Buying a home is a significant milestone and a key component to building generational wealth. Sometimes the process can feel discouraging for first time home buyers, especially if you’re a Low-to-Moderate Income Buyer (LMIB), i.e., you earn less than $100,000 per year ($120k in NY and Northern NJ). If you’ve ever felt like the entire process is harder than it needs to be, there’s a reason for that. It’s not you. You’re not tripping! I’m going to give you some insider tips that you can only get here and reveal the biggest secrets that real estate agents and loan officers don’t want you to know about! This home buying guide is NOT the same-ol’ guide that’s all over the internet. This step-by-step guide will walk you through the steps AND THE MINDSET to achieving your goal of not only buying a home, but also keeping your home. It’s entirely possible to become a homeowner in 2024
Stress Less: Find a Housing Counselor
A voice you can trust
Finding a HUD certified housing counselor is an amazing idea for first-time homebuyers because they will hold your hand through the entire process and help cut through the information overwhelm. While you’ll eventually need a team of professionals to get you to the finish line (real estate agent, loan officer, home inspector, etc.), the counselor is on your side and is the only person that you’ll deal with who’s not getting paid directly from your deal! Everyone else has a financial interest in you completing your deal, so you may not get 100% transparency if it means that they won’t get paid. If a loan officer knows that you’ll be better going off with a different lender because the other lender has a product that better fits you needs, do you think that he’s going to recommend that you go to another lender? Absolutely not! He’s going to tell you that his company has what you need even if there’s a better deal out there (a lower interest mortgage rate, for example). If a realtor doesn’t know the ins-and-outs of a particular housing grant or has never done a multi-family before, do you think that she’s going to send you to her competition so that you have a smoother transaction? Don’t bet on it.
I’ve seen so many buyers accept very high mortgage rates because they didn’t shop around. They felt a sense of loyal to the loan officer who—I promise you—did not feel a sense of loyalty to them. First-time buyers (FTHB) often feel like they have to take the first mortgage preapproval that comes their way because no one else is going to approve them, right? WRONG! While it might be harder to get a pre-approval from your own bank or the first few mortgage lenders that you find on-line, your housing counselor will have relationships with lots of Community Reinvestment Act or CRA loan officers as well as lenders who specialize in LMI community lending. You have lots of options—not just the first one—and that’s one of the best reasons to work with a counselor.
Get assistance with your down payment and closing costs.
Another important advantage to working with a housing counselor is that you can find all sorts of grants, forgivable loans, and CRA lender grants & credits that your can use toward your down payment or closing costs. While your mileage may vary, I’ve seen buyers get the keys and take possession of their new home while bringing ZERO dollars to the closing table.
I mean, imagine paying rent to your landlord one month and then paying a similar amount to the bank the next month, but it’s your house . All without bringing thousands of dollars to the transaction?? Amazing! Y’all better stop playing and get this money! But if you don’t have a counselor to let you know which grants combine with each other or which lenders have “community money” you risk leaving a lot of money on the table.
Getting a Pre-Approval
Are you ready for a mortgage?
When it comes to mortgage readiness, FTHBs at all income levels of income end up comparing their ability to pay rent on time, to what they “should” be able to afford for a mortgage payment. But let’s break down exactly how lenders are going to look at your financial picture—and I need you to think like a lender, not as someone who just wants a loan—so that you can understand what to expect and how to start preparing NOW so that you can get the home that you deserve.
Can you pay?
The two things that every lender wants to know are “can you pay? ” and “will you pay? ” Can you pay has to do with your income and your income stability. Lenders want to understand your ability to repay a loan worth hundreds of thousands of dollars over the next 30 years . This is important to understand because it’s one of the things that can make your ability to pay rent very different from your ability to repay a loan. Your landlord isn’t giving you a hundred thousand dollars or more and if you don’t pay… you get evicted. He loses a couple of months of rent, but he keeps his property that he’s renting to you. But lenders aren’t at all interested in your home, they want the interest from the loan. They’re in the business of using money to make money and they are trying to figure out whether they trust you enough to give you a couple hundred thousand dollars! This is why sometimes, even if you’ve paid your high-rent on time for years, a lender won’t approve you for as much as you think you deserve.
Responsible lenders are interested in how stable your income has been over the last two years. They will determine this by looking at your most recent two W-2 forms, e.g., 2023 & 2022, your most recent two tax returns (form 1040), and a few of your most recent pay stubs. If there aren’t any concerning gaps in the most recent two years of employment and the amount that you’ve been earning isn’t up and down like a roller-coaster, then your income will be deemed stable. The question of “can you pay?” will be satisfied. If there are significant gaps, you may need to explain what happened during the time.
