Here’s some helpful information for first time homebuyers. I was once in your shoes and I remember feeling very overwhelmed by all of this. There’s a lot to learn but you’ll get through it! I’m here to help!
One of the first steps in this process might be to get your credit sorted – the better your credit score, the better your rate will be. If your score is below 740, it may be worth your time to try to increase it before applying for a mortgage. It can save you money on your monthly payment. Note that if you’re co-applying for a mortgage, everyone on the loan’s credit scores count together.
- Consumer Reports – How to fix your credit score – great place for some suggestions on how to fix your credit. Also try YouTube, or Google for more suggestions to build or fix your credit.
- Sign up for a free account a Mint.com – you can get a free monthly credit score there and it’ll give you suggestions on how to improve your score. Great app overall for managing your money.
Down Payment & Closing Costs
Another big step (and one that can take awhile) is to save up for a down payment and closing costs. Putting at least 20% will get you a lower monthly payment, and can strengthen an offer in a competitive situation. Most lenders will allow for less than 20% down (some as low as 3% or less), but you’ll likely need to pay for private mortgage insurance (PMI). If you’re getting a gift for part or all of the down payment know that lenders generally want that money already in your account before getting into contract. Double check with your lender.
Expect to spend another $8-15k on top of your down payment for closing costs. Closing costs are the fees and taxes charged for the transaction. Your lender will give you a loan estimate which breaks down all those estimated fees for that transaction.
You’ll also need some extra cash to pay for the home inspection (maybe $800-$1000) and don’t forget moving costs!
First Time Homebuyer Programs
Check to see if you qualify for first time homebuyer programs. (Also check here). Some offer better rates, help with down payments and more. The Oregon Bond is also worth looking into. There may be more not listed there — do some research, it’s worth a look! Many folks over at Guild Mortgage know about these programs, so it may be worth having a chat with someone there if your lender isn’t familiar.
Lending & Pre-Approval
When you’re almost ready to start to look at homes, it’s time to get pre-approved! You send over a bunch of documents – proof of employment/income and down payment, what debt you have, your tax returns, your current expenses, etc. If approved, the broker or lender sends over a letter saying that as long as this info doesn’t change, we’ll give you a loan for a house worth $X.
If you have a regular W2 job, it’s more straightforward. You just need proof that you’re working there – pay stubs, tax returns, maybe an offer letter if you’re new. If you’re self employed it gets a little trickier. Typically you have to be self employed or have run your own business for 2 years and you’ll need to show proof of income for those two years. The income will be averaged together. If you’ve been self employed or run your own business for at least five years, some lenders can just use the income from your previous year only. Check with the lender to see how they do things.
Lenders calculate what they think you can afford based off your income to debt ratio, not how much money you make or how much money you have in the bank (or how much you’ve been paying in rent for all these years). Sometimes people can pay down debt (maybe you have just a little left on your car payment?) to increase that ratio and allow for more purchasing power.
Things to think about:
- Learn the difference between a mortgage broker and a mortgage lender. Brokers will re-sell your loan and can shop a variety of options available. Lenders (like the bank or credit union) may keep the loan in-house.
- Factor in the cost of PMI into your payment if you’re putting less than 20% down. Also factor in the monthly cost of the property taxes of the home you’re interested in. Know that property taxes often increase every year, and may increase quite a bit after you purchase the home as well.
- The rates for conventional and jumbo loans differ. A jumbo loan is a loan over $647,200 for 2022 (up from $548,250 for 2021, and it’ll be $714,000 for 2023). Jumbo loans are more difficult to qualify for, have some additional requirements and often have higher rates, but sometimes they’re better, so check both options if you’re borrowing around this amount.
- Fixed rate loans are recommended.
- Check out an amortization calculator to see how much interest you’ll pay over the life of the loan. Understand that the payments towards the beginning of the loan are mostly interest, while the payments towards the end of the loan are mostly repaying the loan itself. Know that most people don’t stay in a home for the life of a 30 year loan – average is 13 years nationally, and 11 years in Portland metro.
