Everything a first-time home buyer needs to buy a house
Buying a house for the first time can be incredibly time-consuming. There's so much information out there that it can be hard to know where to start. Let this advice be your guide.
The number of people buying homes for the first time is falling, according to the most recent data from the National Association of Realtors.
According to the association's 2015 Profile of Home Buyers and Sellers report, only 32% of buyers in 2014 were purchasing a home for the first time. That's the second-lowest percentage of first-time buyers since the survey's start in 1981, beating out only 1987's survey, in which just 30% of all buyers were first-timers.
However, this still means that plenty of first-timers are in the market today. And they are entering a housing market in which prices in major markets are continuing to rise.
What do these buyers need to successfully land that first home? Here are five of the most important advantages that a first-time buyer can bring to the house hunt.
A Large Down Payment
Mortgage interest rates remain at historically low levels. According to Freddie Mac's Primary Mortgage Market Survey, the average interest rate on a 30-year fixed-rate mortgage loan stood at 3.59% as of April 7. That's the lowest this figure has been in 2016.
But to qualify for such a low rate, first-time buyers — and all buyers, really — will need a solid down payment. In general, the larger the down payment you can provide, the lower your mortgage interest rate will be.
There's a reason for this: When you have more money invested in your home at the start, lenders believe that you'll be less likely to stop paying your mortgage should you run into financial challenges. This makes lending you mortgage money less of a risk. And when you're less of a risk, lenders don't need as high of an interest rate to protect themselves.
Ideally, you can come up with a down payment of 20% of your home's purchase price. That's a lot of money, though; for a home costing $200,000, such a down payment would cost $40,000. Fortunately, you can still qualify for solid rates even with a down payment as low as 5% of your home's purchase price, if your other financials are strong.
A Good Credit Score
Your FICO credit score is a key number when buying a home. Lenders rely on this number to gauge how well you've handled credit and paid your bills in the past. In general, lenders consider a FICO credit score of 740 or higher to be a good one.
Realtor.com reports that the average FICO credit score of approved mortgage borrowers stood at 718 during the last six months of 2015 and the first three of 2016. If your score is near that level, then, you should have a good chance of qualifying for a mortgage loan.
The higher your score, the lower your interest rate will be. Getting to that 740 level isn't always easy. According to Realtor.com, the average U.S. adult with a credit score had a score of 695 during the last six months of 2015 and the first three of 2016.
A host of factors determine your credit score. The key to a good score, though, is relatively simple: Pay your bills on time every month, cut down your credit card debt, and never close a credit card account, even when you don't use it.
Plenty of Cash
You'll need plenty of cash to buy your first home. First-time buyers, in fact, typically need more available funds because unlike repeat buyers, they can't count on any cash from selling a home.
You'll need cash for your down payment, of course. But you'll also need it for closing costs. Closing costs are the fees that lenders and other third-party sources, such as title companies, charge for closing your mortgage loan. Closing costs can vary, but in general they average about 2.5% of your home's purchase price.
If you are buying a home that costs $180,000, you can expect to pay about $4,500 in closing costs.
The good news? You can accept gifts from relatives or friends to cover your closing costs. The key, though, is that these gift funds have to truly be gifts. The person gifting you the dollars can't expect you to pay them back. Otherwise, your lender will count your gift as a loan, and that will boost your monthly debt obligations.
A Low Debt-to-Income Ratio
Your debt-to-income ratio is another key number when you're buying a home. As the name suggests, this ratio compares your monthly debt obligations with your gross monthly income. Lenders today want your total monthly debts, including your estimated new mortgage payment, to equal no more than 43% of your gross income.
If your debt-to-income ratio is too high, you'll struggle to qualify for a mortgage. Lenders will worry that adding a mortgage payment to your already high debt obligations will boost the chances that you'll fall behind on your home-loan payments.
A Steady Income
Lenders prefer that you have a work history of at least two years at your current employer or, at the least, in your current field. Not having this history isn't usually a deal-breaker, but it can cause lenders to hesitate before approving you. And if you have any other financial challenges — high debts or a middling credit score, maybe — a shaky job history will increase your odds of a mortgage rejection.
When you apply for a mortgage loan, you'll have to provide lenders with a signed letter from your employer stating your position and annual salary. Lenders want to make sure that your monthly income is high enough to support the addition of a mortgage payment.
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