Will you pay?
If “can you pay” is about determining you ability to pay, “will you pay?” is about determining the the likelihood or your willingness to repay.
Because no one can tell the future, lenders will use your past behavior as the best indicator of your future behavior. Will you pay in the future? Well, have you paid in the past?
This is what your credit score is all about. Your score is like a little snitch that tells potential lenders what you’ve been doing. And while some lenders don’t use credit scores at all, having good credit shows that you have consistently paid your debts on time (credit cards, car notes, personal loans) and that you’ve been doing it for a long enough time, that they can bank on it. See what I did, there?
What credit score should you have?
The bare minimum that some lenders will accept is a score of 580. And while this may open a few doors, terms are likely to be unfavorable and getting a home-loan at this score will probably cost your more over the life of the loan.
While it’s generally true that the the higher your score, the better; having a score of 620 will show a lot more lenders that you’re ready for a mortgage and you’ll have more pre-approval opportunities and more favorable mortgage rates.
How Much House Can You Afford?
Your maximum affordability is going to be determined by your gross monthly income (gmi), or, how much you make monthly before taxes and deductions. But why monthly? Ultimately, you pay your rent, utilities, debts, and eventually your full mortgage payment from month to month. Thus, your true affordability will be a percentage of your gmi , or gross monthly income. This percentage, also called a front end ratio, will usually range from 29%-31%, but some I’ve seen some lenders go as high as 42% which is a double-edged sword for the buyer. But the front end ratio is just the maximum that you should be able to afford. It doesn’t necessarily mean that you can actually afford that much monthly.
In order to figure out what you can actually afford, we also have to take your current debts into account. Your debts come from all the things that you bought with someone else’s money. Money that your borrowed. E.g., your car note, your credit card payments, your student loans, any personal loans, buy-now-pay-later schemes (Affirm, Klarna, Afterpay) etc. Sometimes, if all these payments add up to a hefty enough monthly payment, you’ll actually end up being able to afford less. Banks simply don’t want to take the risk of not getting their money back if you’re already laden with debt.
Your PITI
Together your gmi and your monthly debt obligation will determine your PITI amount, or the amount that your lender determines you can afford to spend from month to month on a mortgage payment. PITI stands for principle, interest, taxes, insurance. It comprises the monthly principle amount due of the loan, the monthly interest amount that you’ll pay, property and school taxes, and homeowners insurance. And because lenders will have different ratio guidelines you find that they won’t all offer you the same amount in a pre-approval.
But be careful, just because a lender offers your more, that doesn’t mean that that’s what’s right for you. Lots of people buy homes that are way past what they should be able to afford, only to end up dead broke and in foreclosure within a few years.
Reach Out To Lenders
There are lots of lenders on the national stage, but most often your local lenders can offer you a loan product that better fits the needs of your local market. Start with local lenders to see what they have to offer you. Even if you can’t walk into a branch and talk to a loan officer (and sometimes you can) your local lender will certainly have a phone number where you can reach someone local.
Shop Around For 3 Pre-Approvals!
It will forever be tempting to just run with the first pre-approval that you get. This is especially true if it’s an online lender and you feel desperate. Don’t rush in this process! When was the last time you made a great decision under time pressure? Take the time you need to make a clear headed decision… and compare.
Different lenders will offer different incentives, different interests rates, differing loan products, and different approaches to mortgage insurance. You’re not going to know what the best fit for you is, if you don’t shop around. If you get three different pre-approval letters within 30 days, it won’t affect your credit score 3 times. It will only count as one hit to your score.
Doing it this way will allow you to minimize how much it affects your credit while also being able to compare and contrast which bank is going to offer you the best deal. Remember, you’re going to have this mortgage for the next 30 years. It’s going to be like getting married. You wanna make sure it’s the right one, baby.
Find a Great Real Estate Agent
Real estate agents are a dime a dozen. I would try to prove it to you, but I know you already know it. Everybody has a cousin or someone they went to school with that’s a realtor, realtist, or free real estate professional. This presents a problem because you want to be loyal, but you also want the best.
Let me tell you: it’s IMPERATIVE that you find a competent real estate professional. I’ve seen lots of botched deals by inexperienced beginners and it’s always heartbreaking when the buyer has to suffer. Here are some things to ask that you definitely want to know.
1-How long have they been doing this?
