Embarking on the adventure of purchasing your first home can feel overwhelming, with so many steps and unknowns along the way. At Choice One Community Credit Union, we’re here to help. Our comprehensive home buyer’s guide is designed to walk you through the entire process, ensuring you’re well-informed and confident from start to finish. Let us guide you, step by step, towards unlocking the door to your dream home.
Step 1 – Focus on Your Credit Score
Up until now, you may not really have had any reason to prioritize your credit score. That needs to change. A higher credit score means a better chance of getting approved for a mortgage loan while securing a more competitive rate. It might not seem like a lot, but just a 1% rate difference on a mortgage loan can significantly reduce your monthly payments while providing savings over the life of the loan. The savings, of course, are dependent on the amount borrowed and the term of the loan.
You can request a free copy of your credit report from each of the three major credit reporting agencies – Equifax, Experian, and TransUnion – one time each year. Access your reports at AnnualCreditReport.com. Once you receive your reports, review them carefully. You will want to check for any incorrect information or other errors. If you find any errors, be sure to report them to the individual credit reporting agencies.
Understanding your credit score
Your credit score is a representation of your overall credit history. Five important factors that comprise your credit score are:
Payment history (35%), outstanding balances (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
Credit scores usually range from 300-850. According to Experian, a credit score of 700 and above is considered good with a score of 800 and above considered excellent. Higher scores show lenders that you are a good credit risk and are responsible for paying off your debt. Credit scores under 620 are considered low. If your credit score is on the low side, taking a proactive approach to improving it can mean the difference between being denied for a mortgage loan or not.
Tips for improving your credit score
- Pay all bills on time. Timely payments are crucial for a positive credit history. Paying all of your bills on time every month helps to improve your score, while late payments can significantly lower your credit score. Setting up automatic bill pay can help you ensure your bills get paid on time.
- Lower your total debt or credit utilization. Your outstanding credit or credit utilization is another factor in determining your score. The higher your outstanding balances the higher your credit utilization, which can have a negative impact on your score. You can improve this by paying down your loan and credit card balances. It will also significantly help to keep the cards open after you pay them off, as it will add available credit to lower your debt to credit ratio.
- Work to build a strong credit history. The age of your accounts matters when borrowing money. Lenders like to see a long history, as well as various types of credit, such as a mix of credit cards and various loans. Be mindful of this as you start to build credit. It’s important to keep in mind that every time you apply for a credit card or any other credit account that’s considered new credit, the lender may run a hard check. This can lower your credit score slightly in the short term. For this reason, it’s not smart to apply for several credit cards at the same time. Length of history is another reason we suggest keeping credit cards open rather than closing them after they’re paid off. You don’t need to use them, but having them open for a long period of time helps to improve your length of history. As you establish your credit, charging smaller amounts on different cards and paying them off on time every month can also enhance your payment history. A word of caution: If you have a problem controlling your spending, then it may be better in the long run to close the card you pay off.
- Finally, make sure your credit reports are accurate. If you’ve found discrepancies, report them immediately. Errors are more common than you might think.
If you find yourself with a lower credit score, it might be wise to pause your house-hunting journey momentarily to concentrate on improving it. However, there’s no need to worry—adopting a targeted strategy towards boosting your score can lead to significant improvements. By diligently paying off existing debts and ensuring timely monthly payments, you can positively influence your credit score, paving the way for a smoother home-buying experience in the near future.
Step 2 – Budget and save for a down payment
While you’re working on your credit score, you can simultaneously begin to work on a budget of what you can realistically afford for a mortgage payment. Your credit union mortgage lender can be a big help in determining what you can afford. Remember, the more you have saved for a down payment, the less you will need to borrow. Lenders typically like to see at least a 20% down payment made on a home. The requirement may be lower, depending on your lender. It also may be lower if you qualify for an FHA loan, which is a mortgage that is insured by the Federal Housing Administration. Some lenders, such as Choice One Community Credit Union, have FHA mortgages available for members. Down payment required is a question you can ask as you are comparing mortgage loans with Choice One and other lenders.
Unless you recently hit the lottery or inherited a windfall, you need to come up with your down payment the good old-fashioned way – by saving! If you haven’t started aggressively saving for your down payment, there’s no time like today to begin. Examine your monthly budget and look for ways to save and for expenses you can eliminate. This might include dinners out, those new shoes you’ve been eyeing, a weekend getaway, or that new ATV. After all, a home will be one of the biggest investments you make in your lifetime. It’s worth some sacrifice now for a lifetime of enjoyment. That vacation you give up can mean achieving your down payment goals faster, and that’s a great inspiration. Once you’ve found extra savings each month, open a dedicated savings account, and have money direct deposited each pay period right from your pay into that account. Perhaps put money into a CD for a higher interest rate. Just be sure the term of the CD fits your timeline. If you think you want to purchase a home in a year, don’t invest in a 3-year CD, but rather choose a shorter term. Most importantly, don’t touch your down payment savings for anything other than your down payment. Just focus and watch your balance grow!
