What Qualifies Someone as a First-time Home Buyer?
If you’re in the market for a new home but have never purchased one before, there are some things to consider.
For starters: What qualifies someone as a first-time home buyer?
To answer that question, we need to understand what it means to be considered as such.
How Do You Qualify as a First-time Buyer?
A first-time home buyer is usually someone who is purchasing their very first home. A home is considered a buyer’s primary residence when it is the one they live in. The main residence may also be called the primary residence. Although a principal residence often refers to a residential property, it does not necessarily indicate a home. Someone could, for instance, live full-time on a boat.
A first-time home buyer may be someone who has never purchased a property before, or it could be someone who is purchasing their next dwelling because they have just moved.
A person can buy their first home at any age, but there are some benefits to becoming a homeowner earlier in life that will help with the process of establishing credit and building equity.
One of the other benefits is that it can be easier to qualify for a mortgage because first-time home buyers may have lower levels of credit history and debt than those who are purchasing their fifth or sixth property.
The US Department of Housing and Urban Development (HUD) has taken steps to expand that definition. A first-time buyer is described by the agency as:
The previous owner of the home must not have owned a principal residence during the three years before buying the new home.
Despite the fact that their spouse is a homeowner, they should be an individual who has never owned the primary residence.
If you are a single parent who owned a home with your former spouse
A displaced homemaker whose only property was owned by their spouse
An individual who possessed only properties that violated local and state building codes and could not be brought into compliance without building a new permanent structure
First-time home buyers need to be under specific guidelines and requirements as indicated by the agency.
What Considers You a First-time Home Buyer?
As mentioned above, there are certain guidelines set by the US Department of Housing and Urban Development (HUD) that can qualify someone as a first-time buyer.
If you’re someone that fits the following qualifications, then you can be considered as a first-time home buyer as seen by the eyes of the HUD agency:
If you’re someone who is a person who has not owned a property that is the primary residence
If you are a single parent who owned your home with your former spouse,
A displaced homemaker whose only property was owned by their spouse or an individual who possessed only properties that violated local and state building codes and could not be brought into compliance without building a new permanent structure.
The Six Things to Consider Before Buying a Home as a First-Time Home Buyer
For first-time home buyers, the first step is determining your long-term goals and how they will be supported by home ownership. Your rent payments are simply “wasted” if you want them to turn into mortgage payments that provide equity. Perhaps you view home-ownership as a mark of independence. It is also possible to make a good investment by buying a home. A clear understanding of your long-term goals for home-ownership will guide your route.
1. Are You Doing Well Financially?
Consider your financial situation before you trawl through online listings seeking your dream home. The cost of buying and maintaining a home needs to be considered.
In the end, your audit will reveal whether you are prepared to move forward or if you need to prepare more. Take the following steps:
You Should Check Your Savings.
Make sure to save up three to six months of living expenses before you think about buying a home. You will have to pay significant upfront costs when buying a home, such as the down payment and closing costs. It is important to save for emergency costs as well as these costs.
Savings can be vulnerable to inflation, so keeping them in an accessible, relatively safe vehicle is essential.
Make Sure You’re Spending Wisely.
Keeping track of your monthly expenses is crucial-and where your money goes. Your mortgage payment can be determined with this calculation.
Account for everything you pay for! Utility, food, car maintenance, student loans, clothing, kids’ activities, entertainment, retirement savings, regular savings, and any other miscellaneous expenses.
Do a Credit Check.
Most homeowners need good credit, a history of timely payments, and a maximum debt-to-income ratio (DTI) of 43% in order to qualify for a home loan.
Housing costs (principal, interest, taxes, and insurance) are usually limited to 30 percent of the borrower’s gross monthly income. However, this number varies widely depending on the local housing market.
2. What Kind of House Is Most Suitable for Your Needs?
Residential properties come in many forms: single-family homes, duplexes, townhouses, condominiums, co-ops, and multifamily houses with two to four units.
It is important to determine which type of property will help you achieve your home ownership goals, given that each option has pros and cons.
3. What Are the Features You Want to Have in Your Ideal Home?
This list should have a lot of flexibility, but you are likely making one of the biggest purchases of your life, so you deserve it to meet your needs and wants according to the best of your abilities.
It should include the basics, including the neighborhood and size of the house, all the way down to the tiniest details like kitchen appliances and bathroom layout. You can get an idea of the pricing and availability of properties by checking out real estate websites.
4. How Much Home Loan Can You Get?
If you’re planning to buy your first home, it’s essential to know how much your lender will loan you. A $350,000 home may seem affordable to you, but lenders may believe you can only afford a $200,000 house due to factors such as how much other debt you have, your monthly income, and the length of time at your job. Several realtors won’t accept clients who haven’t given them an idea of what they can afford.
The loan must be pre-approved before placing an offer: Sellers won’t entertain an offer without pre-approval. The application process and documentation are required to do this. A tool like a mortgage calculator or a Google search is useful when choosing a lender and comparing rates and fees.