Lots of people, including your high school friend, want to buy and sell homes because the barrier to entry is so low. Again, I’ve seen some newbies drop the ball in negotiation and buyers sometimes lose their earnest money because of it. While everyone needs to start somewhere, that’s not your issue; you want to shop for homes with someone who has tons of experience.
2-Do they have another job?
Many newbies and ineffective realtors have another job because their business isn’t sufficient enough to sustain them. As a FTHB, this is a red-flag. You need someone who understands the real estate market, how to negotiate, and how to work with the other professionals on your team.
3-Do they understand the grant programs in your area?
Post COVID, work-from-home unleashed a downpour of outside buyers on just about every city and, as a result, increase buyer competition in the housing market. That increased competition is going to mean high prices as the housing inventory is snapped up.
For this reason, applying for grants, CRA funds, lender credits, and forgivable loans will be critical in helping to make you more competitive in the housing market and also allowing you to afford a little bit more than you would otherwise be able to.
Agents that don’t understand the grant products often submit documents late and have poor communication with lenders and counselors because they’re not used to needing to more than their regular wheelhouse. So, experience counts.
Time To House Hunting
Wants vs. Needs
With your pre-approval and your counseling certificate, it’s time to go shopping for what you… NEED.
Lot’s of buyers have a vague sense of what they w0uld like to have, but they don’t have a tangible list. As you go out shopping, lots of homes will catch your attention and will have competing, shiny features that will make it hard to choose. Don’t waste your time and energy doing this way. Make a list.
Start with your needs . What are your must-haves? For me it was a dedicated space for writing, separate rooms for the kids, and a kitchen where I could work my magic!
I also wrote down my wants at the bottom of my needs list. Things that would be “nice to have”, but wouldn’t break the deal for me. For me it was a dedicated space for working-out (which I’ve never used) a bathroom that I loved, and a backyard space (I settled for a back patio). After looking at enough properties, I couldn’t decide. I had visions of dinner parties and summer drinks in my head. But then I took my own advice and made a list. They next day I was able to separate the wheat from the chaff and picked a place that had all of my needs and a few of my wants. Don’t mess around with keeping an “idea in mind”. WRITE IT DOWN!
Check out the neighborhood
Everything looks amazing when it’s being presented in the best light. But you’re not just getting a house, you’re also getting a neighborhood. Be sure to check out the neighborhood in the daytime and the nighttime.
- Does it feel safe for you and your family?
- If you drive, is parking adequate?
- If you take public, can you get to work easily?
- Is there a supermarket nearby?
Don’t let anyone tell you which neighborhoods you should or shouldn’t want. You’ll be there for the next 30 years so choose what’s right for you.
Make an offer!
Now you’re pretty much ready to make an offer! You’ve read this article (nice work!) which should give you some sense of your gmi and your affordability. Of course, without a credit-pull you won’t have a exact sense, but you should understand your actual ballpark. Your housing counselor will do a soft credit-pull (meaning it will not affect your credit) and they will give you a much clearer sense of what you should be able to afford based on your income and your debts. Your lender may go a little higher or lower, but they’ll work together to help you get an amount that works across the board.
As you shop with your realtist or realtor, you’ll eventually find a home that meets your needs and you’ll make an offer. You’ll get to see the property in its entirety during the showing and inspection, but your final walk-through will be your last chance to make sure that everything is right and as you remember it (e.g., the sellers didn’t take the stove with them). Lots of buyers will take their last tour the day before and even the day of closing.
As you come to the closing table, you should have already have had a preview of all of the documents that you’ll need to sign. Please read. Thirty years is thirty years. Please ask questions if you have any unanswered questions or any doubts.
Once you get the keys, CONGRATS! You’re a homeowner. The only think left to do is let me know when the first cookout is.
‘ppreciate you.
F.A.Q. – Frequently Asked Questions
How long will the process take?
Most of the time, this will depend on your level of readiness: your income stability, whether or not you need to pay down debt, and if you need to increase your score. If all of your ducks are in a row, I’ve seen people go from pre-approval to key-in-hand in two months. I’ve also seen people take two years. Remember: you are steering this ship and your team can move no faster than its captain.
Can I get a co-signer?
While just about any lender will allow for this, many of the programs designed to help FTHB will have stipulations as to who can be on the loan. Often, they want whoever is going to be on the loan to also live in the house. So if you’re getting assistance, make sure that you want to live with the person who co-signs.
What if I owned a house years ago?
As long as you haven’t owned a house in the last three years, you’re still considered a First Time Home Buyer.