- Pick a lender based off rates and general competence and then get one pre-approval. Do not get several pre-approvals, it dings your credit. Also lenders work mostly or often completely off commission for closing loans, and don’t get paid to do all this paperwork for you – so it’s kinder to just do it with the one you want to go with.
- Once pre-approved do not mess with your credit (do not open a new credit card, or finance a new car etc) until house is completely closed and you have the keys. Don’t quit your job or change employment either.
- If you can’t qualify you may be able to get a co-signer like a family member or partner. Both your income and both your debt are averaged together, and both signers are fully liable for the payment if one defaults, so make sure they totally understand what they’re signing up for. It may affect their ability to get a mortgage themselves down the road too (this loan will go against their debt in the debt to income ratio).
Learn The Market
It’s not a bad idea to start learning the market. Get automatic emails set up from Redfin or Zillow and track how much they end up selling for. I can set you up with an automatic email from our RMLS system too, feel free to ask. It’s good to start to get an idea of what’s available in your price range.
Also see what neighborhoods you can afford and what neighborhoods you like and why. What’s important to you — commute time? Walkability? Access to dog parks? Proximity to coffee shops and restaurants? School districts? Portland Monthly’s article every neighborhood in Portland in a nutshell might be helpful to learn the neighborhoods.
Picking an Agent
You should pick a competent agent who you trust, like being around, and who makes you feel comfortable. You should feel like your agent is fighting for you.
Once you’ve picked an agent, work with that one agent only. Do not go see houses with multiple agents at a time. If that particular agent isn’t working for you, it’s okay to tell them you’d like to stop working together, and find another. But it’s important to have that conversation with them.
Buyers agents get paid by the fee of the sale of the home, so you don’t have to pay anything to work with your agent when you buy your home. The listing fee which was agreed upon between the seller and the listing agent is split with the buyer’s agent at closing.
Also don’t be tricked into thinking if you saw a house on Zillow or Redfin that you’ll have to use one of their agents to see a home. If you can see a house on those sites, any active licensed agent can get you inside to see. And if you contact an agent directly, they don’t have to pay Zillow or Redfin the massive commission fees.
When it comes time to start looking at homes, it’s important to look at the bigger picture and not get too caught up in the details of a home. What I mean is, don’t look at decorations or furnishings, look at room shape and size, workability, light, storage, and overall vibe of the place. Would that space work with your lifestyle?
You can change the bathroom tile or the wall color but you can’t change your location. Make sure that the location works for you! If you drive – how’s the parking? What’s in the neighborhood? You can even ‘walk around the block’ using Google street view before viewing a property, I do it all the time!
Check the home’s quality and updates – things that are expensive to fix include foundation repairs, new windows, roof, major electrical work.
Here are some additional ideas if you really like a home and are ready to put in an offer:
- Pay attention to, and maybe even talk to the direct neighbors. Do you think you’ll want to live next to this person for the next 5-10 years? Ask them how they like the neighborhood.
- Take a walk around the block and neighborhood and get a feel for the vibe. Consider doing it again at night.
- How loud is it if noise is important to you? Noise changes a lot during the day and night depending on car and air traffic, neighborhood activity, etc, so it’s worth also checking the How Loud website and the National Transportation Noise Map (includes plane, train and vehicle).
- How big is the lot?
- Check the area’s earthquake risk maps + geohazard maps + flood maps + more.
- Check the area’s crime maps + safety maps.
- Check that house’s history via public records on portlandmaps.com. Look for permits and general history data.
- You can also see if the property has had an oil tank already decommissioned on the DEQ’s database.
A local lender here in Portland Julee Felsman at Guaranteed Rate has prepared this Home Buyer 101 document for us, and there’s a TON of great info in there. If you’d like to learn a bit more that’s a great resource.
Fannie Mae has a free online Homebuyer Course called HomeView available in both English + Spanish. It takes about 3 hours to complete, and I think it’s worth taking. Let me know if you end up doing this!