When you apply for your mortgage, you are going to have to show the source of the funds for your down payment. Keep a record of your savings, so you can show where your funds will be coming from.
Step 3 – Research mortgage lenders, types of mortgages and mortgage rates
This should be done before you even begin the process of looking for a new home. Take your time and shop around. Speak to your credit union representative and other lenders to compare mortgage loan options. Be sure to compare apples to apples. The lowest rate is not always the best deal. In addition to comparing rates, you’ll want to consider fees, term options, closing costs, and other factors. Make sure that you’re comparing fixed-rate mortgages to fixed-rate mortgage options and adjustable-rate mortgages to adjustable-rate mortgage options. It’s also smart to get pre-qualified for a mortgage. Pre-qualification is simply an estimate of the total amount a lender is willing to let you borrow. This will help increase your bargaining power. Read more about that in Step 4.
Careful considerations when comparing mortgage loans
- Interest rate – A lower rate may mean a lower monthly payment. Examine the pros and cons of fixed rates vs. adjustable rates.
- Monthly payment – Does the payment fit your budget?
- What are the total points & other fees? This can vary considerably from lender to lender. Mortgage closing costs could include a variety of fees. Here are some examples: appraisal fees, home inspection fee, credit report fee, document preparation fee, loan origination fee, and title fees. As you can imagine, these fees can add up quickly. Historically, credit unions have had less and lower fees than traditional banks and other lenders. This is an important consideration when selecting a mortgage loan.
- Down payment – How much of a down payment does the lender require?
As you research and compare mortgage loans, it’s important to select the best mortgage for your life and your long-term plans. For instance, is this home short term? Do you plan on purchasing a larger home as your family expands? Is there a possibility you will be relocating? What’s most important to you right now – a low monthly payment? All of these questions will help you to determine the best loan and terms for your needs.
Compare Conventional Vs. Adjustable-Rate Mortgage
Understanding the distinctions between conventional mortgages and adjustable mortgage loans (ARMs) is critical in making an informed decision tailored to your unique needs.
Conventional Mortgages are stable and predictable
Conventional mortgages are synonymous with stability, offering fixed interest rates throughout the loan term. This means that your monthly payments remain consistent, providing predictability and ease in financial planning. Ideal for those seeking long-term stability and assurance, conventional mortgages are a popular choice for homebuyers who prioritize a fixed-rate environment.
Adjustable Mortgage Loans (ARMs) offer flexibility
On the other hand, adjustable mortgage loans (ARMs) introduce an element of flexibility to your mortgage journey. Unlike conventional mortgages, ARMs feature interest rates that may fluctuate periodically based on market conditions. Typically, ARMs begin with a fixed-rate period, during which the interest rate remains constant, providing an initial sense of stability. After this period, the rate adjusts at predetermined intervals, potentially impacting your monthly payments.
The term’s impact on rate
The term of a mortgage significantly influences the interest rate structure. In both conventional mortgages and ARMs, the term is an important factor in determining how long the interest rate remains fixed or stable. Conventional mortgages typically come in 15- or 30-year terms, with the interest rate locked in for the entire duration. Choice One offers various terms up to 30 years. On the other hand, ARMs often start with an initial fixed-rate period before transitioning to an adjustable rate.
Understanding how the term affects the rate is crucial. In conventional mortgages, the longer the term, the higher the interest rate may be due to the extended period of rate stability provided. It may also mean a lower, more affordable payment. In ARMs, the initial fixed-rate period dictates the stability, and thereafter, the rate adjusts based on market conditions. Homebuyers must carefully consider their financial goals, risk tolerance, and anticipated time in the home when selecting between the steady path of a conventional mortgage or the dynamic landscape of an adjustable mortgage loan. Review mortgage rates and terms at Choice One Community Credit Union.
Step 4 – Apply for mortgage pre-approval
Now it’s time for the next step. In addition to helping you to determine the range of a home you can afford, the mortgage pre-approval process can also help you to identify any obstacles for approval. It is always best to get pre-approved before you start shopping for a home. Having a pre-approval letter is a great negotiating tool when it comes time to purchase your house. The buyer will know you are serious.
