Your house could become your biggest financial asset – and potential liability – overnight. First-time home buyers have a lot of questions, and rightly so.
If you're thinking of buying a home now, or in the future, then your credit union should be your first stop. Credit unions like BECU are an excellent resource for first-time home buyers because their community-focused approach means that they are there to help you through each step of the process.
BECU members have access to personalized service and advice, beginning with one-on-one access to a Mortgage Advisor. You can also attend one of free in-person or online home buying seminars, designed to help you make the most confident decision possible.
Buying a house is a big step, but it's also a lot of fun. Before you start house hunting you need to consider these important questions:
1. What is Your FICO Score?
Your credit score (also called a FICO Score after the company that provides the score to many lenders) is a number that indicates to lenders whether you're a good credit “risk.” Your score is based on your credit report, and considers many factors including credit cards, outstanding loans (e.g., auto loans, student debt and personal loans), and your payment history.
In fact, think of your credit report as a financial report card: It lists details of your financial story and calculates your score based on this information. Your score is used to determine what size of mortgage you are eligible for and at what rate –if you are even eligible at all.
You may be surprised to learn that over one-third of Americans (39%) have monthly credit card debt, which can contribute to a lower credit score. To avoid a poor credit rating (which can result in higher, less favorable mortgage rates) make sure that you pay all your debts on time. Even one late or missed payment will be tracked on your credit report.
2. How Do Credit Scores Work?
Credit scores range from 300 to 850 with an excellent score considered to be anything above 740. Many people are unfamiliar with their credit score until they suddenly discover that they are not eligible for a mortgage. However, you should be familiar with your credit score before you consider buying a house. If your score is low, you'll need to build good credit to increase it.
It all starts with knowing where you stand. Thanks to The Fair and Accurate Credit Transaction Act (FACTA), you can get a free, annual copy of your credit report from Equifax, Experian and TransUnion.
A bad credit score doesn't necessarily mean that you won't qualify for a mortgage. Lenders take a range of factors into account. Credit unions usually provide greater flexibility than banks, so talk to a BECU representative about your options if your credit score is low.
3. Can You Afford a House?
Buying a house is a big commitment for anyone, but this is especially true for first-time home buyers. You hope you will fall in love with your home (you'll be living there after all), but be careful not to make an emotional decision. You should think of your house first and foremost as an asset and stay within your budget.
When looking at your budget and how much you can afford to spend, there are resources out there to use like BECU's How Much Can You Afford Calculator. Using this free tool is one of the first steps to buying your first home. Another simple question is to simply look at what you already pay in rent, determine if you can pay more, and if so, how much more! Then, work backward from that number: Your mortgage won't just include the cost of the home, but loan interest, annual property taxes, home insurance and sometimes other fees, such as home-owner association dues.
You should also consider the type of financing options that are available to you.
- Conventional financing – Not insured or guaranteed by the federal government
- VA financing – Guaranteed by the Veteran's Administration with little or no down payment
- FHA financing – Insured by the Federal Housing Administration, the down payment is as low as 3.5%, but the purchase price is limited.
The frequency of your payment is another important aspect to consider. Will you pay your mortgage monthly or even bi-monthly? More frequent payments usually mean that you can pay your mortgage off faster, but is more taxing on your budget. To simplify your finances, choose a payment frequency that matches when you get paid.
4. Just What Are Closing Costs?
In addition to the loan itself, there are other home-buying fees charged to close a loan. These are called “closing costs” and are a major expense paid when your loan “closes,” or, when you take possession of the home.
- Earnest Money – Usually 1 – 5% of the home's purchase price, this money is paid to the seller when an offer is made. The money is held in escrow during the negotiations and when the offer is accepted, it is applied toward the down payment. Check out First Time Home Buying 101 for more information about earnest money.
- Down Payment – The larger the down payment the better, but most lenders require a down payment of at least 5%.
- Home Inspection Fees – Inspect a property before you buy it to ensure that it's structurally sound and you're not in for any major (and costly) surprises, e.g., new roof or plumbing work. The costs of a home inspection will vary by geographic area and the size of the home, but you should budget at least $300 for this fee.
- Additional Closing Costs – Generally, it's a good idea to set aside 2.5 – 3% of the total amount of your loan to cover closing costs. Costs include lawyer fees, title insurance, real estate fees, mailing fees, appraisal fee, etc.
So far we have only covered the cost of getting a mortgage and buying home, but figuring out how much you can afford involves a lot more.
5. What's Your Budget?
Just 40% of Americans have a budget, so if you're in the majority without one, now's a great time to get started. Every expense adds up, so determining whether you can afford a home is more complicated than just subtracting your monthly mortgage payments from your monthly salary.
On top of your mortgage, remember you will have many other regular expenses including:
- Property tax and home insurance (usually rolled in your mortgage payment)
- Home owners' association fees
- Electric, gas and water bills
- Maintenance, landscaping and renovations
- Emergency fund
- Living expenses: gas, groceries, activities, miscellaneous
Don't forget to leave enough room in your budget to save for retirement and to have fun, so you can still afford to go out for dinner, go to the gym, or travel.
Before deciding to buy a home, track your expenses on a spreadsheet, including everything from groceries to your current rent. Then add that total onto the cost of a mortgage payment.
It's important to keep some money aside for emergencies like the loss of a job, or health issues. Currently only 48% of adults have enough money saved to cover a $2,000 emergency expense. If something unthinkable happens, you could have difficulty carrying your mortgage unless you have an emergency reserve.
6. Can You Spend Less?
Securing a mortgage through a credit union is often a smart way to save on your new home. First and foremost, credit unions are not-for-profit institutions. Because banks are for-profit, they tend to have more fees. Profit is returned to the members in the form of better rates and fewer fees. Credit unions also generally have lower overhead costs than banks, and because they are structured differently, they pass savings on to their members. Learn more out how BECU puts members first.
Buying a “fixer upper” is another effective way of saving money, so too is splitting the cost of your mortgage with roommates or renters.
7. What's the Process?
Once you've determined that you can afford to buy a home, what is the next step? BECU offers online or in-person home buying seminars tailored to first-time homebuyers. The seminars answer common questions and connect you with the trained professionals that help you close on your first home.
BECU also offers numerous online resources to assist you with every step of the process. Start with our Mortgage Term Glossary and Mortgage Process Guide, which takes you through all the phases of buying a home and getting a mortgage, including:
- Pre-qualification: Most real estate agents won't work with a client unless they're pre-qualified for a mortgage. A BECU representative will contact you and walk you through the process of getting pre-qualified.
- Looking for a home: Once you're pre-qualified you can work with your real estate agent to find a home within your budget. Need help finding a real estate agent? BECU can help you find a qualified agent in your area.
- Locking in an interest rate: Securing your interest rate protects you from sudden rate increases, which could jeopardize your financing – the higher the rate, the less you can afford.
- Appraisal: An appraiser will determine the value of the home that you want to purchase. If the home is valued differently from its sale process, your financing may be affected.
- Processing: The credit union or bank will process your application to purchase the home. If you've been pre-qualified, this should be a seamless step.
- Underwriting: The credit union or bank's underwriter verifies the property value, your financial situation, and the terms of the loan.
- Closing: A real estate lawyer or other neutral third party ensures that all the terms of the contract are met, collects your down payment, and disburses the funds.
- First payment: The loan is closed and you'll make your first payment. Welcome home!
- Everyone hopes to find their dream home one day, but the truth is that your dream home may not be a realistic first home for you. Buying an affordable first home will put you on the financial footing that you need to build equity and eventually afford the home of your dreams. Take the first step with BECU. Attend one of our complimentary home buying seminars to get started.