Unlock Your Dream Home: First-Time Homebuyer Guide

Buying a home for the first time is exciting and a little scary. Even when you know you’re ready to buy a house, you might not know where to begin, and you may be anxious about making an expensive mistake. 

At Focus Federal Credit Union, we’re excited you’re interested in learning more about homeownership. Our mission is to focus on your financial goals while providing superior service. Essential to the process is knowing where you are at and to assist you in getting where you want to go as a first-time homebuyer in Oklahoma. 

Benefits of Homeownership for First-Time Homebuyers

Buying a home is the largest financial decision many people make. As with any major decision, a question to answer before proceeding is, “Why?”

Historically, the most significant advantage of owning a home is long-term financial security. Homeownership in America represented decades-long stability because the housing market almost always increased. The average U.S. home price grew 80% from 2012 to 2022. 

Homeownership also allows other benefits.

Build Equity

Equity is the difference between how much your home is worth and how much you owe. As you pay down the principal and your home value appreciates, your home equity increases. 

Home equity provides an option when you need to access funds. You can use equity to finance home improvements. When you sell your home, the net proceeds can be used as a down payment for your next home. Tapping your home equity is a significant advantage of owning a home instead of renting.

Take Advantage of Tax Benefits

The mortgage interest and property tax deductions are a significant financial benefit of owning a home. Homeowners can reduce taxable income by deducting property taxes paid on their homes. This deduction caps at $10,000 per year on state and local taxes. This deduction provides substantial savings on your tax bill, particularly in the early years when most of your payment goes toward interest. 

If you use a portion of your home as a home office, you can take advantage of the home office deduction. It allows homeowners to deduct a portion of their home expenses, such as mortgage interest, property taxes, utilities, and repairs, if they use a portion of their home regularly and exclusively for business purposes. 

You can also receive tax credits for energy-efficient home improvements, such as installing solar panels, insulation, or energy-efficient windows. These tax credits help offset the cost of these upgrades and provide additional savings on your tax bill.  

Knowing Your Numbers

As a first-time homebuyer in Oklahoma, you want to know your numbers—income, debts, expenses, savings, and credit scores. In other words, what does your financial picture look like? These critical aspects of your financial situation will impact what you can buy.  

Income

Mortgage income sources can include employment, retirement, Social Security, alimony, child support, or other sources. You’ll want to calculate your gross and net income. 

Gross income is earned before taxes or deductions are taken out. Net income is what you have left after taxes and deductions are removed. Lenders use the gross income to qualify you, but the net income is what you need to use to make your budget and determine what you’re comfortable paying monthly for your mortgage.

For example, Michael makes $20 per hour and works 40 hours weekly. His gross pay is $41,600 ($20 X 40 hours x 52 weeks). His annual estimated federal, state, local, and FICA taxes are $11,069. Michael’s net income is $30,531 annually. 

Debts

Debts are liabilities or obligations owed. They include auto loans, credit cards, personal loans, student loans, and other outstanding balances. You’ll want to work to eliminate as much debt as possible before applying for a home loan. 

Consider the snowball or avalanche method to help reduce or eliminate debt. With debt snowball, you first target your smallest debt balance and focus on paying it off. You move on to your next smallest debt, adding the paid-off payment amount to your next most significant debt. You continue to pay off debts until all outstanding balances are paid. Many borrowers like the snowball method because they experience “quicker wins” before tackling larger balances. 

With the avalanche method, you first focus on paying off the largest balance. It may take longer, but you’ll save money in interest.  

Expenses

Expenses are items other than debts you spend on. They can drain your budget. Expenses are categorized as fixed and variable. Fixed expenses include rent, utilities, insurance, and transportation and remain consistent. Variable expenses, including eating out, entertainment, clothes, and travel, change over time. 

It’s easier to cut variable expenses. But you’ll also want to find ways to reduce fixed costs and free up extra money. For example, you need to eat and drive your car to work, and living without electricity or even a cell phone isn’t an option. But you might pack your lunch instead of eating out every day. Streaming is great, but is it worth the extra $150 monthly? 

Savings

Saving money for the purchase of a house is a necessity. You’ll need to provide a down payment and closing costs to settle on your home. You will also need to plan for moving expenses, deposits for utilities, new furniture, and repairs. Saving money can be a challenge, but it can be done with some careful budgeting and planning. 

Credit Score

Your credit score is a calculation determined by a Credit Reporting Agency (CRA). It’s made up of multiple factors and represents to lenders how likely you are to repay a loan. 

