Welcome to the complete guide of owning your first home.
As a licensed real estate agent and 15 years as a real estate investor in Middle Georgia, I want to convey to you my personal experience and training to own your first home. A few topics this will cover are:
- Credit score
- Qualifying for your mortgage
- Finding the affordable home you want
- Papers you will sign
- Buying a home in Georgia
- Closing attorneys
- Insurance and Taxes
- Basic repairs on your home
**The following is for information purposes only. We are not financial advisors. This information is based on personal experience. All banks qualify borrowers on their own criteria. Shop around.
It all Starts with Credit
Most new homebuyers are not wealthy enough to buy their first home with all cash out of their pocket. If they are, they are probably smart enough to not do such a thing anyway. Before talking to a bank about getting a loan, there are a few things to have ready before that meeting.
A credit score tells the bank if you are a safe bet to loan to. After all, if a new homeowner does not pay back the bank, the bank (in essence) has bought a home they didn’t want. Banks don’t want homes; they want interest from loans. If they don’t feel comfortable that you can pay the loan back, they will not lend to you.
Again, all banks are different, but most banks require a minimum credit score of six hundred forty (640) to qualify for a home loan. The higher the score, the more you can negotiate a lower interest rate. Since all US citizens are allowed a free copy of their credit report every year (but not the score), get a copy of your report. One website to get a credit report is Annual Credit Report.com. After you have a copy from all three credit bureaus (Equifax, Transunion, Experian), do the following:
Make sure your credit score is accurate;
- Personal information
- Old and new accounts show accurate payment history. Open and closed dates are correct.
Submit a correction to each credit bureau for any wrong information.
Points to be aware of:
- Hard (full) credit inquiries can hurt a credit score, call each company on the list and ask them to remove the inquiry.
- Know your credit score before talking to any lender. Don’t let lenders/dealers pull your credit unless they can offer lending with the credit you tell them you have (keep in mind, you will have to prove the score you claim).
Challenge late payments with the credit bureaus, even if you’re not sure it. They may take it off.
The easiest way to improve your credit score is:
- Open small credit card or loan accounts. Charge a little and pay it off each month (small loans too).
- Increase credit limits over time and pay on time.
What makes the best credit score.
- Accounts opened 3 years or longer
- Keep high limits and low balance (pay off each month is best)
- Show monthly activity (charge something, pay it off)
- Pay all accounts on time or a few days early.
- As few hard inquiries as possible
- Total Credit vs used credit is low (prefer 30% or less. Amortized loans like cars and homes have structured payments. Cannot be adjusted)
Qualifying for your mortgage
A new homebuyer will need a few more items to show the bank when qualifying for that first home loan. The other points the bank will look at are your debt-to-income ratio and your provable income. Both of these must meet a minimum threshold. These numbers can be different for each bank. Make sure to shop around.
Provable income for a first-time home buyer.
Many entrepreneurs and business owners will tell you they cannot get a loan from a bank. Reason being, their business does not give them a W-2 paycheck income. Banks like to see a steady income going specifically to the borrower. Keep bank statements and W-2 income paystubs for at least three years. If you own a business, pay yourself a W-2 income.
Banks will lend to a borrower based on a percentage of the income they produce. A percentage of the borrower’s income will go to the loan payments (20%, 30%, 40%. This can be different for each bank). Monthly income will determine how much monthly payment the borrower can afford and, in turn, how big of a loan amount the bank is willing to offer.
Example; $3000/mth income x Bank threshold (27%) = Total payment max allowed, $810/mth.
Your Debt-to-Income ratio
A new homebuyer’s total debt-to-income ratio is also part of this equation. The bank will want to see that the borrower’s total monthly expenses are not over a certain percentage of their total income. Credit cards, Student loans, Car loans, Alimony and child support are examples of other debts that must be factored in.
All these costs, plus your future mortgage payment (which includes-principle, interest, homeowners insurance and property taxes) minus your total income makes up your debt-to-income ratio.
Example; $3000 Total income (stock dividends, w-2 job, etc.) – $1600 Total and future debts = $1400 net cash. 1600\3000= 53% debt-to-income (Which may be too high for some banks).
Finding your first home
Now that you are pre-approved for a loan, you can find a home. This is where an experienced real estate agent (Like Me) provides value, insight, and reduces uncertainty. Just like people who think “speed limit” is the suggested speed for a stretch of road, many people think a pre-approved loan amount should be the target price for their new home. NOT TRUE!
Until you get comfortable living and maintaining a home, it is wise to start small. Most starter homes are less than 1500 Square feet for a reason. Many new home owners can’t afford that much. A smaller home is also easier to keep up. A less expensive home also helps you budget for extra expenses like;
- Broken windows
- Leaky faucet
- Storm damaged roof
- AC repair
- Circuit breaker replacement
- Lawn care
- Broken toilet
- Carpet cleaning
Many first-time home buyers only want to look at the newest homes they can afford. They soon find new houses have “issues” to iron out. Don’t be afraid to look at older houses. If someone else lived in the house first, someone else has already taken care of the “gremlins” that come with a new construction home.
