First time homebuyers, this one is for you!
These frequently asked questions and guide will have everything you need to know to be prepared for a successful home buying experience. Let’s first start off with a little FAQ:
WHAT DOES “FIRST TIME HOMEBUYER” MEAN?
While it appears at first sight that a first time homebuyer (“FTH”) is just that, there’s actually more to that classification than meets the eye. Surprisingly, membership to this club doesn’t actually require that this be your first time buying a home. According to the Department of Housing and Urban Development (“HUD”), HUD HOC Reference Guide, First Time Homebuyers, Chapter 3, all of the following could be characterized as a FTH, and therefore eligible for a number of Federal Housing Administration (“FHA”) insured loans, FHA mortgage insurance and federal programs:
- An individual who has not held ownership in a principal residence during the three-year period ending on the date of the purchase.
- For couples, if one spouse is/was a homeowner but the other has not owned a home, both spouses are considered first-time homebuyers.
- A single parent who has only owned a home with a former spouse while married is considered a first-time homebuyer.
- An individual who is a displaced homemaker (has worked only in the home for a substantial number of years providing unpaid household services for family members) and has only owned a home with a spouse is considered a first-time homebuyer.
- An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations (such as a mobile home).
- An individual who has only owned a property not in compliance with state, local or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.
As such, an individual who has purchased a home before could still be classified as an FTH for purposes of eligibility to apply for FHA resources and programs dedicated to FTH.
WHAT IS THE FHA?
The FHA is a government agency that is part of the HUD. The primary purpose of the FHA is to assist low to moderate income and first time homebuyers get an affordable mortgage. The FHA primarily does this by providing mortgage insurance to the homeowner, thus protecting lenders from the impact of a potential mortgage default by the homeowner. This allows lenders who otherwise may not have extended a loan to the homebuyer to feel more confident in doing so.
HOW HAVE COVID-19 AND THE SUBSEQUENT PASSAGE OF THE CARES ACT IMPACTED FIRST TIME HOMEBUYERS?
With the ongoing pandemic resulting in many people suffering financial hardships, more homeowners find themselves at risk of defaulting on their mortgage payments. As a result of the passing of the CARES Act, the FHA now offers mortgage payment forbearance and other forms of relief for FHA-insured mortgages, including for FTH who have FHA backed/insured loans.
WHAT OTHER BENEFITS ARE AVAILABLE TO FIRST TIME HOMEBUYERS?
In addition to access to FHA backed loans and mortgage insurance, a FTH could also be eligible to receive tax breaks and assistance from state and federal programs.
Now that we got all of that information out the way, let’s move on to the guide. While this article is meant to be a resource for first time homebuyers, the guide below is useful and relevant to all homebuyers.
HOME BUYING GUIDE
1. Save money. The first step to starting your homebuying journey is to start saving money. This may seem like an obvious one, but what might be a little less obvious is just how much you will need to save to afford your home. While an FHA approved loan could require as little as 3.5% down payment, and some conventional loans require as little as 3% down, the more you put down, the more likely you are to receive a lower interest rate on your mortgage. That means that your house will cost less overall than it would by putting less money down. You don’t just need to save for your down payment, however, as home ownership costs more than just the amount that you pay to buy the house. When figuring out how much you need to save to buy a home, be sure to keep in mind additional expenses, such as closing costs, move-in expenses, and eventual repairs and renovations that may be required. There are many services and platforms, such as Mint, that help you track your spending and help you uncover places in your budget where you could cut costs and save money.
2. Determine how much you can afford to spend and how much house you can afford. This step is similar to the one above, but it nudges your analysis a little bit further. In order to determine if you have enough saved up to afford the type of house you want, you will need to determine your income vs. debt ratio, your credit score, your eligibility for loans, etc. There are many services and resources that can help you make these determinations, including income vs. debt ration calculators and credit reporting and tracking websites. Also, what you can afford to buy will also be highly dependent on where you plan on buying. For example, a 4 bedroom, 3 bath, single family home in coastal San Diego is likely to cost far more than a similarly sized home in inland San Diego. It is important to think these factors through in order to have a realistic expectation of what you can afford to buy.
3. Check and strengthen your credit. While the FHA helps homebuyers with lower-moderate credit scores (as low as 500) obtain loans, many conventional lenders will not lend money to borrowers with credit scores below 620. In order to maintain a high credit score to ensure that you are considered a desirable borrower, you should make sure that you have a good credit score and a solid credit history. You can do this by making sure that you have open credit cards and have made timely payments on them and that any negative marks on your credit have been dealt with and resolved prior to applying for a home mortgage. Something as seemingly innocuous as an overdue credit card balance could result in a decreased credit score, making lenders wary to lend money to you. You don’t want to find the perfect house after saving enough money only to find out that you can’t get a loan because of a stain on your credit. Following this step will ensure that you are better positioned to get the loan you need to buy the house you want.
4. Look into your mortgage options. Once you have a good idea of what you have saved, how expensive of a home you want and can afford, and have determined the health of your credit, but even before you start house-hunting, you should start looking into what mortgage options are available to you. You should do your research and due diligence to see if you qualify for FHA loans, conventional loans, USDA loans and/or VA Loans and to decide what option works best for you. This is a good time to determine what mortgage term you’d like, such as 30 or 15 years. Once you figure out what type of loan you want to apply for, you will want to compare different lenders’ mortgage rates and fees to find the one that works best for you.
5. Look into your local, state, and federal homebuyer assistance programs. There are many available resources and programs that can help make your homebuying dream a reality. Be sure to check them out before starting your house hunt.
6. Get a mortgage pre-approval letter. Once you have determined how much you want to spend on your home purchase, what your down payment will be, the amount of your mortgage, and which lender you want to proceed with, get in touch with your preferred lender and ask them to prepare a pre-approval letter for you. Your preferred lender will gather information from you in order to make a determination of how much and on what terms they will extend a loan to you for. Not only is the information in the pre-approval letter incredibly valuable for you to have and know, but any offer package that you submit to a Seller should include this letter in order to show the Seller that you are a serious buyer that is ready and able to obtain a loan to purchase the home.
7. Find a great real estate agent. The last and final step of my homebuying guide is to find a great real estate agent. While I have included this step at the end of my list, a great real estate agent can actually help walk you through all of the above steps, so don’t hesitate to start here. A great agent is not necessarily the one with the fanciest office or the coolest website, but rather one that supports you all the way from step one to closing, especially if you are a first time homebuyer. A great agent will be honest with you about what you can expect to get in your target area for your budget and will actively search for homes that fit your criteria and budget. However, they should also a create problem solver who can help you think outside the box. For example, a buyer may state that they have a budget of $1.75million and are hoping to find a property with 5 bedrooms. A good agent would not only look for homes that fit that exact criteria but would also look for homes that cost a little less perhaps, say $1.5million, and maybe have fewer bedrooms but have a larger lot that would have enough room to build an extra bedroom with the money saved from the home purchase. The very best agents are those that make themselves experts of their client’s homebuying dreams. They are prepared and informed, ready to advocate and facilitate.
We hope that this article and guide have been helpful as you start, or continue to embark on, your home buying journey. Please feel free to contact us with any follow-up questions you may have. For more information on how Esquire Real Estate Brokerage, Inc. can help you in the San Diego real estate market, feel free to give us a call at 949-413-6699 or send us an email at ptorkamani@esquirereb.com.