Credit scores have a 300-850 score range. 

Lenders will pull your credit score from the three major CRAs: Experian, Equifax, and TransUnion. 

They will use an average of your scores or the middle score to qualify you for your mortgage. 

While many lenders use credit scores to help make decisions, each lender has their own risk strategy. But the higher your score, the lower your risk to the lenders. 

Factors impacting your credit score are:

• Payment History. Payment history accounts for 35% of your credit score. While payment history includes multiple elements, the extent to which it impacts your score depends on the severity of lateness, how recently a late payment was made, and how frequently you made late payments.
• Amounts Owed. Loans and credit cards make up 30% of your score. High balances and maxed-out credit cards lower your score, but smaller balances may raise it.
• Length of Credit History. Credit history represents 15% of your overall score. A long history of making timely payments means a higher score. 
• Recent Activity. Are you taking on new debt? If you’ve opened or applied to open new accounts, it will temporarily lower your score. New credit represents 10% of your overall score.
• Credit Mix. Credit mix represents 10% of your overall score. Lenders want to see a mix of types of credit.  

How Do You Manage Your Credit Score?

Understanding the factors that affect credit scores can help you connect your behaviors to your scores. While certain factors are beyond your control, you can make choices that positively impact your score relatively quickly. Improving your credit score will depend on your unique credit situation. 

In general, you’ll want to:

• Create a Plan. Establish a spending plan and live within it. Online budgeting apps can assist or stick to the old pencil-and-paper method.
• Monitor Your Credit. Fraudulent activity can weigh down what could be an otherwise good credit score. Keep a close eye on your credit and check for suspicious or inaccurate transactions. Dispute any details you identify as incorrect. 
• Pay Your Bills on Time. Late payments negatively affect your ability to get credit. Set up autopay so you remember to make a credit card payment. Contact your lenders if you need to catch up on your payments. Many lenders will work with you to set a different payment schedule or interest rate.
• Use Credit Cards. Yes, you read that correctly. Have some credit, but (and it’s a big “but”) manage it responsibly. Having no credit history is almost as bad as having an adverse credit history. You only need a few accounts reported to the credit reporting companies to demonstrate credit management.
• Diversify Your Credit Mix. Lenders like a mix of revolving and installment loans. A mixture of credit types demonstrates your ability to manage different debts. A history of repaying an installment loan is necessary, but a revolving account shows you can responsibly manage credit.
• Keep Low Balances. Keeping your balances low compared with credit limits demonstrates you only charge what you can pay. By charging a small amount on at least one card and paying the balance on time, you will show you can handle more significant amounts of available credit.
• Use Caution When Closing Accounts. Closing an account isn’t always a good thing. It can increase your balance-to-limit ratio, making you appear to have an increased credit risk.
• Calculate Your Debt-to-Income Ratio. Debt-to-income ratio is your monthly debt payment divided by your gross monthly income. Lenders consider your monthly payments compared with your monthly income. They want to measure your ability to manage your monthly payments. Federal regulations dictate a debt-to-income ratio over 42% is not allowed on most mortgage loans.
• Demonstrate Stability. Creditors consider your length of employment and residence in making credit decisions.

How Much House Can You Afford?

The cost of a home is the single largest personal expense most people will ever face, including first-time homebuyers in Oklahoma. Determining how much you can afford is essential in the home-buying process. 

Two general rules of thumb can help you determine how much you can afford:

• 2.5 Rule. The rule of 2.5 is that your income determines the range you aim for in a home purchase price. The cost of your home should be no greater than two and a half times your annual income. For example, if you make $50,000 annually, you can afford a $125,000 home. 
• 28% Rule. The 28% rule suggests you spend at most 28% of your income on mortgage payments. If you earn $50,000 annually, you make about $4,166 per month. With the 28% rule, your recommended monthly mortgage payment would be, at most, $1,166 per month.

Using one of these methods provides a ballpark of what you can afford, but other factors can increase or decrease your buying power. 

