Top 5 Tips for First-Time Home Buyers in 2016

Will you be a first-time home buyer in 2016? If so, you probably have a lot of questions about how to make your first purchase. This website is designed to answer as many of those questions as possible, and in plain English. But let’s start with some basic tips to get you started off on the right foot.

Top-5 Home Buying Tips for First-Time Buyers in 2016

This article includes five of the most important tips for first-time home buyers in 2016, with an emphasis on current housing market and mortgage industry trends. It is designed to get you started on the right foot, when buying your first house.

1. Figure out how much you can afford to pay each month.

Pop quiz. What can you afford to spend each month toward a mortgage payment? If you don’t know, you’ve got some math homework to do before you start talking to lenders. Some very important math homework.

First-time home buyers often look to their mortgage lenders for budget advice. But that’s not the lender’s job. The lender will simply measure the risk associated with giving you a loan, and charge an appropriate amount of interest to generate a profit. That’s what they do. Coming up with a housing budget is your job, and you need to do it early on.

Some financial advisers recommend spending no more than 28% of your monthly income on your total housing costs. Another rule of thumb is to keep your total monthly debts (including the home loan and everything else) below 36% of your gross monthly income. Statistics have shown this to be a manageable level of debt for the average consumer.

Just bear in mind that these are guidelines. As a first-time home buyer in 2016, your budget should be fine-tuned to match your specific financial goals and habits. So feel free to deviate from the “rules” if necessary.

2. Check your credit scores.

When you apply for a mortgage loan, the lender will check your credit scores to see how you have borrowed and repaid money in the past. That’s what this three-digit number shows them. It’s a direct reflection of your borrowing history.

A high score indicates that you have repaid most, or all, of your debts on time. A low score suggests you may have had trouble repaying bills in the past. Mortgage lenders will also check your credit reports, for an account-by-account breakdown of your borrowing habits and history.

Lenders have different standards for home buyer credit scores. So there isn’t a single number that will “make or break” your chances of qualifying for a loan. In general, a FICO credit score of 620 or higher will put you in a good position to buy a home, while a score of 750 or higher could help you qualify for the lowest interest rates. But these numbers are not set in stone.

3. Consider your debt-to-income ratio.

I know, it sounds like something economists might discuss during a cocktail party. Debt-to-income ratios. Yawn. But as a first-time home buyer in 2016, you need to understand this concept because it can help or hinder your chances of getting a home loan.

As its name suggests, the debt-to-income (DTI) ratio compares the amount of money you earn each month to the amount you spend to cover your recurring monthly debts. Lenders have used DTI ratios for a long time, but they’ve become more important in recent years. First-time home buyers should be aware of this all-important qualification criteria.

Here’s what it boils down to. If you currently have a lot of debt in relation to your monthly income, you could have a harder time qualifying for a mortgage loan. On the other hand, a lower and more manageable level of debt could aid your cause and help you get approved.

DTI standards and limits vary by lender (you’ll notice a pattern here). These days, most mortgage lenders in the U.S. seem to be setting the bar at around 43% for back-end debt ratios. This means that if your total monthly debts — mortgage payment, car payment, credit cards, etc. — use more than 43% of your gross monthly income, you might have a harder time landing a mortgage loan. And vice versa.

4. Get pre-approved for a home loan before house hunting.

During the mortgage pre-approval process, the lender will examine all aspects of your finances to see if you’re a good candidate for a home loan. They’ll also tell you how much they are willing to lend.

Why should 2016 first-time home buyers bother with a pre-approval? Here are three good reasons:

  • Real estate agents will be more eager to work with you.
  • Sellers will take your offer more seriously, compared to a buyer without a pre-approval.
  • You’ll be able to narrow your home search based on affordability, thereby saving time.

Mortgage pre-approval can make the entire process go more smoothly. And when it comes to buying your first home in 2016, smoother is definitely better!

5. Study your local real estate market with an eye on sale prices.

First-time home buyers often have unrealistic expectations when it comes to their budgets. They want to check all of the boxes on their wish list, even when their budgets fall short. This can create a lot of frustration and heartache — just ask a veteran real estate agent! It can also cause problems during the negotiating stage.

Fortunately, these problems can be avoided with a little homework on your part. Before you start shopping for a house, spend some time examining local home prices. Use real estate websites like Zillow, Trulia and Zoom in on your local housing market and look at recent sales prices. This is the most accurate indicator of what the market is doing, and what you can get for your money.

So there you have them, five of the most important tips for first-time buyers in 2016. In closing, I leave you with one final tip…

Download our free e-book, How to Qualify for a Home Loan in 2016. It offers more than 50 pages of useful information for mortgage shoppers. You’ll find it in the upper-right corner of every page of this website (or down below, if you’re viewing this website on a mobile device). You can download the e-book in PDF format for easy reference, printing, etc.