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Before Buying a Home: 3 Things You Should Learn

Jul 12, 2021

The pandemic changed nearly every aspect of life as we know it, but many people forged on, finding unique opportunities to continue to grow both personally and financially—including taking the leap from renting to buying a home. In fact, first-time buyers were 31% of all home buyers in 2020, and as this trend continues to grow, it's important that all buyers are as informed as possible to ensure that no requirement, fee, or nuance comes as a surprise at any point during the process.

Here are three things first-time buyers need to know before buying a home:

What determines whether you qualify for a mortgage

If you're buying a home, you'll likely need a mortgage. You can get one from a credit union, bank, or other financial institution, but there are a number of qualifying criteria that any lender will need to make sure you meet:

  • Your credit score: Your credit score will impact whether or not you qualify, and the higher your score, the better! Try to boost your credit score as much as possible before reaching out to any lenders, as they will use this to determine your rate as well.
  • Your debt-to-income (DTI) ratio: This is the amount of debt you have relative to your income. Paying down debt is the number one reason some Americans struggle to afford their first home, cited by 26% of home buyers. It's important that you don't gloss over or sweep any debt you may have under the rug, as it will play a role in whether or not you qualify. More importantly—you don't want to inadvertently set yourself up to continue contributing to the debt over time.
  • A down payment: Most lenders require a minimum 5% down payment, but it all depends on how qualified of a buyer you are—be aware that this percentage can shift.
  • Your work history: You'll need to provide proof of employment for at least two years, and that you have a steady income either from an employer or another source, such as disability benefits.
  • The condition and value of the home: You'll have to have the home inspected and appraised to confirm the lender isn't enabling you to enter a bad real estate deal.

There may be other specific requirements depending on the lender you use and the type of mortgage you get, so be sure to clarify any additional requirements once you select a lender and ask any questions up front to avoid surprises.

The reverse-engineering strategy

It's common to see a home with a "for sale" sign or to see it online, fall in love with the home, and then crunch the numbers to determine if it could be your future home. But, unfortunately this isn't necessarily the best strategy. It's important that you figure out what your budget is before starting to shop around for your home so you don't overspend or commit yourself to a loan that you can't manage.

Fees you'll be expected to pay

There are a number of fees that you'll be expected to pay; however, it's important that you explicitly confirm with your selected lender which fees they will require, as they can vary.

Some common fees include:

  • Down payment: This will most likely be the biggest expense during closing.
  • Closing costs or lender fees: These may include origination fee, underwriting fee, application fee, and/or a fee for pulling your credit report.
  • Title-based fees: These can include fees for the title search, settlement, insurance binder, or insurance. It's important to note that you can negotiate lower rates by shopping around for title services.
  • Land survey fees: Typically, this cost is approximately $500, but you can also shop around to avoid paying a higher amount.
  • Appraisal fees: You'll pay this fee (typically between $300 and $400) upfront, before the appraisal of your home.
  • Homeowner's insurance and property taxes: Be prepared to pay at least the first year of homeowner's insurance and the first six months of property taxes. Do some research early on in the process so you can obtain and compare quotes to find the best deal on insurance.
  • Escrow fees for holding taxes and insurance
  • Agent commissions, if using a real estate agent

Buying a house is no easy undertaking, so it's important that you do your due diligence and research all of the various components that go into the homebuying process before making any commitments. Consider all of the variables and financial implications, but most importantly, make note of all the nuances you uncover along the way, as these can help you hone your money management skills and make you sharper for any future homebuying experiences.

Happy homebuying!

Erin Elis  Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM
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