When estimating, you’ll want to factor in:

• Outstanding Debt. The 28% rule may estimate that you can afford $1,166 per month, but if you have $800 in credit card debts, student loans, and other balances, it dramatically impacts your ability to afford that amount.  
• Property Taxes. Property taxes are paid to a local government agency for maintaining the local roads, schools, and other municipal expenses. The amount of property taxes paid depends on the property’s value and the local tax rate. Property taxes can be paid to your lender as part of your monthly payment and held in escrow until they are due in December. 
• Homeowners Insurance. Homeowners insurance covers damage to a residence, along with furnishings and personal property in the home. Most homeowner’s insurance policies protect against perils such as fire, lightning, hail, wind, vandalism, and others named in the policy. The age and size of the home, age of the roof, security features, proximity to public services, deductible, and other insurance discounts all contribute to the final premium. You’ll also need liability insurance if someone has an accident on your property. Lenders require you to have adequate coverage to ensure their interest in the property. They want to know if something happens to your property, the insurance company will either pay to fix the damage or pay off the mortgage loan against the property.
• Private Mortgage Insurance (PMI). If you have less than a 20% down payment, you will have PMI included in your monthly payment. PMI is insurance that protects the lender in the event of default. Once you can put down 20%, you won’t have to pay for mortgage insurance, which frees up more cash toward principal and interest.  
• Maintenance and Upkeep. Taking the necessary steps to maintain and keep your home in good shape is essential. You need to plan for repairs. Designate an amount for upkeep from minor updates, such as paint, to extensive maintenance, such as replacing the heating and air unit. Having money set aside for repairs will prevent panic and reduce stress when something comes up. 

Mortgage Options for First-Time Homebuyers

Mortgage loans fall into two categories: government and conventional loans. Any loan the US government doesn’t guarantee is called conventional or traditional. They are the most common type of home loan. A down payment for a traditional loan is typically around 5%, but anything less than 20% will require PMI. Lenders will also want to see a credit score of 640 or greater. 

Government-backed loan options include:

• FHA Loans. Backed by the FHA, these loans allow eligible homebuyers with a score of 580 or better to take out a mortgage with a 3.5% down payment. Items on the credit report are considered over the actual credit score to give borrowers with lower credit scores more options.
• USDA Loans. USDA loans are geared toward suburban and rural homebuyers. They usually require no down payment.
• VA Loans. VA loans provide affordable housing loan options to qualified veterans, service members, and surviving spouses. They don’t require a down payment and have flexible credit score requirements for borrowers. 

What is the Difference Between Fixed and Variable Rate Loans?

The interest rate you pay on your mortgage can be fixed or variable. The decision is made based on predictability and cost.

With a fixed-rate mortgage, your interest rate and payments won’t change during your mortgage term. Since your interest rate and mortgage payments will remain the same, it can be easier to plan and budget. And you know exactly how long it will take to pay off the mortgage.

With a variable-rate mortgage, your rate and payments fluctuate. Uncertainty creates risk for the borrower, but borrowers typically benefit from lower initial interest rates. Many lenders allow homeowners with a variable rate to change to a fixed-rate mortgage anytime.

What Are Loan Term Options?

Your loan term will determine your monthly payment and how much interest you’ll pay over the life of the loan. Most homebuyers select a 30-year fixed-rate mortgage. These are paid off in 30 years and have a consistent interest rate.

Another option is a 15-year loan. These have a lower interest rate than a 30-year, but the monthly payments are larger. 

If you can afford the higher payment, a 15-year mortgage is the best option because you pay the loan off faster and save on interest. But many people have longer loans on their homes, since they are major investments.

First-Time Homebuyer Mortgage Terminology 

The home-buying process can be filled with lots of new terms. Here are some common ones you’ll want to be aware of. 

Preapproval

The preapproval process for first-time homebuyers in Oklahoma starts with meeting with a mortgage professional to discuss your situation. The lender will ask you questions about your current address and employment. A two-year history is required for each of these. Information about assets and liabilities is discussed, and a credit report is pulled and reviewed. 

The lender will qualify you so you know exactly how much home you can afford before heading out to tour homes. You can let your real estate agent know you have your mortgage loan ready to go once they help you find your home. A preapproval may give you more negotiating power. The seller may be willing to accept a lower offer or help with closing costs.

Income Documentation

Documentation showing your income and proof of current receipt is required. You will need your two most recent pay stubs and your W2 form from last year for wage earners. 

For self-employed borrowers, you will need tax returns with all schedules for the most recent two years. Contract laborers who receive 1099s are considered self-employed. They must have a two-year history and have filed taxes on income to use for loan qualification. This includes side jobs such as Uber, Lyft, or DoorDash.

Social Security and VA income will require the most recent proof of receipt, usually with a bank statement showing the deposited amount.

Other retirement, annuity, and pension income will require documentation and proof of current receipt.

Down Payment

A down payment is a large initial expense that’s a percentage of the purchase price. The amount of your down payment determines your loan amount. Many lenders accept down payment assistance (DPA), which can help you cover the down payment. 

