Ecstatic young couple celebrating their new home with the young man holding his wife in his arms as she grins and laughs at the camera

Purchasing your first home is a joyful moment (photo credit: Dash)

You’re thinking about buying your first home – congratulations. You’re likely thinking about furniture, paint colors, and snapping those photos of your family standing on your new front steps.

However, your mind may be swirling with thoughts and questions. How exactly do buy your first home? How do you get a mortgage? Are there first-time homebuyer programs? What are the qualifications for a first-time homebuyer, anyway? What questions do you need to ask yourself?

A home is the single biggest purchase many Americans will ever make. This guide is to help you navigate the questions you will have before you purchase your first home.

Do you qualify as a first-time homebuyer?

Let’s start by defining who qualifies as a first-time homebuyer. According to the U.S. Department of Housing and Urban Development (HUD), a first-time homebuyer is anyone who meets any of the following criteria:

  • An individual who has had no ownership in a principal residence during the three years ending on the property’s purchase date. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).
  • A single parent who has only owned with a former spouse while married.
  • An individual who is a displaced homemaker and has only owned with a spouse.
  • An individual who has only owned a principal residence not permanently affixed to a permanent foundation by applicable regulations.
  • An individual who has only owned property, and is not in compliance with state, local, or model building codes cannot be brought into compliance for less than the cost of constructing a permanent structure.

Livabl spoke to mortgage expert and vice president of sales Nicolette Chapman of Zonda Home about what buyers need to consider. Chapman says affordability is the most significant thing first-time homebuyers must consider.

“The cost of living with inflation has made living expenses more challenging. But people still need to concentrate on the number one factor, whether they have enough money.”

“They also need to consider if they will save more money if they improve their credit score or if it is more beneficial to put more money down instead. What about the timing? They need to decide if it’s best to buy right now.”

“Potential buyers need to realize that it’s more than just a principal and interest payment; they’re also going to be looking at potentially increased real estate taxes because the more that property appreciates, the higher the tax bill climbs.

“It’s the same issue with utility costs or home repairs. In addition, the home will require maintenance or homeowners’ insurance, and those things aren’t necessarily fixed in price. Homeowners must understand that once you purchase a home, maintenance costs and taxes will be due in addition to that mortgage payment.”

Young couple imagining interior of new house. Moving day

There are a plethora of first-time homebuyer programs in many states (Photo credit: Pixel-Shot)

First-time homebuyers’ programs

Virtually every state has first-time homebuyer programs—Nerdwallet lists each state’s programs and a breakdown of lenders, with ratings and descriptions.

For example, a first-time homebuyer in Arizona can seek assistance from the Arizona Department of Housing (ADOH). Arizona’s Home Plus loan program helps with down payment and closing costs. In addition, borrowers can get discounts on mortgage insurance. Home Plus is available in every Arizona city, county, and zip code. More than 32,000 homebuyers in the state have taken advantage of this program.

The Home Buyer Down Payment Assistance Program provides a 30-year fixed-rate mortgage combined with down payment assistance (DPA) ranging from 0% – 5% depending upon the new underlying first mortgage. The DPA can be used toward the down payment, closing costs, or a combination of the two. The DPA is only available in conjunction with a Home Plus mortgage.

The borrower(s) annual income cannot exceed $122,100. In addition, one borrower must complete a home buyer education course before closing. Finally, all borrowers on the mortgage must have a minimum credit score of 640 or better.

The State of New York Mortgage Agency (SONYMA) handles the first-time homebuyer program in the Empire State. SONYMA’s lowest interest rate program is called “Achieving the Dream” and features the following benefits:

  • 30-year fixed rate mortgage
  • No points *
  • Down payment requirements are as low as 3% (and 3% down payment assistance available)
  • A minimum cash contribution of 1% (3% for co-ops)
  • Available for 1-4 family homes, cooperatives, and condominiums
  • No prepayment penalties
  • 120-day interest rate locks for existing housing
  • 240-day interest rate locks for properties under construction or rehabilitation, cooperatives, or distressed sales
  • It can be combined with other SONYMA special features
  • Other grants and subsidies can be included with no limit

Requirements include the standard good credit, stable employment, and you must be using the property as your primary home.