When applying for mortgage pre-approval, your lender will require various documents to verify income. This includes proof of employment, recent tax returns, as well as copies of W-2 forms, pay stubs, and any other income. They will also need a listing and verification of all of your assets as well as your debts. This includes credit union, bank and investment statements and credit information. As previously mentioned, they will also want to see the documentation of where your down payment will be coming from. They will require other information as well, such as information on your place of residence.
Experts typically recommend your monthly mortgage payment be no more than 28% of your monthly gross income. This percentage may change based on other debt you owe. Your lender will take all financial factors into consideration before pre-approving you for a mortgage amount.
Keep in mind that a pre-approval is not a guarantee that you will get the loan, and is conditional. Should there be a major change in your financial situation after pre-approval, you may no longer be eligible for the loan. Pre-approvals are not indefinite. They are only valid for a limited period of time, so be sure when you are seeking pre-approval that you are ready to begin your search. Speak to a Choice One Loan Officer about mortgage pre-approval today.
Step 5 – Hire an experienced realtor
Finding and purchasing your dream home takes a lot of time and work. A qualified realtor can make it much easier for you. They can be your closest ally in accomplishing your home buying goals. An experienced realtor has access to endless research, including facts and figures related to various school districts, neighborhoods, taxes, arts & culture, and much more. You’ll want a professional realtor who is knowledgeable about the communities in which you are searching, is highly skilled, and is extremely motivated. It also needs to be someone you can work closely with, but it doesn’t necessarily have to be a friend. It’s not always a good idea to mix friendship and business. You will be spending a lot of time with your realtor, and you want it to be a positive experience. Your realtor should be able to work within your set budget and take into consideration your needs, likes, and dislikes. This will save you the time and heartbreak of looking at homes that don’t fit your needs or that you can’t afford.
Ten tips for finding the right realtor
- Ask friends, family, and co-workers for recommendations.
- Look for someone with the proper licenses, credentials, and experience.
- Look for a realtor who is part of a larger team and has access to the tools you need for a successful home search. You’ll want them to have the inside scoop when new homes are coming to the market. Ask to meet the other people on their real estate team.
- Look for someone with local expertise. You want them to be extremely knowledgeable in the areas where you are looking to buy.
- Look for a good negotiator.
- Ask for references and speak to clients who have worked directly with the realtor.
- Look at the realtor’s current listings.
- Do an online search for reviews, as well as any complaints or disciplinary actions.
- Interview the realtor to test his/her knowledge of the real estate market in general, the home buying process, and the geographic area. Ask about their availability. You want to know your realtor is responsive and can dedicate the time needed to help you find the right home. Be sure to interview multiple agents, so you have something to compare.
- Question the potential realtor about resources they have at their disposal, such as access to experienced home inspectors. This will help to take one more thing off your list when purchasing a new home. You will read more about home inspections below.
Step 6 – Make a list of the home features you want & start your search
In addition to the budget, there are other things your realtor will need to know to effectively help you in your home search. Other considerations include the number of bedrooms and bathrooms you need. Do you need a large yard for children and pets? Are you looking for a home with a pool or extensive landscaping? Is there a particular school district you’d like to be in? Close proximity to shops and restaurants? Perhaps you’re looking to move closer to your place of employment. Do you prefer a home in move-in condition or are you open to a fixer-upper? What are your garage needs? We all have things we are looking for in a new home, so make a list and prioritize your items. You should specify your must-haves for a new home, as well as other features on your wish list that aren’t as important to you. Communicate all of this to your realtor. Having a real estate agent on your side who completely understands what you want in a new home is vital.
Now comes the fun part, actually starting your home search! Take your time and be thorough when looking through homes. Walk and drive through the neighborhoods as well. Are the other homes on the block well maintained? What’s the neighborhood like? Once you narrow your search, go back for a second or even a third visit. Take the time you need to be sure this is the right home for you and your family. Ask for the cost of taxes and homeowners insurance on the home, as well as utility costs and any association dues. This will all come into play when determining if a home fits your budget.
Step 7 – Make an offer
Time to make an offer and start the negotiation process. Again, your realtor will be your secret weapon in negotiating the best price for your new home. You will want to do a little research before you make an offer. Ask your realtor to perform a comparative market analysis. This will provide you with trends in the area and how other homes have been selling. You will also want facts, such as how long the property has been on the market and if the price has come down at all during that time.
It’s helpful to know why the seller is selling. Are they moving out of the area? Have they grown out of the home and are upgrading? Are they unable to keep up with the maintenance of the home? If they need to sell quickly, because they are moving or have already purchased another home, they may be more open to negotiating. On the other hand, if the seller is looking for another home, but not yet ready to move, your flexibility on possession date may make the seller more apt to choose your offer.
