First-Time Homebuyer Guide

Although purchasing your first home is exciting, it can be daunting and confusing to know where to start. The secret to beginning your homebuying journey is to first understand the fundamentals. Once you have a solid understanding of the basics, you'll have the confidence to take your first steps towards becoming a homeowner.

Setting your Budget: 

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Determining what you can afford is a crucial first step in the home buying process. For most buyers, taking out a mortgage is necessary to cover the costs of their first home. The type of home you can afford will depend on the type of mortgage you qualify for, which is determined by various factors that lenders consider when calculating a borrower's qualifications. These components play a significant role in determining how much you can borrow. These components include:

  1. Down Payment.
    The down payment is the amount of money you set aside to put towards your home purchase and is typically expressed as a percentage of the total cost. It is good to save up early and often to prepare for these costs. For instance, an FHA (Federal Housing Administration) loan typically require a down payment as low as 3.5%, or a conventional loan could allow for 3% down. If you were purchasing a $500,000 home with an FHA loan, you would only need to put down at least $17,500, or $15,000 with a conventional loan, and the remainder of the purchase price would be covered by your loan. This down payment does not even include the additional closing costs for the mortgage itself, such as but not limited to items like appraisal fees and/or title fees, which should also be saved up for and budgeted for before applying.

  2. Interest Rates.
    The impact of interest rates on your homebuying journey cannot be overstated. Generally, the lower the interest rate you're approved for, the lower your monthly mortgage payment will be, enabling you to afford your dream home with ease. A variety of factors can affect the interest rate you receive, including creditworthiness, so focusing on improving your credit score before applying is key. 

  3. Debt-To-Income Ratio. 
    Your Debt-to-Income (DTI) Ratio is the amount of your income that is used to pay off your debts. Lenders use this ratio to determine the amount you can borrow, ensuring that it remains within a specific percentage range.

  4. Mortgage Payments.
    Understanding the components of a mortgage payment is vital in assessing your buying strength. Your mortgage payment is composed of principal payment, which is the payment towards your original loan amount, and interest payment, which is the interest paid to the lender. These two make up the base of your mortgage payment, and lenders will consider them when calculating how much you can borrow. 

    Homeowner's insurance may also be required by your lender to protect them in case of any damage to the property, which can increase your monthly debt. Additionally, property taxes must be paid by every homeowner, and the amount may vary depending on your location. A lender will add up all these expenses to determine your monthly mortgage payment, and if you are obtaining a loan with less than 20% down payment, you will also be responsible for mortgage insurance. It is recommended to start saving and reducing your debt to improve your financial health and increase your chances of acquiring your first home.

Try out our Mortgage Affordability Calculator to see how much you can realistically afford.

Homeowner Qualifications

The requirements for becoming a homeowner differ based on the type of loan you choose.

The most common loan option for first-time buyers is an FHA loan, which is backed by the Federal Housing Administration and offers lower credit score and down payment requirements. To qualify for an FHA loan, you need:

  • a down payment of 3.5% 
  • Maximum debt-to-income ratio, including monthly mortgage payments, should be around 43%
  • You must have a verifiable income for the past two years.  

If you have slightly better credit, you may want to consider a conventional loan, which is backed by private lenders.

To qualify for a conventional loan, you need:

  • a down payment of 3%.
  • a maximum debt-to-income ratio varies by lender but is usually less than 50%
  • a loan terms of 10, 15, 20, or 30 years. 

There are also other loan options, such as VA and USDA loans, with unique requirements, including 0% down payment for eligible buyers. A VA loan is exclusively for service members, veterans, and eligible surviving spouses, while a USDA loan is offered in rural communities based on the applicant's income compared to the area's median income level.

*Please note: Northeast Credit Union does not offer FHA , VA or USDA loans.

Homeownership Benefits

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Owning a home comes with a host of benefits that potential buyers should consider. For starters, it can help build equity and serve as a preparation for retirement. Instead of paying rent each month, your payment would go towards your mortgage, and by the end of it, you'll fully own your home! This is especially significant for those looking to retire because owning your home can significantly lower your monthly expenses. Typically, homeowners are only responsible for maintenance, HOAs, insurance, and taxes, providing a sense of stability and security. Plus, there are tax benefits to owning a home, such as deductible mortgage interest, property taxes, and some closing costs that can reduce the amount of your income subject to tax, providing long-term stability that is hard to beat.

Homeowner benefits Include:

  1. Tax Benefits
    Owning a home can bring about tax benefits. You should always consult a tax advisor to confirm your situation, but mortgage interest, property taxes, and some closing costs can often be deducted, resulting in a reduction of the amount of your income that is taxable.
  2. Secure Monthly Payments
    Opting for a fixed-rate mortgage ensures consistency in your mortgage payment throughout the loan's term, eliminating the risk of monthly fluctuations. This stability can provide peace of mind and help you plan your budget more effectively.
  3. Long-Term Stability
    Owning a home brings peace of mind and a sense of stability that cannot be matched. No longer will you have to worry about moving due to rent hikes or constantly adjusting your budget to accommodate fluctuating expenses. Your home is a sanctuary where you can relax, recharge, and build lasting memories.

Finding the Right Lender 

To embark on the journey of homeownership, it's vital to gain knowledge and expertise. The first step is to meet with a loan officer who can help you determine the amount you qualify for and the best loan type for your needs. By discussing your options with a professional, you'll have a clear understanding of the amount you can borrow and begin your journey towards homeownership. It's essential to interview multiple prospects and seek referrals from friends and family members to find a lender that offers the best rates and personalized service.

If you'd like to start the process of applying for a Mortgage with Northeast Credit Union, you can pre-qualify here