First-Time Homebuyer Guide

Understanding your financial situation is critical in determining your budget for the new home. And, if you’re planning to get a mortgage loan to finance the purchase, your credit and finances are even more important because they are a significant factor in determining the loan terms that lenders can offer.

Here is what you need to know about your credit and finances before starting your home search:

Your credit score is a record of how well you have managed debt repayments over time.^[5] Your score is a factor in determining whether you qualify for a home loan and at what interest rate. Your interest rate is important because it impacts your monthly mortgage payments (the higher the rate, the higher the payment amount). The higher your credit score is, the better. 

You can pull a free copy of your credit report from AnnualCreditReport.com.^[6] Start by reviewing your credit report for accuracy. A 2013 study by the Federal Trade Commission (FTC) found that as many as one in five people have an error on their credit report, with around 5% of consumers having an error that could result in less favorable loan terms[7]. If you happen to find an error, you can report it to the credit bureau that reported the error (the three major credit bureaus are Equifax, Experian, and Transunion).

If you have concerns about your credit score, reach out to a local mortgage lender who can help you understand if you can proceed with the home-buying process with your current credit score. 

Your income is important to the home-buying process, particularly if you plan to take out a mortgage for the purchase. Lenders want to see a steady income. You might need to provide recent paystubs, W2s, or tax returns to confirm your income. Your lender may also contact your employer (if applicable) to verify your position and your salary or wages.

Your debt-to-income ratio (DTI) shows how much of your current income is already allocated to cover current debt payments (such as auto loans, student loans, medical loans, or credit card debts). This is an important metric for mortgage lenders who want to make sure that borrowers can comfortably afford their new mortgage payments in addition to any other debt payments.

To calculate your DTI, divide your total monthly debt payments by your gross income (the amount you make before taxes are taken from your paycheck).

Your DTI is just one factor of many that determine your eligibility for a home loan, so there is no hard-and-fast percentage that you need to hit. But, generally speaking, the lower your DTI, the better.

Secondly, being pre-approved can make your offer more appealing to sellers, perhaps increasing your chances of getting your offer accepted. This is because sellers want to know that you can qualify for the funding needed to close the deal before they agree to put the property under contract with you, essentially taking it off the market. 

You can get pre-approved for a mortgage conveniently online. Simply visit PNC Bank’s online pre-approval application. You’ll answer some basic questions about yourself and any co-borrowers, compare available loan options, and upload your financial documents. 

A mortgage professional then reviews your application to confirm whether you qualify for a mortgage loan and, if so, at what interest rate.

Getting pre-approved can help you understand how much you can spend (as in, how much money the bank is willing to lend you for your purchase). But it’s important to determine how much you’re comfortable spending. 

Creating a budget will help you objectively assess your income and expenses to determine how much you want to spend. You can use the Home Insight^® Planner as a template for creating your budget.

You’ll have two types of expenses to consider: upfront and ongoing.^[9] Here are some tips for deciding how much you want to spend in each category.

Upfront expenses include the following:

• Earnest money: This acts as a security deposit to demonstrate to the sellers that you are a serious buyer with every intention of completing the purchase. The amount of the earnest money varies, but in many markets, 1% to 3% of the purchase price is customary. Assuming the deal proceeds as expected, this amount may be applied toward your down payment or closing costs (more on this coming up).
• Down payment: This is the amount of the purchase price that you are paying out-of-pocket. The amount needed for a down payment depends on your financial situation and your home loan type. Many buyers put between 3% to 20% down, but some loan types offer 0% options under certain circumstances. It is important to note that you may need to purchase private mortgage insurance if you put less than 20% down. This is an insurance policy that helps to protect the lender from borrower default; this additional protection is what enables lenders to issue home loans with a down payment of less than 20%.
• Closing costs: Closing costs cover a wide range of additional fees and expenses necessary to facilitate the home purchase. For buyers, this includes expenses like appraisal fees, loan origination fees, and prorated property taxes and insurance. These costs may add up to around 3% to 5% of the purchase price.

If you have concerns about covering these upfront expenses, you might consider looking for a down payment assistance program (DPA). Depending on current housing market conditions, you might also be able to negotiate with the home sellers to have them pay a portion of your closing costs out of their proceeds from the sale. 

Ongoing expenses for homeowners include:

• Monthly mortgage payments: Monthly mortgage payments typically include four components, collectively known as PITI:^[10].
  • Principal: The amount of the original loan to be repaid.
  • Interest: The cost of borrowing money.
  • Taxes: Property taxes due to the local tax collector.
  • Insurance: Homeowner’s insurance premiums plus any mortgage insurance premiums if your loan requires mortgage insurance.
• Maintenance: Expected monthly maintenance expenses, like landscaping and cleaning supplies. 
• Maintenance reserves: An amount set aside every month so that you have funds available to cover the repair or replacement of items like the heating system, A/C, or roof when needed. 

You might choose one of these commonly-used mortgage affordability models for deciding how much of your monthly income you’re comfortable spending on your mortgage payments and maintenance expenses.