When you’re ready to purchase your first home, the process can seem both exciting and a bit overwhelming. You may know what you’re looking for regarding the number of bedrooms and baths, but that’s only one small part of the homebuying journey.
Financing your purchase and understanding the responsibilities that come along with homeownership are often steps most first-time homebuyers overlook. In fact, the list of unknowns is long for the typical first-time homebuyer – as is the preparation you need to do to get ready to buy. So, what can you do to better prepare yourself for what’s ahead?
Consider these 12 tips for first-time homebuyers put together by our experts. While a little planning and prep might not be as fun as picking out paint colors or decorating your new space, doing your homework will prepare you for many of the hurdles and victories you’ll face along the way.
12 First-Time Homebuyer Tips
1. Consider Where You Want to Live & Style of Home
Have you considered your ideal neighborhood? Check out different areas at different times of the day, i.e., morning, afternoon, and night. Ask your co-workers how they like their neighborhoods and if there are any homes for sale. You’ll also want to consider a home’s style. Do you like brick homes? Want a two-story? How many bathrooms and bedrooms should your new home have? Create a list of what you want – must-haves and nice-to-haves. These can help you research homes and evaluate homes more objectively.
2. Research Homes Online and In-Person
Speaking of research: you can easily check out homes online thanks to Zillow, Homefinder, Realtor.com, and other sites. The great thing about looking for homes online is that you can narrow down your search with a click of a button. Attending open houses or going on in-person walk-throughs are still critical. Thanks to photo retouching software, some homes may look better online than in person.
3. Be Realistic About How Much Home You Can Afford
Online calculators can go a long way in helping you understand what your monthly payment will be for your mortgage and how the loan’s time period can affect these payments. Are you comfortable financing your purchase for 15 years or 30? Once you understand these parameters, you must be comfortable with the amount you spend on your mortgage payment and how it fits within your monthly budget. If you’re currently renting an apartment, you may want to use your rent as a guideline. Or you can always consider you and your partner’s salary. Whatever you do, be honest with yourself about how much you want to spend on your new home. Also, discuss your needs with a loan officer who can help you develop a plan that works for you.
4. Think about Your Down Payment Amount & PMI
Realtors often tell people that putting a 20% down payment on a home is best because it can reduce the monthly payment cost and help you avoid paying private mortgage insurance (PMI). However, the norm is 3% to 5%, with some people putting down 10%. If a home has multiple offers, you may have to make a higher offer to compete, which could raise your monthly payment. A larger down payment such as 20% will help offset or lower your monthly cost if you can afford to do so.
5. Understand the Different Loan Options
What type of mortgage is right for you? First-time homebuyers’ loans and mortgage rates vary. If you have good credit, a steady income, and can afford a down payment, you may consider a conventional loan. It offers you lower closing costs and a variety of terms from 10, 15, 20, and even 30-year fixed rates. Shorter loan terms offer the lowest interest rate options. Government-backed loans provide more flexible credit guidelines and offer attractive rates. These include the following mortgage loans:
- FHA Loans: These loans are insured by the Federal Housing Administration and are for first-time homebuyers with low credit scores and smaller down payments. FHA loans have easier credit qualifying guidelines, as well as closing cost assistance and down payment requirements. However, FHA loans also include mortgage insurance. You’ll pay an upfront premium and annual premiums that will drive up your overall borrowing costs.
- VA Loans: Financing is available to active-duty military, veterans, and their spouses to help purchase properties with no down payment or minimum credit score, lower interest rates than some other mortgage loans, and no private mortgage insurance (PMI). VA loans have a funding fee that may be rolled into your loan costs. Some service members may be exempt from paying the fee.
- USDA Loans: A loan for rural families and individuals with low and moderate-income, assisting in qualifying the borrower for mortgages even without a down payment. To qualify for a USDA mortgage loan, you may need a credit score of 640 or higher. If your score is lower, you’ll want to show documentation regarding your payment history to improve your chances of getting a USDA loan.
When shopping for a mortgage, be sure to consider all the fees they include, such as loan origination fees. A mortgage broker can help you shop for the best loan for your needs.
6. Don’t Wait to Get Pre-Approved
If you want to move to an area experiencing growth or revitalization, chances are you may have some competition for your dream home. Getting a pre-approval letter shows sellers and real estate agents that you’re serious about buying a home. The pre-qualification process will help you spot potential credit issues so that you can correct them. If you need to pay off debt, consolidate credit cards, or refinance a student loan, now is the time to do it — before you shop for your new home.
7. Choose the Best Real Estate Agent for You
First-time homebuyers can benefit from the knowledge and expertise of an experienced agent. So, how do you find the right real estate professional for your needs? Remember that any agents listed on a “For Sale” sign will represent the seller. That means they’ll likely want to get their client the most money so that they can earn a full commission. Your real estate agent will represent you, the buyer, and will understand what you’re looking for and how much you want to spend. They’ll write up offers on the homes you’re interested in, negotiate the price of a home with the seller’s agent, and work with you on all final paperwork at closing. Ask family, friends, and co-workers for referrals or contact a real estate office. Also, remember that any home listed “For Sale by Owner” will not be working directly with an agent; instead, they will use a real estate attorney to represent their needs during closing.
8. Understand the Hidden Costs of Home Ownership
The big-ticket home purchase is only one part of the cost of home ownership. Hidden costs will also factor in. There will be upfront costs, such as furnishing the home, moving expenses (hello, rental truck!), and hooking up utilities. First-time homebuyers might need tools or equipment they’ve never purchased: a lawnmower, for example. Consider all your initial must-haves (like appliances) and make a list of what you’ll need in the near future. There are also ongoing costs, like property taxes, that can be factored into your mortgage payments or paid out-of-pocket.
9. