or upgrades were completed, any appliances requested are there, etc.
This is when your realtor will give you the keys to your new home. Congratulations, you just bought your dream home!
Get in touch with Assist Home Loans for your next purchase
If you’re considering buying your first home, refinancing your current mortgage, or have questions about whether a conventional loan or an FHA home loan is best for first-time homebuyers, reach out to the home loan specialists at Assist Home Loans today.
Our experienced home lending team is ready to help you buy your first home in Colorado.