First Time Home Buyer In California – Everything You Should Know
Buying a home can be an intimidating process, especially if it’s your first home. Considering that the purchase of a home is the biggest investment most people will ever make, the idea of buying a house can be daunting. However, if you’re a first-time homebuyer, alleviate any fears by simply familiarizing yourself with how the homebuying process works. If you’re a first-time homebuyer in California, our step-by-step guide should help you get a better understanding of what to expect from the home buying process and how you can make it go as smoothly as possible.
When Are You Considered A First Time Buyer?
First-time homebuyers in California are defined as buyers who have never owned property before. However, it’s worth mentioning that you can still qualify for certain home mortgage programs created to help first-time homebuyers even if you were a homeowner at one point. For example, although FHA (Federal Housing Administration) loans are meant for first-time homebuyers, you can qualify as long as you haven’t owned a property for at least three years leading up to the purchase of your new home.
Set Your Goals
Once you’ve made the decision to become a homeowner, there are a number of things to consider before you begin looking at houses. It’s tempting to begin house hunting right away, but doing so is truthfully a waste of time if you haven’t spent some time deciding exactly what you’re looking for. The very first thing you should do is to set your goals.
How Much Can You Afford?
Going house hunting without a budget is a huge waste of time. There is no point in looking at properties that you can’t afford. Take the time to figure out exactly how much you can afford, considering all of your current financial obligations. This includes both debts and monthly expenses.
Don’t forget about the associated costs of homeownership — not only will you be required to make a down payment (unless you qualify for a special mortgage program), but you’ll also have to pay homeowner’s insurance, HOA fees (if there are any), property taxes, utility costs, potential maintenance and repair costs, and mortgage insurance (unless you’re able to make a down payment of 20 percent or more).
Even if you get pre-qualified for a mortgage, do your due diligence and draw up a monthly budget. Just because you qualify for a large loan doesn’t mean you can afford a house at that price point.
Are You Planning On A New Or Old House?
Buying a new house is much different than buying an old house. Deciding what type of house you want will help narrow things down a lot when you begin house hunting, saving you a significant amount of time. Old houses often have more character than new houses and are typically available for lower prices; however, newer houses will be more energy-efficient and equipped with newer appliances and equipment. Old houses are also more likely to be in need of a few repairs or renovations than newer houses.
What Kind Of Mortgages Are You Considering?
The traditional method of getting a loan is to go to your local bank and apply for a conventional mortgage. However, it’s not the only way to obtain a home loan. If you have limited funds and a lower credit score (or haven’t had a chance to build much in the way of a credit history), you might want to look into some other options. For example, FHA loans require smaller down payments of 3.5 percent.
Other programs that you should look into include VA loans (if you’re a veteran), which require zero down payment, and USDA loans, which you may qualify for if you’re looking to buy property in a rural or suburban area. Don’t limit yourself to conventional loans–do your research to see if there are better options out there for your specific financial situation.
Once you know what your goals are and you know what to look for when you begin house hunting, these steps will prepare you for a potential bid should you find a house you want to buy:
Check Your Credit Report And Scores
Your credit score is what lenders will use to get an overall picture of your financial situation. The lower your credit score is, the more difficult it will be to qualify for a home loan at favorable terms. With conventional loans, your credit score will affect your interest rate. You can get a free credit report from one of the three major credit bureaus to obtain your credit score and your credit history.
Credit scores are calculated using numerous factors, including the amount of debt you’re carrying, how long your credit history is, how varied your credit is, and if you have any blemishes on your credit (such as late payments, bankruptcies, collections, and foreclosures). If you have a low credit score, consider taking some time to improve it before you apply for a loan. Not only could it help improve your odds of qualifying for a loan, but you might also be able to qualify for better terms, which can help reduce your monthly mortgage payments.
Getting pre-qualified is extremely helpful. To get pre-qualified, all you really need to do is provide your lender with some basic information, such as your debt, income, and assets. Based on this, the lender will provide you with an idea of whether or not you’ll qualify and how much you would qualify for. This will give you a better idea of what price range you should be looking at when house hunting. Getting pre-qualified is a process that won’t cost you anything and can be done over the phone. It shouldn’t take more than two or three days to be provided with this information.
Getting pre-approved for a mortgage is a more involved process than being pre-qualified. You’ll complete a mortgage application and provide the lender with all of the required information. They will perform a background check, including an employment check and a credit check. You’ll then be provided with a pre-approval letter that explains that you’ve been pre-approved (based on financial information, such as your credit score) along with how much you’ve been pre-approved for. It’s more accurate than a pre-qualification since the lender will have taken your credit history into account.