* Wait – what are points?

You may have caught the mention of points in the above list. You could encounter points when it’s time to close your home. Here’s what they are and how they work.

Points are included in the closing cost of your home. There are two different types of points: Origination and discount. Origination points cover the lender’s charge during the mortgage creation. Think of them as payment for the loan officer. While origination points aren’t tax deductible, the good news is that many lenders have shifted away from using them, and those that continue to do so are willing to negotiate the fee.

Discount points are used to buy down the interest rate of the mortgage. Think of these points as prepaid interest. The purchase of each point generally lowers the interest rate on your mortgage by up to a quarter of a percent. Most lenders provide the opportunity to purchase anywhere from a fraction of a point to three discount points.

Both origination and discount points equal 1% of your total mortgage. So, for example, if you received a $500,000 purchasing loan, one point would be worth $5,000.

Happy property owners shaking hands with real estate broker after a deal. Young couple handshaking real estate agent after signing contract.

Your broker can help you decide which mortgage is best for you (Photo credit: Jacob Lund)

Fixed-rate mortgages versus adjustable rate

“In the United States, most mortgages are fixed rate,” Chapman said. “They’re often 30-year terms. For example, if you bought last year and the interest rate was at 2.5%. You’re locked in at that rate for 30 years or until you sell the property”.

“The most common mortgages in the adjustable-rate space would be either a 5/1 adjustable-rate mortgage (ARM), 7/1 ARM, or a 10/1 ARM. That means the fixed rate is adjusted after a five-year, seven-year, or ten years respectively, once a year.”

So how do you determine which type of mortgage is right for you? There are a few factors to consider. A fixed-rate mortgage might be right for you if you’re looking for simplicity. A homeowner can easily budget their monthly payment because it doesn’t change. This can bring peace of mind in a volatile market with rising interest rates.

However, a fixed-rate mortgage becomes harder to justify if interest rates begin to lower and you’re stuck with a higher rate. The amount of interest you pay will depend on the length of your mortgage term. A shorter term means it will cost you less in the long run, whereas a longer term will have lower monthly payments, but you’ll pay far more interest over the mortgage cost.

The benefits of an ARM are the lower monthly payments in the early years of a mortgage. A borrower who chooses an ARM may save several hundred dollars a month for up to seven years, after which their costs are likely to rise. The new rate will be based on market rates, not the initial below-market rate. If a buyer has luck on their side, it may be lower depending on the market rates at the time of the rate reset.

The biggest problem with ARMs is the potential volatility of your monthly payment. You must be prepared for your payment to change many times throughout your ARM. Once you’re out of your initial five-, seven-, or ten-year period, you’re beholden to the market’s fluctuations. When the rate adjusts, the new rate is calculated by adding an index number to a margin specified in your mortgage documentation. Common indexes used to figure out rates for ARMs include the Secured Overnight Financing Rate (SOFR), the Cost of Funds Index (COFI), and the Constant Maturity Treasuries (CMT).

Ultimately, ARMs are best for short-term homeowners or those who intend to pay off their homes in a short amount of time.

Here are the questions you should be asking yourself before deciding on fixed rate versus ARM:

  • What’s the size of the mortgage payment you can afford today?
  • Could you still afford an ARM if interest rates rise?
  • How long do you intend to live in this home?
  • Interest rates are currently on a significant upswing – do you have reason to believe they will continue in that direction for the foreseeable future?

Help me – my credit is terrible

Talking mortgages is much easier when you have a sparkling credit rating. But what happens if you’re carrying a mountain of debt and your rating is in freefall?

“Credit is one of those things you absolutely can fix,” Chapman said. “When you are interviewing mortgage companies and lenders to get pre-qualified, don’t be scared. There are a lot of people out there that think they have bad credit, and so it’s embarrassing for them. Or they don’t think that they’ll ever be able to qualify.”

