How to Get Ready to Buy Your First Home
June 14, 2023 by Chevron Federal Credit Union
Buying your first home is an exciting milestone in life. It represents a step toward stability, security and the freedom to create a space that truly feels like your own.
But the journey to homeownership also takes careful financial planning. There are a lot of things to consider, from finding the right property to getting approved for a mortgage.
These tips can help you reach your homeownership goals.
Building a home-buying budget
The first step is to build a budget to determine how much you can comfortably afford to spend on a home.
Many experts recommend keeping your mortgage payment to 28% or less of your monthly income, but you should stick to what you’re comfortable with. Don’t forget to include expenses like property taxes, homeowners insurance, utilities and other living costs. You should also have a cushion in your budget for unexpected expenses, such as repairs or maintenance.
Be sure to factor in one-time costs like closing fees and moving expenses.
Our mortgage calculator can help you figure out what you can afford to spend on a home.
Getting your down payment together
A down payment is a percentage of the purchase price of the home that you pay upfront. The larger your down payment, the lower your monthly mortgage payments will be.
Putting at least 20% down will help you avoid private mortgage insurance — an additional fee that secures conventional loans, but coming up with a large down payment for your first home can feel daunting. With many mortgage programs, you can receive a portion of your down payment as a gift from friends or family. Be sure to research and consult with professionals to understand the specific guidelines and requirements for such programs.
You may also qualify for a mortgage with a smaller down payment. Some lenders — including Chevron Federal Credit Union — offer mortgage loans with as little as 3% down, helping you reach your dream faster.
Our Dedicated Loan Officers are here to help you understand what you can afford and explain what mortgage programs are available.
Boosting your credit score
Your credit score plays a significant role in securing favorable mortgage terms. A higher credit score demonstrates your ability to handle debt responsibly, which in turn translates to lower interest rates and better loan options. To boost your credit score, start by reviewing your credit report and addressing any inaccuracies or discrepancies. Then, focus on timely bill payments, reducing credit card balances and avoiding new credit applications that may negatively impact your score.
Building and maintaining good credit is a gradual process, so starting early will give you a better chance of improving your credit score before applying for a mortgage.
Understanding your debt-to-income ratio
Lenders use the debt-to-income (DTI) ratio to assess your ability to manage monthly mortgage payments in relation to your overall debt load. It is calculated by dividing your total monthly debt payments by your gross monthly income. Generally, a lower DTI ratio is preferred by lenders.
To improve your DTI ratio, focus on reducing your existing debt. Consider paying off high-interest credit cards or other outstanding loans to lower your monthly obligations. Avoid taking on new debt while you're in the process of applying for a mortgage, as it can negatively impact your DTI ratio and mortgage qualification.
How the mortgage process works
For first-time homebuyers, the mortgage process may seem overwhelming. However, understanding the basics can help demystify the journey. Here's a simplified overview:
- Pre-approval: Start by getting pre-approved for a mortgage. This helps to see what you’re qualified for and makes it easier to look for a home. Many sellers require an offer from a buyer who is pre-approved.
- House hunting: Armed with a pre-approval letter, you can confidently explore the housing market within your budget.
- Loan application: Once you've found your dream home, it's time to formally apply for the mortgage. Provide the necessary documentation, such as income verification, bank statements and employment history.
- Loan processing: After submitting your application, the lender will review and verify your information. They may request additional documentation or clarification during this stage.
- Underwriting and approval: The lender's underwriting team will assess your application and ensure it meets their guidelines. If approved, they will provide a loan commitment letter.
- Closing: The final step involves signing the necessary legal documents, paying the closing costs and officially becoming a homeowner.
Buying your first home should be an exciting time. Our free webinar, Becoming a Homeowner, can help you prepare in advance so you can focus on finding your dream home when the time comes. Join us on June 23 for expert guidance on everything from budgeting to applying for your first mortgage.