Benzinga's 5-Step Guide For First-Time Homebuyers

First-time homebuyers represent roughly one-third of all buyers in today's housing market, and many often underestimate what needs to be done to prepare for their last rent payment and first mortgage bill. 

For the benefit of those making their first foray into property acquisition, Benzinga offers this five-step guide to understanding the homebuying process.

Step One: Can You Afford This? Let’s get the unpleasant truth out of the way first: buying a home is an extremely labor-intensive pursuit that requires buyers to be in the proper financial state. To determine one’s readiness, here are some criteria that need to be addressed:

• Are you carrying excess debt, either through student loans, medical bills, credit cards or other interest-bearing burdens? If you are, it is recommended to mitigate — or, even better, erase — that debt before moving forward.
• Do you have good credit? If you don’t know, go over to AnnualCreditReport.com and access free reports from the three major credit reporting bureaus: Equifax EFX, Experian EXPGY and TransUnion TRU. Shaky credit or worse will work against you when you apply for mortgages.
• Will you be able to start and finish the buying process? This endeavor is riddled with expenditures, from a down payment at the beginning to closing costs at the end and other expenses in between, including home inspections and appraisals.
• Do you understand what you're getting into? Homeownership comes with a multitude of costs, fees and invoiced services that take generous monthly bites out of a budget.

The folks at LendingTree TREE recommend spending no more than 28% of income on housing-related payments each month. Do a number crunch and determine whether you can keep up with the 72% of your income that is left over.

Related Link: Best Mortgage Lenders for First Time Home Buyers

Step Two: What Do You Want? Simply, what are your goals in acquiring a home? Will this be a starter house for a new family, or is this going to a long-haul residence for growing that family? Or have you watched a bit too much HGTV and believe you can fix up a run-down property for fun and perhaps a lucrative profit?

Are you planning to use the home as a combination residence and business office, or will the home be the embarkation and return point for a weekday commute? Are you comfortable in a community-type environment for condominiums and townhomes, or would you prefer fences and lawns to maintain a cordial distance from your neighbors?

If you are considering a home in an area where you have limited familiarity, start researching neighborhood data including crime, school quality, local amenities and commerce and access to medical care.

Many communities are the subject of Facebook FB forums, which offer a cross-section of comments from residents with something positive or negative to say about their surroundings.

Related Link: Best First Time Home Buyer Programs by State

Step Three: The Mortgage Process. There has never been a more wide and diverse selection of lenders for the potential mortgage borrower: banks, credit union, nonbank mortgage lenders, fintechs, federal loan programs and state housing finance agency programs are all competing for your business. That can be a plus and a minus.

On the plus side, mortgage rates remain at near-historic lows —Freddie Mac FMCC reported the 30-year fixed-rate mortgage averaged 3.13% for the week ending April 8, while the 15-year FRM averaged 2.42%.

This has brought more buyers to the market, and lenders are furiously competing to offer the most attractive loan programs to snag potential buyers.

On the negative side, a surplus number of lenders can leave a buyer spending a lot of time trying to find the right partner.

This can be a time-intensive activity, so schedule yourself accordingly. When you find a lender that you feel comfortable with, seek out a mortgage pre-approval letter, which will signal to home sellers and real estate agents that you are serious about a property purchase.

Related Link: Learn About Mortgages

Step Four: Using a Realtor or Going Solo? Working with a realtor is not a prerequisite for homebuying, but having an agent with a strong familiarity with an area and who might be aware of properties before they are listed is certainly advantageous.

As with choosing any vendor, do your research thoroughly – ask for recommendations, seek out online reviews, and don’t be shy about peppering the realtor with as many questions as possible, especially in relation to helping first-time buyers. Realtor commissions average around 6% and are usually split between the buyer and the listing agent.

But for those who seek greater control of the process, there is no shortage of websites and apps that can connect you with sellers. But being able to navigate the iBuyer route is predicated on both your research skills in locating the desired property and your negotiating skills in trying to reach a mutually satisfactory agreement with a seller or the seller’s representatives.

Related Link: The Mortgage Process: First Time Homebuyers

Step Five: Be Prepared For A Potentially Lengthy Journey. Today’s housing market is pockmarked with historically low inventory, and bidding wars for the few listed properties are not uncommon. The brokerage Redfin RDFN reported that 61% of the home offers written by its agents in February faced bidding wars, up slightly from 59.3% in January, while 36% of homes sold above list price, the highest percentage recorded.

On April 2, Redfin reported that asking prices of newly listed homes rose 14% year-over-year to $353,500, an all-time high. Affordable homeownership opportunities have been elusive in many major metro areas. Data from CoreLogic CLGX found home prices during February increased 16.2% year-over-year in Phoenix, 12.5% in Seattle and 8.2% in Los Angeles. At a state level, Idaho, Montana and South Dakota had the greatest price growth in February with 22.6%, 19.5% and 17.1% year-over-year increases, respectively.

Thus, the most important tool a first-time homebuyer could have is patience. It's a difficult housing market, but not an impossible one to crack. With the right financial and emotional planning, the American Dream can become a reality.

(Photo by Jens Neumann / Pixabay)