“It’s a much prettier picture than what they think it’s going to be. A great mortgage company is going to have plans in place that are going to be able to do a run of the numbers. It says if we look at your credit and pay off your high-interest credit cards, your credit score will jump. At that point, we’ll be able to get you qualified in many situations. It’s attainable in a small amount of time.”

That doesn’t just go for banks. Builders may be willing to help you out, too.

“Many builders are willing to say, ‘Listen, if you stay on track, we will work with you to help you build a home.’ The biggest advice I would give is not to be afraid to look and to talk to a good mortgage company willing to help.”

“Many people don’t understand that scoring credit for homes is different than purchasing a car or securing a credit card. Often people think they need to pay off everything to get their credit to where it needs to be. A lot of times, it’s not the case. For example, maybe you have a medical debt that doesn’t necessarily go against you when qualifying for a mortgage. Work with someone qualified to understand what your credit needs to look like to qualify for a mortgage.”

How do you find your mortgage broker?

So, you’ve decided on the type of mortgage you want. What should you look for in a mortgage broker?

“The number one factor is trust,” Chapman said. “Your home builder or your realtor partner should have been in the business a long time and know how to communicate well with people.”

“My best advice would be to talk to different lenders. Buyers should get three different rates or talk to three different lenders to understand what their rates are or what programs they might have. It will help them gain an understanding of how these comfortable you’ll be dealing with them. A big piece of a successful closing is which lender you choose.”

“And don’t forget about your home builder,” Chapman added. “Many of them offer incentive money if you use their preferred lender. For example, they might help put money towards closing costs or if you don’t have money put down on the home, which is attractive for a new for first-time homebuyer and different than the resale community.”

“Builders say, ‘OK, we’ll give you $10,000 towards your closing costs.’ Or what’s happening now is many home builders will say, ‘Instead of using that $10,000 towards closing costs because you’re using a program that’s covering it — let’s take that money and buy your rate down.’”

“So instead of qualifying at a fixed percentage rate, we’re able to buy the rate down to 5%, which will save you several hundred dollars on your monthly payment. There are all sorts of ways to be creative right now with working with builders and their lenders to help make housing more affordable.”

Have an honest conversation with yourself (and your family)

It’s time to ask yourself the questions you need to consider before making your big purchase.

It may seem obvious, but you must decide what type of home you want and if that desire truly matches your needs. If it’s just the two of you (and you intend to keep it that way), do you need a 3,500-square-foot house, or would those funds be better served elsewhere? If you’re a family of five with kids on the verge of becoming teenagers, how happy will you be in a 1,300-square-foot townhouse?

Keep in mind the features you want to see in this home. If your family spends a lot of time getting ready to go out, you might want to look for multiple bathrooms. Are you working from home? Pick a house with a bedroom that can double as an office or dedicated flex space for your desk. Don’t forget about a fenced backyard if you have a dog.

Your wants matter as much as your needs, but ultimately you want to plan for the place that makes the most financial sense and offers long-term comfort.

Be realistic about your current financial situation. Do you have any savings? What are your current spending habits like — do they need to be controlled? Finally, check on your credit rating. Generally, to qualify for a home loan, you’ll need good credit, a history of paying your bills on time, and a maximum debt-to-income (DTI) ratio of 43%.

Lenders limit housing expenses (principal, interest, taxes, and homeowner’s insurance) to about 30% of the borrowers’ monthly gross income. However, this figure can vary widely, depending on the local real estate market.

How much house can you truly afford? Just because a lender qualifies you for a vast sum of money doesn’t mean you should take it. Make sure you’re leaving room to budget for all the necessities (utilities, clothes, food, transportation, insurance) and savings for entertainment and possible emergencies. Being house-poor isn’t a fun way to start your homeowner’s journey.

Remember to enjoy yourself

Purchasing your first home may be one of the most stressful events of your life, but it should also be gratifying. The feeling of finally having ultimate control over the space in which you live is satisfying. In your first days as a homeowner, you may find yourself grazing your hands over the walls and doors and thinking, “I own this.” We won’t ruin the fantasy of mentioning the technicality of your lender. Just enjoy the moment. You’ve earned it.

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