All homebuyers need guidance from a seasoned real estate agent, but first-time buyers, in particular, may require a little more hand-holding based on their lack of experience with buying a home. Aside from the obvious assistance they require in terms of finding the right home and negotiating a good deal, first-time buyers will also need a little guidance when it comes to securing a mortgage.
Here are a few suggestions that you should make to your first-time buyer clients when it comes to getting a mortgage:
Pull a Credit Report
All first-time buyers should have a clear understanding of what their credit score is before they apply for a mortgage. Knowing what their score is can give them a better idea of how likely they will be to get approved for a home loan and what type of interest rate they can expect if they do get approved.
This will also give them a chance to make any necessary adjustments to improve their credit score if they discover that the number is lower than they thought it would be.
Lenders typically prefer to work with borrowers who have a strong credit score, as this lessens their risk when lending out money for mortgages. Generally speaking, borrowers should ideally have a credit score of at least 700 in order to increase the chances of getting approved for a conventional mortgage. However, loans like the FHA Loan will have much lower credit score requirements but will look more closely into metrics like debt-to-income ratio.
Get All Paperwork in Order
Applying for a home loan involves a ton of paperwork, so agents should give their clients a heads up about all the documentation that lenders expect from borrowers. Documents such as employment letters, paynstubs, tax returns, W-2s, and many others may be requested from lenders to help them assess borrowers' financial capabilities of affording a mortgage of a certain amount.
Without such documentation, lenders will have nothing to go on when determining whether or not to approve a mortgage. By having such paperwork ready to submit, the process can move along much faster and closing costs can be kept to a minimum.
Once first-time homebuyers know what their credit score is, they should get in touch with a mortgage broker to start the pre-approval process. While getting pre-approved for a mortgage is not mandatory before looking at houses, it offers plenty of benefits.
For starters, getting pre-approved can help buyers understand what they can afford, which will help them narrow down their choices when searching for homes. It will also help give them a competitive edge with sellers when there are multiple buyers looking at their homes at the same time. Sellers often prefer that the buyers they negotiate with have already been pre-approved.
Being pre-approved for a mortgage can also get the mortgage approval process moving along faster after an offer has been accepted since much of the paperwork has already been submitted to the lender.
Don't Borrow Up to the Limit
Just because borrowers may be approved for a certain mortgage amount, that doesn't mean they should necessarily spend up to that limit. There are so many expenses involved in buying and owning a home that first-time buyers need to be aware of, and maxing out their mortgage to buy a more expensive home can just wind up making them "house poor."
Real estate agents should suggest to their first-time buyer clients that they look at homes in a slightly lower price range compared to what their pre-approval letter stipulates. This will help give them a bigger financial cushion that will leave them with more money in their pockets to be spent on other expenditures related to homeownership.
Try to Gather Up a 20 Percent Down Payment
The down payment is a crucial component to getting a mortgage, and just about every type of mortgage product will require one. While conventional mortgages require a five percent minimum down payment, borrowers are often encouraged to put down at least 20 percent towards the purchase price of a house simply because it will eliminate the need to pay for Private Mortgage Insurance (PMI).
This insurance premium is required by lenders when borrowers put down less than 20 percent because the risk is higher for lenders when the loan-to-value ratio (LTV) is very high. By putting down at least 20 percent, borrowers can save on this extra expense, which can cost between 0.5 percent to one percent of the loan amount on an annual basis. That means borrowers would be saving as much as $1,000 per year on a $100,000 loan, based on a one percent PMI fee.
This is a general suggestion, and may not be feasible in markets such as San Diego, but if you're able to save up this much, doing so can benefit you greatly.
Real estate agents should encourage their first-time buyer clients to shop around for a mortgage rather than simply heading straight to their local bank branch for a mortgage. An easy way to shop around would be to employ a mortgage specialist who will do all the legwork for the buyers.
These professionals typically work with a network of lenders, each of which works with specific types of borrowers in order to ensure a good match. Mortgage brokers can comparison shop on behalf of borrowers to find mortgages with the lowest interest rates and more favorable terms.
As a real estate agent, you have plenty of tasks on your plate when it comes to adequately serving your clients. First-time homebuyers, in particular, might require a little more assistance throughout the process simply because of the fact that this is a completely new ballgame for them.
Since they've never had to take out a mortgage before, your job as a helpful agent would be to help them navigate the world of mortgages along with the assistance of an experienced mortgage broker to ensure that they go into the process fully armed with as much information as possible to make an informed decision.