Tips for First-Time Home Buyers in Denver

If you’ve decided Denver is your forever home—despite some alarming housing prices in the city and around the Centennial State—it can be exciting to start looking for what could be your Mile High City dream house. But it can be a daunting task for first-time home buyers to enter the housing market without a few tips first, and this isn’t exactly your parents’ housing market. 

Scary questions can enter your mind, like “What is an FHA loan?”, and “What if I have outstanding student loans?”, which are fair questions. According to a Bank of America report detailing the money habits of millennials in 2020, nearly two-thirds of millennials claim they are weighed down by outstanding debt and feel they can’t achieve their personal and financial goals because of it. 

So you aren’t alone in feeling intimidated, but that shouldn’t stop you from getting a place of your own. Below are some tips to help alleviate some stress in searching for your first home. 

Know Your Debt 

Chances are you’ll need some help from lenders in purchasing a home, and they’ll want to know about your current debts before agreeing to new monthly payments in a mortgage. Common debts lenders consider are credit card debts or student loans and will take into consideration your debt-to-income (DTI) ratio. 

According to Forbes, The Consumer Financial Protection Bureau (CFPB) reports that a maximum DTI ratio of 43 percent is required to receive a qualified mortgage, though a good marker is making sure your monthly debt—including your mortgage payment— doesn’t exceed 36 percent of your gross monthly income. The more debt you pay off before applying for a mortgage will help bring down your monthly payments in the future. 

Generally, student loan debt doesn’t prevent you from getting a mortgage, but it will affect your DTI ratio which could skew how lenders view your application. The myth is you can’t purchase a home until your student loans are paid off or nearly paid off completely. While this is not true, they can have a big impact on your ability to land a solid mortgage rate. 

Know Your Credit 

If you have a solid credit history and credit score, chances are you’ll be met with lower interest rates on your mortgage. Give yourself time before applying for a mortgage to know where you stand so you can make adjustments that will save you pain later in the process. Lenders generally look for a credit score between 620 and 680, though lower credit scores won’t disqualify you from certain mortgages. Lower credit scores require bigger down payments and higher interest rates. 

Make sure to stay up to date on credit card payments, be aware of potential errors and correct/dispute them, have negative but paid-off entries removed from your credit account, and increase your credit limits on existing cards. These methods can help you shine as a more reliable spender and can improve your credit score.

Get Preapproved for a Mortgage 

After polishing your credit report and getting your debts in order within reason, you’ll want to get pre-approved for a mortgage. Pre-approval entails providing proof of employment, income tax returns, assets, and a qualifying credit score. Pre-approval is key in determining what you can actually afford because you’ll be able to see how much you can borrow. This way you can stay within your budget and begin to search for realistic homes. 

If you’re pre-approved, you’ll be perceived as a “serious buyer”; a real estate agent will know you’ve been vetted previously, and your chances of being taken on by agents will be much higher than those who aren’t pre-approved. 

Get Familiar with Interest Rates & Down Payments 

First, you’ll need to determine your down payment. How much you can put down will impact what kind of mortgage you’ll receive. A typical down payment can range from 3.5 percent down to as high as 20 percent down. The more you pay as a down payment will generally help you receive a more decent loan and strengthen a lender’s confidence in you going forward. 

Private mortgage insurance (PMI) is a policy that protects a lender if a buyer defaults on their loan. This policy is often put in place for down payments less than 20 percent. In 2021, the average down payment for first-time home buyers was just 7 percent, and 17 percent for repeat buyers. So don’t feel discouraged if you can’t put down a massive amount of cash upfront. 

Know What You Want 

Whether it’s a house, townhouse, condominium, or duplex, the last place you want to find yourself in is a home you’re locked into for years that you no longer like. Research different types of homes and neighborhoods in your area and weigh different factors like:

• Cost of living in that neighborhood
• Property taxes 
• Parking 
• Schools in the area 
• Crime rates 

Don’t become infatuated with just the structure alone. The neighborhood in which you live is just as important as the house. You don’t want to close on a home and then find you hate where you live a few weeks later. 

Ask for Advice 

This may seem like a no-brainer, but you’d be surprised how many people go into the housing market blind. Talking with others your age who have already been through the house-buying process can help you dodge some of the potential landmines they’ve already stepped on. They can tell you what interest rates are worth taking as the market changes, or how they were able to secure a loan with a less-than-favorable credit score or amount of debt. 

Your parents have likely purchased a home at some point in your lifetime. Even though rates aren’t what they were even a decade ago, your parents will have an idea of what is fair in the market today and how to maneuver the obstacles needed to close on a house. 

Use all resources available to you, like PrimeLending Denver,  to not only be the best educated about the housing market today but to limit your stress as you navigate it for the first time.