So you’re thinking about buying your first home – congratulations!

What do people typically do when they start thinking about purchasing a home? If you answered – “Go on Zillow, and start browsing listings!” – you would be correct. Is that what you should be doing right away? Not quite…

But that is why we are here to share exactly how to prepare, act, and finally get that house of your dreams!

Who is a “ready buyer”?

Are you a ready buyer? To find out, let’s answer few qualifying questions:

1. What is a debt-to-income ratio?
2. What are your financing options?
3. What are the current mortgage rates?
4. Do you have a pre-approval letter?

It is perfectly normal to not know some, or even all of the answers. This article is going to provide you with all of the answers, and by the end of it you will be on your way to becoming a ready buyer!

1. What is a debt-to-income ratio (DTI)?

A debt-to-income ratio (DTI) is an important part of your financial health, and it is one of the first qualifying guidelines a financial institution may ask about to find out whether you can qualify for a mortgage.

Why do lenders need to know your DTI?

Simple – lenders need to know whether you can pay them back. You can’t get a loan that you won’t be able to pay back.

How to calculate your DTI?

Step 1 Calculate your monthly bills. This can include your rent, child support, loan payments, credit card minimum payments, and other debts. Note: expenses like groceries, utilities, gas, and your general taxes are not considered a debt.

Step 2 Divide your total amount of monthly debt by gross monthly income.

Step 3 The result is your DTI in percentage. The lower the DTI, the less risky it is for lenders to give you a loan.

That wasn’t that bad, was it? And now you are one step closer to becoming a ready buyer, so let’s keep moving!

2. What are your financing options?

There are two main ways you can finance your new home:
• getting a loan;
• cash, or hard-money.

When thinking about getting a loan, you have a variety of options. Three main types of loans offered are conventional, FHA, and special programs.

Conventional loans typically cost less than FHA loans, but can be more difficult to get. There are two types of conventional loans: conforming (they have a maximum amount set by the government), and non-conforming.

A confirming conventional loan is the most common loan type used for financing. The loan amount limit is determined by the county cost of living, and if your down payment is less than 20% you are typically required to obtain mortgage insurance.

Non-conforming conventional loans are less standardized. Eligibility, pricing, and features can vary widely by lender. Some non-confirming loans are intended for borrowers with poor credit, which results in higher interest rates, and risky features. They may ask for a minimal documentation of your income, allow you to pay only interest, or allow your loan balance to increase. If you are considering obtaining a non-conforming loan, it is best to consult with multiple lenders, and ask if you can qualify for other types of loans instead, since this type of a loan is risky, and has gotten a lot of people in trouble during the crisis.

FHA loans are regulated and insured by the Federal Housing Administration, and are obtained through the private lenders. They allow a down payment as low as 3.5%, lower credit scores than most conventional loans, and also have a maximum loan amount. For all FHA loans obtained it is required to have mortgage insurance.

Special loan programs can be more affordable than conventional, or FHA, but not everyone can qualify. There are three special loan program types: VA loan, USDA loan, and state and local programs.

The VA loan is provided by the Department of Veterans’ Affairs, and in order to qualify you have to be either an eligible veteran, current service member, or a surviving spouse. These types of loans often offer more protections, low-cost refinance options, and are available with low, or even zero down payments. They do not require mortgage insurance, but typically do require an upfront fee at closing.

USDA loans (also known as rural development loans) are designed for low- and moderate-income borrowers in rural areas, and can be a great option for people who have limited amount of savings. They also offer zero down payments, and are usually cheaper than FHA loans. This type of mortgage also requires obtaining mortgage insurance, and paying an upfront fee at the time of closing.

State and local programs vary. They can help homebuyers with their down payments, are typically curated specifically towards a group like first time homebuyers, minorities, veterans and so on. You can explore programs in your area by doing your own research, or by contacting a local housing counselor.

Cash financing can be obtained through the hard-money lender that can act as your mortgage lender, and/or buyers’ agent. They typically have one-year payout policies, which often consist of only one payment. What that means is, your lender will buy the house for you by paying cash, and then sell it to you when you get a mortgage.

One of the pros of cash financing is quick closing times, which is why sellers often accept cash offers over other mortgage commitment offers. Cons can include the higher down payments, fewer options, more limitations as to your representation as a homebuyer, and limited availability.

Now that you know your financing options, you can find out what is your best fit, and we can move along to answering our question number three!

3. What are the current mortgage rates?

This question is a little tricky. The mortgage rate is never locked in, and varies based on your loan amount, length of mortgage commitment, down payment size, state, and credit score.

One important thing to remember here is – there are fixed-rate mortgage, and adjustable-rate mortgage options.

If you choose a fixed-rate mortgage, your interest rate will be locked in when you take out a loan. This is a safer option due to the ever-changing nature of mortgage rates. Just imagine how much money people that purchased their home few years back at a 3% interest rate have saved. And you always have an option to refinance your home if the rate goes further down.

With adjustable-rate mortgage you are not locked in, and your rate may go up, and down along with the changes in the market. It may seem like a great option since they can start you with a lower interest rate, than fixed-rate mortgage, but you have to keep in mind that you are not locked in that rate. Even if you have purchased your home with an adjustable-rate mortgage at 3%, it can easily turn into a 6% interest rate.

4. Do you have a pre-approval letter?

If you already have a pre-approval letter – great! And if you are not pre-approved, you now know your options, the key factors used for determining your eligibility, and getting pre-approved can be a breeze!

Congratulations! You are now a ready buyer! With a pre-approval in hand you can start looking for houses, know your exact budget, which properties you can bid on, and will definitely be taken serious!

We truly hope that you found this article informative, easy to read, and that ultimately it has answered all of the questions you may have had as a first time home buyer. And if you still have unanswered questions, you can always reach out for help!

Also, we have a bonus – National Association of Realtors ® have created series dedicated specifically to the first time buyers experiences, just follow the link, grab your popcorn, and enjoy!