In recent years, Colorado has become one of the most desirable places to live in the country. Fort Collins, in particular, is a popular location, and as a result, the housing market is very competitive. If you’re a first-time homebuyer, there’s a lot to get familiar with before securing the perfect home. Buying a home in a competitive housing market is a complex and challenging task that requires strategic planning and quick thinking. Multiple factors such as low interest rates, high demand, and limited inventory often lead to intense competition among potential buyers. Homes in such markets typically sell quickly, often resulting in bidding wars and properties selling above their asking prices.
Despite the rigorous process, securing a dream home in a sought-after location can be an immensely rewarding experience. Here are 8 things that every first-time homebuyer should know.
What Can You Afford?
One of the most important first steps is determining how much you can afford. For the vast majority of first-time buyers, purchasing a home outright with cash is not feasible since the current median home price in Fort Collins is over $500,000. Even if that figure sounds completely unattainable, don’t worry, that’s where taking out a mortgage can help.
A mortgage is a loan taken out to buy property or land. Most run for 30 years, but the term can be shorter or longer. Most mortgages require you to put a certain amount of money down, (usually at least 3% or more of the purchase price as a deposit), and borrow the rest of the money (the mortgage) from a lender such as a bank or building society.
The loan is ‘secured’ against the value of your home until it’s paid off. If you can’t keep up your repayments, the lender can repossess (take back) your home and sell it so they get their money back.
So, returning to the question of what you can afford, the real consideration is: what size deposit and how much in monthly payments can you afford
Deposits and LTV
The total cost of your home will obviously affect the size of your monthly payments, but so will the amount of your down payment.
When talking about mortgages and down payments, you might hear people mentioning the ‘Loan to Value Ratio’ or LTV. This is simply the amount you’ve borrowed to buy your home (the loan) compared with the mortgage lender's valuation of the property.
For example, if you buy a house for sale in Fort Collins for $500,000, put down $50,000 as a deposit, and have a mortgage of $450,000 – your LTV is 90%. This is because the amount you’ve borrowed ($450,000) is 90% of the home’s value ($500,000).
The lower the LTV, the lower your interest rate is likely to be. This is because the lender takes less risk with a smaller loan. The cheapest rates are typically available for people with a 40% deposit, which is a 60% LTV. On the other hand, you may be able to buy a home with as little as 3% down depending on the loan type, amount, and credit score.
Private Mortgage Insurance
Most mortgage lenders also require private mortgage insurance (PMI) if you bring less than 20% in down payments. This insurance (that is protecting the lender, not you) will be added to your monthly payments but can be canceled once you reach 20% equity over time.
PMI, therefore, adds complexity to the overall question of affordability. Paying a 20% down payment may not be possible for all individuals (and may seem expensive at face value), but keep in mind that this higher down payment will in turn earn you a lower interest rate and allow you to avoid paying PMI every month!
Across the entire course of ownership and mortgage repayment, you will spend less money overall if you can put down at least 20% upfront. Just remember to not go beyond your means in order to do so.
Other Costs to Consider
Apart from your down payment and monthly mortgage, there are other costs to consider when buying a home.
These include:
- Appraisal fees
- Home inspection fee
- Origination and unwriting fees
- Moving costs
- Homeowner’s Insurance
- HOA dues if you’re moving to a neighborhood governed by a Home Owners’s Association
Credit Score
Lenders want to see that you are a reliable borrower when they are assessing your mortgage application, so it helps to have a good credit score. You’ll want to check your credit rating before you apply for a mortgage so there aren’t any surprises. It’s a good idea to do this several months or even a year or more in advance so you have time to improve your credit rating.
A few easy and quick steps to improve your credit include:
- Closing unused bank accounts
- Creating a history of at least 6 months of on-time payments on credit cards
- Registering to vote (oddly enough, credit agencies view registered voters as a positive sign because they can more easily confirm your identity.
Lending Options
All first-time homebuyers should know what lending options are available to them. There are many different types of mortgages on the market, and understanding these options will help you make the right choice.
Here are some of the most popular types of home loans:
Conventional Loans
These are mortgage loans from mortgage lending institutions not backed by an agency of the government such as the U.S. Department of Veterans Affairs or the Federal Housing Administration. They can be either fixed-rate or adjustable-rate.
FHA Loans
Federal Housing Administration (FHA) loans are designed for low-to-moderate-income borrowers who are unable to make a large down payment.
VA Loans
Veterans Affairs (VA) loans are made by private lenders and guaranteed by the U.S. Department of Veterans Affairs and are available to active military members, veterans, and their spouses.
USDA Loans
The United States Department of Agriculture (USDA) offers loans with 100% financing to buy a home in a rural area to people who meet certain income requirements.
Interest-Only Mortgage
With this option, the homeowner only pays the interest on the loan for a fixed period, after which you start paying both interest and principal.
Adjustable-Rate Mortgage (ARM): This option starts with a fixed interest rate for a certain amount of time, then the rate can fluctuate.
Jumbo Loan
This type of loan exceeds conforming loan limits set by the Federal Housing Finance Agency. These are more common in high-cost areas and generally require more in-depth documentation to qualify.
Pre-Approval
Getting pre-approval from lenders is a great way to give yourself the edge in the hunt for your dream home. Pre-approval means a lender already agrees to lend you a certain amount of money. This is advantageous because, even though there are currently hundreds of houses for sale in Fort Collins, great homes tend to fly off the market with offers from buyers usually coming in on the same day they’re listed. If you are pre-approved and suddenly find the perfect home, you’ll have no difficulty putting in an offer without delay.
Choosing a Real Estate Agent
Oftentimes, what will make or break a house-buying experience is the real estate agent you work with. Therefore, you should find a real estate agent who is knowledgeable about the area and who has experience working with first-time buyers for the best possible results.
Seeking Houses for Sale in Fort Collins?
If you’re a first-time homebuyer and are looking for your dream home in the beautiful town of Fort Collins, contact the real estate professionals at Black Bear Real Estate and Property Management. Our team is here to help you through the entire buying process - from finding more home options to providing you with all of the market research, documentation, and resources you could possibly need, our experienced agents are the path to your success.
Schedule a free consultation with the Black Bear team today!