Thinking about buying a first home and trying to figure out what to do can be an overwhelming thought. There are a lot of things to consider such as price, payment, amenities, down payment, and qualification. Plus spending and probably borrowing tens to hundreds of thousands of dollars is a huge step. So foremost, a first time home buyer must be an informed and educated buyer. In this article we want to provide the first time buyer how to avoid the worst mistake. Also, throughout the article there are links to other helpful articles for first time buyers on this site.
Do Not Make This Mistake as a First Time Home Buyer!
There are a lot of firsts for a first time home buyer. So, what is the worst mistake to avoid and what buyers say they wish they would have done first? Drumroll… “If I had only taken the time to get a solid approval prior to looking at homes and getting under contract!”. Buying a house is exciting and getting a mortgage is not! So it is only human nature to want to find the right house first and then figure out the financing later. But this is totally backwards from the way it should go. Do not figure out your finances during due diligence! Getting expertly qualified and understanding the numbers up-front will make the home search process go so much easier! Check out the reasons to get approved up-front and avoid this worst mistake ever.
“Do Not Figure Out Your Finances During Due Diligence!”
Reasons to Get Approved Up-Front
If you think about it for even a second, it is just not a good idea to start the mortgage process AFTER signing a purchase contract. Discussing goals, terms, required documentation, and more prior to contract makes perfect sense. Having 30 days or less to handle the process usually can be done, but why put the unnecessary stress on yourself? So what should be done prior to going under contract on a house? Let’s discuss these areas in detail.
- Know Home Loan Options
- Figuring a Budget for House Payment
- Know a Payment & Price Range
- Documentation is Done
- Better Chance of Contract Acceptance
First Time Home Buyer Should Know the Home Loan Options
Now, there are times that a buyer knows which home loan they want and may be correct. But a buyer needs to realize that it is smart to explore any options available. Each loan type has advantages and disadvantages. Plus, what is best for one buyer may not be best for another. So a statement from a friend saying “make sure you get a conventional loan and put down 20%”, may be right for you but maybe it isn’t. That is why there will be detailed questions asked by the loan officer so that applicable loan options may be presented. There are a lot of different options to consider for a first time home buyer.
First Time Buyer Loans
Below are the most common loan options chosen by first timers. Click on each for more detailed information on each loan program.
- USDA Guaranteed Loans
- VA Home Loan
- Down Payment Assistance for NC or SC DPA
- Conventional Loans as low as 3% down
- Purchase / Rehab
Figure if House Payment Fits First Time Buyer’s Budget
Sure, lenders are going to figure if a mortgage payment fits within the mortgage debt ratio guidelines for particular loan programs. That will determine a mortgage loan approval or not. But, a first time home buyer needs to have a budget in order to feel comfortable with a payment.
If a buyer currently pays rent or a mortgage, it is easier to come up with a comfortable payment. Conversely, it gets more complicated when living rent free with family or friends. So, going from zero housing payment to $700, $1000, or $1500 is a big difference. This isn’t to say that it can’t or shouldn’t be done. There just needs to be some planning and maybe some lifestyle changes to allow for a mortgage payment. Also it is a good idea to actually write down a budget before and after the purchase. We are happy to provide a budget form for buyers to use.
Know a Payment and Price Range
So, now you know program options and have a budget. Then, let’s figure a total monthly payment. After a thorough discussion of goals, budget for a payment, and program options that fit, we can use this information to come up with a price range. Now, there isn’t a way to come up with an exact payment without a property yet. The reason is that property taxes and insurances vary from property to property. But, until a property of interest is identified a good guess on taxes and insurance could be used. Since all of the work has been put in up-front as discussed in this article, it will be easy to make tweaks to the loan structure to come up with a total actual payment. It can’t be stressed how much easier it makes going under contract when these steps are completed first.
Providing Complete Documentation
All of these steps are important but where most of the procrastination comes in is providing documentation for the loan. It is very common for borrowers to say “I will provide the documentation once I find a house.”. This is a huge mistake. The reason is that there are so many things hidden in bank statements, paystubs, or tax returns that could cause loan issues or at minimum need to be addressed. Being proactive in the purchase process is going to get the best result and save time. Regretfully sometimes this best result is a denial. But wouldn’t you prefer to know it doesn’t work before going under contract?
The absolute best option is to provide all requested documentation after the application and discussion with the loan officer. Just think of the benefits of having everything borrower related taken care of other than possibly providing updated paystubs and bank statements.
The biggest benefit being we are able to complete the following review
- Verify employment & actual income – Self employed, commissioned, overtime, within income limits when applicable, w2 or tax return transcripts, and more could be verified
- Make sure assets are verified & allowed – Avoid cash issues early, make sure of actual amount available
- Document rent history
- Take care of any credit explanations / issues
- Processing and underwriting review
Think of the confidence you and your Realtor will have when viewing homes and making an offer! Knowing that as long as the property appraises, inspections go well, and title search is clear, the closing should happen.
One thing we say a lot is “We are good at what we do. But if we don’t have required documentation, we are not able to do what we do best for you. The happiest clients who are cruising in the end are the ones that provide documentation up-front so we can do what we do very early. Buyers with stress at the end are the ones that are still providing documentation near the end that was originally requested in the beginning. So be a successful first time home buyer by providing requested documentation as soon as it is requested.”.
Better Chance of Contract Acceptance
So you have completed everything above and you are ready to make an offer. Just remember, it is often a competition in a way. There may be other buyers interested in the home and you need to look as good as possible to the seller. Not only should your offer price be an acceptable amount, but it would be very helpful to look strong as a buyer. In addition to other buyers getting a mortgage, you could compete with cash buyers as well. Cash buyers are less risk to a seller, so are very desirable. But if you are a strong, already qualified buyer with a little higher price, the seller could take your offer. Without a strong qualification, the chances of acceptance go down.
Our goal is to not only help you buy a home, but to do it in a way that is as smooth as possible. So hopefully this article will convince you of the importance of avoiding this mistake. Let our team walk you through the home process and into your perfect home.
Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.