Closing Costs

Closing costs are typically around 3-6% of the purchase price. Closing cost assistance is available through grants or loans. You can also look to your seller for help with closing costs through seller concessions. The seller can help with attorney fees, tax services, and title insurance.  

Why Work With a Real Estate Agent?

A real estate agent is a person who acts as an agent during the purchase of your home. They meet with you to discuss your housing needs and perform duties related to purchasing your first home. They research properties that meet your requirements and price range. They also provide market analysis to determine the appropriate price range of properties, prepare contracts, assist with negotiating contract terms, and provide guidance to make the home-buying process more manageable. 

Real estate agents represent either the buyer or seller:

• Listing Agent. A listing agent represents the homeowner in the sale of their home. They are working on behalf of the seller, and their goal is to obtain the best possible terms for the sale of a home.
• Buyer’s Agent. The buyer’s agent represents the prospective buyer’s interest in a real estate transaction. Their goal is to help the buyer locate and purchase property that meets their needs and is within their budget.

When you meet with a real estate agent to identify potential properties, they’ll want information to help them find the perfect property for you. 

Things they’ll want to know:

• Price Range. Now that you’ve received your preapproval, you can provide a price range for your new home. Your price range may depend on property attributes. For example, you may pay more for a house in a specific neighborhood or school district or if the house has a bigger lot.
• Location. A property’s location will play a role in its overall value. Properties located in areas deemed more desirable will cost more. Distance to work, shopping, schools, health care, and entertainment will impact the value of a home.
• Types of Properties. Residential properties are classified based on their proximity to other homes and the style in which they are built. As a first-time homebuyer in Oklahoma, you probably are looking for a single-family home, but a duplex or manufactured home also may be an option.
• Property Characteristics. When evaluating your new home, you will want to consider the home’s characteristics. These can include the lot size, number of bedrooms and baths, garage size, square footage, and other home features.  

Understanding the Home-Buying Process

Once you have identified a property, your real estate agent will help you make an offer. This is the part where they prepare a written document outlining the terms that you, as the buyer, are willing to agree to purchase the property. 

The offer will include:

• Price. Your real estate agent will have information on recent sales of similar homes in the area that will help you determine a fair price to offer for the property. If the property has everything you want, a higher starting price may ensure you don’t lose the property to another buyer. Homes listed for sale for longer may have a better chance of accepting a lower price than newly listed homes. 
• Closing Costs. The seller is obligated to pay certain closing costs associated with the sale of the property, such as updating the title to the property and the prorated part of the property taxes they owe for the time they owned the property for the year. Other closing costs the buyer typically pays can also be negotiated with the seller in the purchase agreement. The seller may not accept the offer to pay your closing costs. They may submit a counteroffer accepting to pay a portion.
• Earnest Money. Earnest money is a deposit made by the buyers when submitting their purchase agreement to the seller. If the seller accepts the purchase agreement, the closing company holds and escrows this money. If the buyer backs out of the purchase agreement, the earnest money is forfeited to the seller.
• Inspections. A home inspection will cover the condition of the home’s major systems, such as the heat and air system, plumbing system, electrical system, foundation, roof, windows, and doors. You’ll also want a pest inspection, which examines the home for signs of damage due to termites, mice, insects, and rodents. If the property doesn’t have public water and sewer service, you’ll want a well and septic inspection to note any issues.
• Appraisal. Once you have an accepted purchase agreement, the preapproval you obtained from your lender is updated with the property information, and an appraisal is ordered. The appraisal determines the property’s fair market value based on property characteristics. It will consider the condition and compare the property to recent home sales in the immediate area. 
• Closing. After your inspections and appraisal, and when your loan is approved, you are ready to finalize the purchase. The title company will help finalize the transaction. The lender will send loan documents to the title company. They will prepare the final closing disclosure that lists the transaction terms, including purchase price, earnest money, closing costs, and the final amount needed to finish the transaction.

The title company will coordinate a day and time for the buyers and sellers to sign the loan and legal documents, transferring ownership from the sellers to the buyers. The title company will file these legal documents with the county agencies and submit payments to the various agencies and companies involved in the transaction. Copies of all documents associated with the transaction are provided for your records.

Let Our Experts Guide You

Focus Federal Credit Union wants to be your resource when you’re ready to navigate your first-time home buying experience in Oklahoma. Our team is available to answer any questions about the process. 

Start your application online or call us at 405-230-1328 and ask to speak to someone in our Mortgage Department. Listen to our “First-Time Homebuyer Process” podcast to learn more about the process.