Once the negotiations are complete and your offer is accepted, you will sign a contract and provide a small amount of cash in the form of a deposit. Your offer will be conditional upon a home inspection and financing. You will have a specified amount of time to complete your due diligence on the property, which includes the home inspection.
Step 8 – Home Inspections
This is an important step in purchasing a new home. To make sure there are no problems, you need to have a home inspection or inspections completed. This is where the expertise and connections of your realtor can really be of help. They can guide you to a list of recommended and experienced inspectors who can ensure your home is in good shape. In addition to getting recommendations from your realtor, you can seek recommendations from friends as well. Your home inspectors should be professional, licensed, insured, and highly experienced. You want someone who will guarantee the inspection and is licensed to practice in your state. You should also check to see if they are affiliated with any professional inspection organizations, such as the National Association of Home Inspectors. Do a search to be sure there are no complaints lodged against them. You want someone who will not only be thorough in the inspection, but will look out for your best interests as well. Finally, you want your inspection to be independent of any inspection report the seller may have.
Home inspectors basically look for any signs of damage or defect. They will verify there are no structural problems, code violations, or any other concerns. The inspector should thoroughly evaluate the structure of the home and examine the following:
- Heating and AC
- Sewer or Septic System
- Water System
- Walls, ceiling, flooring, window and doors
They will look for lead-based paint in older homes, wood damage, which can be a sign of termite problems, asbestos, mold, and any other potential problems or structural defects. A pest inspection or termite inspection is usually performed separately. You may even desire to hire specific experts for inspecting certain areas of the home, depending on what items your home inspector can handle. A basic home inspection takes approximately 3 to 4 hours and the cost varies depending on the location and size of the home, as well as the experience of the inspector. You can ask to tag along with the inspector while they are checking the home to see first-hand what they are looking for.
If any problems are found or repairs needed, you may want to reconsider your purchase, ask for certain items to be repaired, or renegotiate the price. This will be dependent on the extent of any problems or concerns identified in the inspection.
Step 9 – Contact your mortgage lender
If you followed our previous steps, you will have already selected your mortgage lender and been pre-approved for a mortgage loan for up to a certain amount. Now it’s time to inform them you’ve found a home. If you haven’t already done so, you may want to work out the details of the loan, such as fixed or adjustable-rate and also the term of the loan. Most mortgage lenders, including Choice One Community Credit Union, offer terms up to 30 years.
Mortgage loan considerations include:
- Fixed-Rate Mortgage – Interest rate never changes
- Adjustable-Rate Mortgage (ARM) – Lower rate that may increase or decrease over time.
- FHA Loans – This type of loan is regulated by the Federal Housing Administration.
- Fees and closing costs, which might include:
- Appraisal Fee
- Home Inspection Fee
- Loan Origination Fee
- Loan Application Fee
- Credit Report Fee
- Document Preparation Fee
- Title Insurance Fee
- Private Mortgage Insurance
- Attorney Fees
Your lender will arrange for an appraiser to visit the home and provide an independent estimate of the value of the home. The appraisal assures that you are paying a fair price for the home. The appraisal is a report that states the value of the home based on the size, condition, and features of the home, as well as the sales price of similar homes sold recently in the area.
Your mortgage lender will also arrange for a title company to handle all of the paperwork and do the necessary searches. Pre-approved borrowers have already provided some of their information to the lender, so it will often speed up the overall mortgage process.
Once all information is compiled, the lender will then send the loan package to their underwriters for approval. Finally, if all goes well, your lender will approve the loan, and you can plan your closing.
Step 10 – Closing the Sale
Closing is when you will actually take ownership of the home. Your realtor will walk you through everything you need to prepare. Prior to your closing date, you will receive a closing disclosure that summarizes the costs and fees associated with the transaction and the amount of money you will need to bring to the closing.
During the closing, all parties meet and sign all of the paperwork involved in the sale. You will have to provide proof of homeowners insurance at this time. Funds are then transferred from you and your lender to the seller, and the deed is transferred to you. All closing costs are also paid at this time, which can include all fees, such as title search and insurance, appraisal and inspection, points if applicable, and any other closing costs.
Congratulations, you will walk away from the closing with the keys to your new home!
We hope you found this home buyer’s guide helpful. For more information on the home buying process, visit a Choice One Community Credit Union branch location or contact a Choice One Loan Officer by phone at (800) 610-2788. Tap to view mortgage loan rates and terms or apply for mortgage pre-approval or a mortgage loan.