5. Do You Have Enough Money to Buy a Home?
Occasionally a bank will approve a loan for a greater amount than you actually wish to pay. Even though a bank offers $300,000, that doesn’t mean you should borrow that much. When homeowners first obtain a mortgage, they often make this mistake and are left “house-poor,” lacking additional funds for clothing, utilities, vacations, entertainment, or even food after paying monthly mortgage payments.
It is important to consider the overall cost of the house, not just the monthly payment when determining the size of the loan. Take into account the property taxes in the neighborhood you are considering, the homeowner’s insurance costs, the maintenance or improvements you want to make to the house, and your closing costs.
6. Who Will Assist You in Finding a Home and Assist You During the Purchase?
You can work with an agent to find homes in your price range that are suitable for your needs and then meet with them to view those homes. The professionals can assist you every step of the way, including helping you make an offer, getting a loan, and completing paperwork. Real estate agents who are knowledgeable about the process can protect you from any pitfalls.
How Do Down payments Work?
You need financing to buy a new home unless you have all the cash on hand.
You can often receive the entire loan amount for purchasing a home from a bank. This is called 100 percent financing.
The borrower, however, is typically required to contribute to the mortgage loan. Down payments are the amounts that a buyer contributes out of pocket toward a home.
An example: If you buy a new house for $100,000, you’d need to borrow $90,000 (90 percent) and put down $10,000. This represents a down payment of 10 percent.
How Much Does a First-time Buyer Need for a Deposit?
If you’re buying with your spouse or partner and only one person has been on the mortgage before, then both people will have to provide credit references for this type of mortgage approval.
If that person’s credit score isn’t high enough (700+), but the other person does, then the lower score can be offset by a larger deposit.
Deposits will range at about 3 to 6% if you’re taking a mortgage. But, this depends on how much credit score you have. Otherwise you’ll need about 20% of the purchase price.
The common belief among first-time home buyers is that you have to put down 20 percent. After exploring potential mortgage options, they discover that their house payments are considerably less than they had previously thought.
A first-time home buyer’s down payment is only six percent on average. For a $300,000 home, an 18% down payment would equal $18,000.
You may qualify for a mortgage with just 3% down – which means $9K worth of cash for a $300,000 home – if you have a credit score of 620.
Many first-time home buyers are surprised to learn that a low-down-payment mortgage is making the process much more affordable than they originally thought.
Closing Costs Should Not Be Overlooked
There are other costs involved with buying a home for a first-time buyer besides the down payment. Closing costs also need to be paid.
You have to pay closing costs for everything related to setting up your loan – from the lender’s fees to the appraisal fee, credit report fee, title fee, etc.
Closed-end loans typically have closing costs ranging between 2 and 5 percent. In most cases, these rates are less than 5 percent unless the loan is only a small amount.
To put it simply, you need to budget for a minimum of 3 to 4 percent of the loan amount in cash, in addition to your down payment budget.
When you buy a house for $300,000 with a 5 percent down payment, you should estimate closing costs of around 4 percent.
Home — $300,000
Down payment (5%) — $15,000
Loan — $285,000
Closing Costs (4%) — $11,400
Total Needed Upfront Cost — $26,000
When you plan to buy a home, it is important to budget for closing costs. In that case, it’s very likely that your savings from your down payment will be wiped out when you realize you have to pay closing costs as well.
Who Qualifies for FHA Loans?
Before discussing who can qualify for an FHA loan, homeowners must understand what FHA loans are.
The FHA loan is an insured mortgage insured by the agency and issued by an FHA-approved lender. An FHA loan is designed for borrowers with low-to-moderate incomes; the down payment is lower, and credit scores are lower than those for most conventional loans.
FHA loans are not actual loans because the FHA does not actually lend you money for a mortgage. FHA-approved lenders, like banks and financial institutions, will instead provide loans. It is, however, guaranteed by FHA. This is why many people refer to it as an FHA-backed loan.
The FHA requires that mortgage insurance be purchased by borrowers qualifying for an FHA loan in order to secure its guarantee. The premium is paid directly to the FHA. Lenders bear less risk since the FHA will reimburse them if you default on your loan.
Should I Save Money Before Purchasing a Home?
Most buyers try to save up to 20% of the purchase price for a down payment. But, depending on what type of loan you take out and how much your employer contributes to your 401(k) plan each year, this could change.
A larger down payment means lower monthly payments because there’s less money borrowed. A smaller mortgage may also be in order if other debts are too high and there’s not enough income to cover monthly payments.
Can You Ever Be Considered a First-time Home Buyer Again?
You can, but only after a certain amount of time has passed. The law varies from state to state, but in many cases, you must wait at least two years before qualifying as a first-time home buyer again.
Property owners with primary residences not in compliance with state and local regulations may be able to become first-time home buyers again if the property cannot be modified for less than the cost of building a new permanent residence.
Shield My Deal can help first-time home-buyers get their dream home without the stress.
Trust our reputable real estate agents to assist you in purchasing a property that suits your needs and is in a neighborhood you love.