It's easy to get overwhelmed when planning to buy your first home. Searching for the right house, in the right neighborhood with needed amenities at a price you can afford is often just half of it. Unless you're paying cash, the other major part involves navigating the process for financing it. Knowing what you should do ahead of time and shopping for the best loan can be confusing for anyone new to the world of home loans.
I recently sat down with a trusted mortgage professional to get answers to a few of the most common questions asked by those shopping for their first home. Chris Kvikstad, president of Kvikstad Mortgage Solutions, works often with first-time buyers. In this Q&A he offers practical advice for anyone curious about the first steps of home financing.
Q: What should I do in advance?
A: The first thing is to look inward and think about why you want to purchase a home. How long do you think you will be there, how stable is your income situation, and are you comfortable with taking on the responsibility of any repairs should they be required?
Once you have determined that you are indeed ready to purchase, then think about your lifestyle and whether a condo, single family home, or townhome would be ideal. Think about how much you could comfortably spend each month on the combined housing payment, and then we can proceed together from there, using the steps above, and begin working out the numbers to see what a comfortable price range might look like.
If you have any bills that are past due, bring those current before we start the process, otherwise, that might delay the process as we work together to resolve those types of issues if they occur.
Q: How do I know how much I can afford?
A: This is a good question and the one that comes up most frequently with my clients. There are a few different ways we can approach this. The first step is to ask, “What is a comfortable payment for you that would include all of your housing expenses?” We can use that amount and then work backward to calculate a general home price range that would include various expenses, such as property taxes or homeowner’s insurance, monthly association fees for a condo or townhome, and so on.
Monthly Expenses
Depending on whether you're looking for a single family home or a townhome or condo, the price range we calculate together can vary according to those different expenses. We look at current income and monthly living expenses, such as car loans and student loans, and we also want to take into account any surprise expenses that can come up after purchasing the home, such as a new furnace or normal maintenance and repairs. While this last part isn’t a requirement for financing, I like to broach that subject so that people are mentally planning ahead for surprises.
Lessons learned
During the years leading up to the housing crisis, too many people put on their blinders and only wanted to focus on the absolute maximum amount they could be approved for. Houses were appreciating in value very rapidly, often in the double digits per year, and the fear of “missing out” on a great deal was a very real emotional component. That has all changed now, and I think everyone is taking a much more conservative and realistic approach when it comes to this very important piece of the puzzle.
Verifying Employment
Self-employed vs. employee?
Hourly vs. salaried?
Base wage + incentive compensation?
Q: What information will I need when applying for a loan?
A: We'll need personal information and will need to know whether you currently rent or have owned a home in the past. When it comes to verifying employment, the required documents will depend on the type of employment – self-employed versus employee, hourly rate versus salary, and whether there is incentive compensation in addition to a base wage. Generally, a couple of recent, back-to-back pay stubs and the last two years of W-2s are sufficient to get the ball rolling for most people. We need to verify assets, as well, so this generally means two months of bank statements plus the most recent statement for any other accounts, such as retirement or investment accounts.
Q: How much do I need for a down payment?
A: We have many excellent programs today that do not require substantial down payments. In fact, both Fannie Mae and Freddie Mac have outstanding first-time buyer programs that only require 3% down, and FHA requires 3.5% down. Our military veterans have the ability to purchase with as little as zero down through the use of their VA eligibility for VA financing. VA loans are a wonderful program and I really enjoy working with our veterans. In all of these cases, the down payment can come from a gift from a relative.
Less than 20% down
Ask your lender about first-time home buyer programs, FHA, or VA loans that require low down payments.
These reduced down payment requirements really make it convenient and affordable for people to take that next step towards home ownership. You can always put down more than the minimum requirement, of course, and the more you put down the lower the monthly payment will be.
Heidi Swanson is a Realtor® based in St. Paul, Minnesota. She writes a blog to share information on a variety of real estate related topics including buying and selling, market conditions, homeownership trends and more. Reach her at heidi@lyndenrealty.com or 651-503-1540.