Getting pre-approved for a mortgage is very beneficial since it is essentially a conditional commitment from the lender. The pre-approval letter shows a seller that you’ll be able to pay for the home you’re bidding on. This helps if you’re competing with another buyer. One of the dangers of not getting pre-approved is that financing could fall through after you’ve had a bid accepted. If a seller is choosing between two bids, they’ll often go with the buyer who has been pre-approved since there’s less of a risk that financing will fall through.
Have Your Financials In Order
Pay off some of your existing debts if possible to lower your debt-to-income ratio. Not only will this improve your credit, but it will reduce the size of your financial obligations once you buy a house. You should also have some money saved up for your down payment. While 20 percent is ideal, 5 to 10 percent will do for a conventional loan (depending on other factors, such as your credit score). However, the more you have in savings the better. You should also obtain proof of funds to show to sellers along with your mortgage pre-approval letter. This shows the seller that you have your financials in order which will make the closing process go a lot smoother.
Be Aware Of Foreclosures And Short Sales
Foreclosures and short sales are a good way to find homes priced at lower than their market value. These types of properties are being sold quickly by lenders who are trying to recover the balance of a defaulted loan. However, while they may seem like great deals, there are often special conditions that you should be aware of. It can sometimes take as long as six months to close on such a property–and even then, there’s a risk that it doesn’t happen. You should definitely speak with a California real estate agent about the possibility of buying a foreclosed home so that you know what you’re getting yourself into.
Common Mistakes To Avoid
Before you head out the door to begin looking at houses, it’s worth knowing some of the common mistakes that first-time homebuyers in California often make. Being familiar with common home-buying mistakes will hopefully help prevent you from making them.
Not Enough Research On The Neighborhood
First-time homebuyers in California often focus too much on the house and not enough on the neighborhood the house is in. Do you really want to buy a property that contains your dream house if that property is located in a crime-ridden neighborhood right off the freeway? Research the neighborhood. Look at how safe the neighborhood is, what the commute will be like to your place of work, what kind of amenities are available in the neighborhood (grocery stores, banks, restaurants, gas stations, etc.), what the school district is like (if you have or are planning to have kids), whether there are plans for nearby construction, and more.
Not Being Mentally Prepared
Houses are expensive, especially in California, so you’ll likely need a home mortgage. However, first-time homebuyers are often not prepared for how much a house will actually cost them monthly. Look past the sticker price and focus on the month-to-month costs. Be prepared for the cost to be higher than you think, especially once interest, taxes, mortgage insurance, homeowner’s insurance, HOA fees, and more are all factored into your monthly payments. This will help when you compare the initial costs of different homes. While a $10,000 difference won’t seem like much from one house to another, it may not be something you can afford when it comes down to how it affects your monthly payments.
Not Enough Research On Your Realtor
Not all real estate agents are the same. Don’t just hire the first one you come across. Do your research. Look into their reputations by checking online reviews and by requesting references. If you can, contact past customers who have bought homes through them and ask them about their experience working with the agent. You can also go to the California Department of Real Estate website and look them up using their real estate license to make sure they’re in good standing.
Overbidding Due To Emotions
Always keep your budget in mind. First-time homebuyers in California often make the mistake of getting emotionally involved if they get caught up in a bidding war with another buyer. Don’t go over your budget, even if you’ve fallen in love with a property. You can always find another house. Don’t saddle yourself with a house that you can’t afford as this will cause all kinds of financial misery.
Be Aware of Any and All Grants That May Assist
Buying a home is expensive. Most first-time homebuyers in California will need to take out a home mortgage. However, you should also do a little research on potential grants that you could qualify for. A grant can provide you with the financial assistance that can lighten the financial burden of buying a house.
Talk To Family And Friends
Speak to friends and family members who are homeowners. They can help you mentally prepare for the homebuying process as well as give helpful advice on things to do and mistakes to avoid. You may even be able to find a good real estate agent recommendation from someone.
Buying Your First Home is a Major Milestone & Need Not Be Stressful
Buying your first home can be very stressful — but it doesn’t have to be. If you properly prepare for the home buying process and follow the tips outlined in this guide, the process should go much more smoothly. Buying your first home in California is a major milestone and it’s one that you’ll want to remember as a positive experience.
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