As an agent and investor, I know where to find the neighborhoods in middle Georgia that fit your needs.
Your first home should be maintained by you. This is cheaper than hiring someone and it’s a good learning experience for any homeowner.
Papers involved with your new home
Once you have a home in mind, it’s time to make an offer. Many people don’t know this, but everything is negotiable. Many people (myself included) have haggled for; cars, lawnmowers, trampolines, appliances, window fixtures, furniture and many other items to sweeten the purchase of that new home. Don’t be afraid to ask. It would be a good idea to have your own real estate professional help you with this part (the listing agent is not a good idea. They represent the seller).
Get an inspection report.
Once there is a signed agreement on the purchase of your home, next is usually the inspection period. Even if your lender doesn’t ask for a home inspection, get one anyway, even if you have to pay for it yourself. Here are some things a home inspector should report on:
- Condition of the roof
- Any plumbing leaks
- Broken or chewed wires
- Condition of the AC unit
- Outlets not working
- Cracked foundation (big expense)
- Rotted wood/siding/facia
- Drainage problems
- Poor insulation
- Septic issues (if applicable)
- Soft or rotted Floors
- Dangerous condition
Once you have an inspection report, you have a bargaining chip to re-negotiate price with the seller, if need be. This will also protect you from buying a problem home that will cost you a lot more later.
Is this home worth the price
Most lenders will ask for an appraisal also. This is an evaluation of how much the home is worth compared to similar homes in the area that have already sold. Most appraisals report the value of a home in similar conditions as well, meaning any damage or repairs that are needed may not reflect in the appraisal. Unless the home is obviously a full rehab or the appraiser is made aware of the lesser condition, the report will most likely reflect an after repaired value (ARV).
In Georgia, a termite letter will also be required by the lender to ensure there are no active infestations in the home.
Other papers you may need to ask for (or your agent to get) are;
- Septic/building permits
- Septic inspection (If applicable)
- Current home warranty
- Written right of ways
- Authorization to sell (home in probate)
- Crime reports for the area
- Sexual predators report
- Repair receipts
Use your real estate agent’s expertise to guide you thru this part.
Your home is going to closing
The next two parts are dependent on each other. In Georgia, real estate attorneys are the closing body for real estate transactions.
As a buyer, you are going to be signing papers for many people. Here is a basic list of what papers and why;
HUD-1 – Balance sheet explaining the buyers and seller side of the transaction and where the money is going (loan funds, taxes due by seller, closing coasts, agents’ fees, earnest monies already pid, etc.). This document should be emailed to you a day or two before closing so you have time to review it and make corrections. Call the attorney before closing and remind them if you don’t receive it.
Warranty Deed – Seller will sign over a warranty (or limited warranty) deed, conveying ownership to you as the buyer.
Promissory note (mortgage) – This document is your I-O-U to the bank. It explains how much money you agree to pay back the bank and how you intend to pay (terms, interest, payment schedule, fees, etc.).
Security Deed – Now that the home is signed over to you, you can now sign a pledge to the bank; If you do not pay the mortgage (note), the bank will have the right to sell your home to recover the money you owe them. In that time, you agree to keep certain terms and conditions honored (pay taxes owed, keep insurance on the home, etc.).
Other papers you may have to sign include;
- HOA Agreements
- Waiver of rights
- Waiver of survey
- Hold harmless letter
- Confirmation of identity
Ask the closing attorney for a copy of any papers you will be signing before the closing. If they can’t, at least don’t be afraid to ask questions at the closing table. You’re taking on a loan and a home. Make sure everything is as you expect.
** Do not loss these papers. Make sure to file them in a safe place. In most counties in Georgia, only the warranty deed and security deed are recorded in the clerk of court by the attorney.
Repairing your new home
Some of the expenses of keeping a home were mentioned before, but here are a few more to be aware of as a first-time homeowner. Keep In mind, you should have seen your parents do some of these repairs or they may have asked you to do these chores growing up;
- Gas to mow grass
- Trimming trees and shrubs
- Digging out drainage ditches
- Cleaning gutters
- Loose flooring
- Cracked window
- Fixing faucets/ toilets
- Patching holes in the wall
- Replacing the screen door
- Replacing outlets/switches
None of these items are a big deal, but be aware that if these items need to be fixed, you should have the money set aside to afford it. Many landlords will set aside $50/mth for repairs on rental properties. It is a good idea for new homeowners to do the same thing. If you can’t, that is an indication to look for a more affordable home.
When you are ready to buy your first home, I hope you will trust me to guide you thru this process guide you thru the process.
Good Luck and when you are ready to buy your first home, Contact Chris.