Buying your first home can feel both exciting and terrifying. You’ve been saving for years and have been on the hunt for the perfect house. With so many questions to ask, how do you know when you’re prepared to take your home search to the next level?
Wondering what to know as a first-time homebuyer? You’re not the only one! We’re here to guide you through the process to ensure you’re fully educated and confidently prepared. Knowledge is power, and you need to make sure you’re armed with the right information to make an informed purchase.
Ensuring You’re Financially Prepared
First, you need to make sure you’re prepared financially to take the next steps. Taking out a mortgage isn’t an insignificant event. In fact, it’s potentially the largest loan you’ll ever have, not to mention the longest, so you need to be in tip-top financial shape. Otherwise, you won’t be able to negotiate the best terms and rates.
Let’s make sure you’re prepared for this investment by following these tips for first-time homebuyers.
Why Do You Want to Buy a Home?
It’s important to evaluate your objectives for making this investment. Will you be raising a family in it? Will you rent it out for income? Are you going to renovate it and resell? Make sure you understand your reasons for making the purchase so you can structure your loan appropriately and customize your search according to your needs.
How Much Home Can You Afford?
It’s easy to get excited when you start looking at homes. But be sure you’re looking within your means. To do so, have a solid understanding of your financial position. Generally, you should consider homes that cost no more than 3-5 times your annual household income.
When you start researching loans, understand that lenders will want to confirm your financial liquidity and will look at things like income, assets, debts and liabilities. You’ll also need to factor in more than just the purchase price of the home. Consider the costs of homeowner’s insurance — and maybe even flood or earthquake insurance — plus closing costs, maintenance costs, homeowner’s association fees (if applicable) and more.
Mortgage professionals will be happy to help you determine the home price you can most comfortably afford during the loan prequalification and preapproval process. You can (and should) get this figure ahead of time, before you start house-hunting in earnest.
The last thing you want to do is misunderstand the amount of house you can afford, only to be disappointed in the search or loan process later on.
Is Your Credit in Order?
Have you checked your credit recently? Before you start house-hunting, it’s good to know your credit score and your financial history. You’re entitled to one free credit report every 12 months from each of the three major credit reporting agencies. When you review it, check it for errors that might be negatively affecting your credit score. You’ll be assigned a credit score based on your history. Here’s what those numbers mean:
• Excellent credit score: 720-850
• Good credit score: 690-720
• Problem credit score: 650-690
• Poor credit score: 350-650
• No credit: 0-349
If you have any delinquencies lowering your credit, pay those off before you apply for a mortgage. Also, pay down any credit cards with high balances. This shows lenders that you’re not using all of your available credit. And if you know you’ll be applying for a mortgage, avoid opening new credit card accounts or taking out other loans, as frequent credit inquiries could be a red flag to lenders.
It’s important to keep in mind that each time a lender accesses your credit information for a mortgage quote, that request will show up on your file. Try to make all your mortgage requests within a fairly tight timeframe, so it doesn’t look like you’re applying for several loans.
Generally, higher credit scores qualify you for better loans. However, keep in mind that if a couple is purchasing a home, lenders tend to look at the lower credit score of both individuals when determining rates.
Get Prequalified and Preapproved for Your Loan
Now that you know how much house you think you can comfortably afford, and you have your credit in order, you need to speak with mortgage lenders to get prequalified. This will let you know how much you can realistically afford to borrow and what your monthly payments will total.
It’s smart to get quotes from more than one lender — consider asking for quotes from your bank, online lenders and even credit unions. Not only will you see the range of mortgage products available, but you can also often use multiple quotes to negotiate a better rate.
In doing so, you’ll need to provide financial statements, credit details and personal information to your lender. After a review, your lender will let you know how much you can spend on your home.
Make sure to review the quote to identify junk fees — that is, fees that are designed to increase a lender’s profit — such as administration, credit reports or document prep. Comparison shopping will let you identify some of those junk fees and potentially reduce or eliminate them.
Although federal law forbids lenders from marking up settlement expenses or charging for goods or services that aren’t provided, it still sometimes happens. It’s up to the educated borrower to review the paperwork well in advance of closing to ensure everything is on the up-and-up.
You’ll also learn that there are numerous types of mortgage products available for varying terms. Research each one carefully to see what product makes the most sense for your situation, such as:
• Fixed-rate mortgages are great options for lenders wanting to lock in current low interest rates. The 30-year option is popular with many homebuyers who like the lower payments, although it comes with a higher interest rate. The 15-year option has just the opposite: lower interest rates but higher monthly payments.
• Adjustable-rate mortgages have varying periods (e.g., 1 year, 5 years) at a set interest rate. After that time period, the interest rate will adjust yearly based on market conditions. While these mortgages may offer attractive initial rates, you need to be sure your finances can accommodate the payment fluctuations. These options are common for those who anticipate moving or refinancing before the term’s end.
After you decide on the best loan product for your situation, the next step is getting preapproved, which requires additional financial information — like W-2 forms and bank and financial statements — to support the information you provided during the prequalification process.
Now that you know exactly how much home you can afford, you can use your preapproval to your advantage when bidding on a home: the seller knows you have your financing in order and are a serious buyer.
As a first-time homebuyer, you should expect to put down between 3% and 20% of the purchase price as the down payment. The more money you put down, the better your interest rate is going to be.
Depending on your cash flow, you can look into programs that offer a lower down payment. Consider going through the Federal Housing Administration (FHA) Loan Program, which can reduce the down payment to as low at 3.5% for first-time homebuyers. FHA also offers financial help for individuals older than 62 and people buying mobile homes and factory-built housing. These loans will, however, require the borrower to pay two forms of mortgage insurance — one paid up front and the other paid annually.
USDA-backed mortgages are another strong option, and one which eliminates the down payment entirely. This program is reserved for homes located in less densely populated (rural) areas, so be sure to check the eligibility of any homes you might be interested in, if this option sounds like a good fit.
If you’re able to put down 20%, however, it will help you get a better interest rate, as well as let you avoid paying for private mortgage insurance (PMI). PMI guarantees the lender is covered in the event that you default on your payments. It can be very expensive, so it’s best to avoid it if you can.
Closing costs are the fees associated with your home purchase and home loan. They are traditionally paid at closing. The fees, which can total several thousand dollars, will vary by state and by lender. They often include things like points, origination, title search fees, title insurance, prepaid interest, recording fees and flood certifications.
Although these fees are the responsibility of the buyer, you can ask sellers to pay the closing costs. This is something you can ask your agent to include in your contract.
Additional Cash Reserves
Make sure the purchase of your home doesn’t completely deplete your cash reserves. Make sure you have cash on hand in case of emergencies.
Enlist the Help of a Real Estate Agent
A home is probably the single largest purchase you’ll ever make. And buying Chicago homes is a decision you’ll need to be smart about. To take advantage of the closing costs paid and to recoup any potential market losses, you’ll want to stay in your home for at least five years (for townhomes, at least 10 years).
So, although you can do a lot of online research on your own regarding available homes in your area, hiring a real estate professional gives you access to insider community and market information you wouldn’t otherwise be privy to. Other benefits to hiring an agent include that they:
• Understand the laws associated with buying and selling a home
• Are knowledgeable about the faults and features of a home that can affect the price
• Are skilled at negotiating sales contract terms and acting in your best interests
If you don’t know a realtor, ask around. References from friends and family are always a great place to start. Another approach is keeping an eye on signs in your area (if you’re staying local) or looking at online listings to see whose names frequently appear as listing agents.
Once you’ve cultivated a list of possible realtors, meet with them either in person or over the phone. Because they’ll be working for — and with — you, you want to ensure you have a good relationship, can trust them and are confident in their abilities. Ask them questions like:
• How long have you been a realtor?
• What services do you provide your clients that other realtors don’t?
• How many homes do you buy and sell each year?
• How well do you know the areas that I’m looking to buy in?
You’ll be spending a lot of time with your realtor over the course of your search, so you want to select a partner that will work well with you and advocate on your behalf.
Once you select your realtor, set up a time to refine your search parameters, so your realtor is clear on what you’re looking for. If only a 4-bedroom, 3.5-bath will do, emphasize that so they won’t waste your time showing you anything less. If you have specific amenities in mind (e.g., near a park, located in a top-rated school district, access to community pool), make sure you convey those wishes, too.
Questions to Ask While House-Hunting
Once you start house-hunting, make sure you take pictures or notes at each house you visit. In short order, they can start to run into each other in your memory. As you visit, take note of the standout features (whether good or bad) and ask yourself or your realtor these questions:
• What’s the neighborhood like? Are there kids? Is there a lot of street traffic? Are the other homes in good condition?
• What is the house’s proximity to amenities, like grocery stores, big box stores and shopping malls?
• What are the neighborhood’s amenities — playgrounds, pools, tennis courts, etc.?
• What is the street like at night — is it safe?
• How old is the roof, and has it ever been replaced?
• Have there ever been any floods that affected the structure? Has there ever been significant damage to the home?
• Is the home part of a homeowner’s association? If so, how much are the dues?
• What are the approximate monthly utility costs? What about during peak months?
• What are the yearly taxes?
• What schools are available? How are they rated?
• Have any pipes ever broken, or has sewage ever backed up into the house?
• Are there any signs of mold?
• Have there been any signs of pest infestations, including termites, ants, birds or squirrels?
• Have any pets been buried in the yard?
• Has the home ever flooded or been struck by lightning?
• Are there any registered sex offenders nearby?
• Do appliances run on gas or electric?
• Does the owner have documentation on warranties?
• Is there a septic tank?
• Does the home use well water?
• Is the garage big enough?
Identify and head off trouble by asking these and other questions before you submit your offer. The more you know, the better.
Submitting an Offer
Once you find the right home, it’s important to act fast, as well-priced homes often sell quickly. Your agent will help you write your offer. You may put a contingency on the contract, such as a home inspection contingency that states that the offer is conditional and based on a satisfactory home inspection report.
Although it’s an exciting time, when you decide on that offer price, keep in mind your down payment, closing costs and other costs you might incur.
Once the offer is drawn up, make sure you read it carefully before you sign it. After you sign it, your agent will send the offer to the seller’s agent.
And then you wait.
Sometimes the seller will reject your offer outright. Sometimes, there will be negotiating back and forth between you and the seller (via the agents) — called “counter offers” — to come to a mutually agreeable decision. In some cases, if you’ve requested that the homeowners pay the closing costs — which reduces your day-one expenses — they may counter by raising the sale price to make up for it.
Sometimes, your offer is accepted right away. When an agreement is reached, both you and the seller will sign the final contract. Now you’re officially “under contract.”
You’re Under Contract — Now What?
Now you’re under contract — sometimes called “in escrow” — for the home. If this is your first time buying a Chicago home, you may think you have time to take a breather. But actually, there’s some important work for you to complete.
Conduct a Home Inspection
Ordering a home inspection is something you want to do as soon as you go under contract. As one of your biggest purchases — and investments — you want to be sure that you know as much as you can about the condition of a home before it becomes yours.
Home inspections are so common that they’re often included as a buyer’s contingency. Although some markets discourage a home inspection contingency, prospective buyers should always perform an inspection before they take ownership of the home — even on new construction.
Your real estate agent likely has numerous recommendations for licensed inspectors, if you don’t have one of your own. These inspectors are trained to look for defects in the home, which may include electrical issues, faulty plumbing, drainage issues, high radon levels and other health and safety hazards.
Such inspections will generally run at least several hundred dollars and will take roughly a half-day to complete. A few days later, the inspector provides a comprehensive report (either printed or online) that outlines any faults or deficiencies. Unless you have waived the home inspection contingency, you then have the option to request that the seller fix some or all of these deficiencies.
Your agent will again go back and forth with the seller’s agent to negotiate the items to repair until an agreement is reached.
If the seller does make the requested repairs (he may choose to instead give you a cash credit at closing in exchange for the estimated cost of the repairs), you have the right to do a final walkthrough immediately before closing to confirm that repairs were made, and to verify the condition of the home.
Order an Appraisal
When you’re ordering the home inspection, you should also order a neutral, third-party appraisal. A trained appraiser visits the home — inspecting its location, features and condition, as well as making a comparison between your home and similar homes in the area that have recently sold — to determine a fair market value. Homeowners nationwide generally spend between $200 and $425 for an appraisal.
This is vitally important to buyers to ensure they aren’t overpaying for a home.
Go Through Loan Underwriting
Now it’s time to get your final loan approval, using all your documentation. Most loans are conditionally approved, meaning you often have to provide even more information for the final approval. These conditions generally fall into three categories:
• Explanation and correction of anomalies. The lender may ask you to clarify discrepancies in your documentation.
• Verifications and attestations. Further verification of the origin of funds, income or the like.
• Supplementary documentation. Any last pieces of data that can clarify financial information, such as tax documentation.
Research Homeowner’s Insurance
Finding the right homeowner’s policy is important, as this insurance protects your biggest investment — and it’s required to get your final loan approved. Besides that, you want to be sure your new home is protected in the event that disaster strikes.
You’ll need to prove at closing that you’ve taken out a policy and that it’s effective as of the closing date.
Closing on Your New Home
As a Chicago first-time homebuyer, getting to this point of the journey is exciting. You’re headed down the home stretch, but there’s still some work for you to do.
The Final Walkthrough
The final walkthrough occurs as close as possible to closing — the day before or the morning of are ideal — to make sure all inspection items have been addressed and that no new issues have surfaced. Even if something does surface, it doesn’t have to delay closing. The realtors can often work together to resolve any outstanding problems.
Once the final loan underwriting has been approved, you’re ready to close on your new home — you may also hear it referred to as “going to escrow” or “settling.” This means your lender is prepared to fund your home and work with a settlement company to prepare the closing documentation. The closing itself is simply the legal transfer of ownership of the home from one person (or company) to another.
You should be sent a copy of your final settlement statement, known as the HUD-1, before the closing date. It’s important that you carefully review the information and ensure it’s correct before you arrive at the closing.
At the closing, the seller, the seller’s agent or your agent may or may not attend. You and the closing officer will review each piece of paperwork to ensure it’s error-free. This process can be quick, or it can take a few hours.
After the closing, you’ll get the keys to your new home, as well as any other important items (like garage door openers) and documents (some sellers will provide manuals and warranties for items in the home).
Taking the First Steps Toward Home Ownership
Owning a home is an important part of many people’s long-term investment strategy — but it’s not for everyone. It’s a significant investment and commitment that requires ongoing financial solvency, but now you should have a better understanding of the process that starts at wanting to become a homeowner and ends with keys in hand.
If you’re ready to take the first step toward becoming a first-time Chicago homebuyer, we invite you to review our featured listings. And if you see something you like or simply want to know more about the home-buying process, contact us. We’d love to help make one of our houses your first home.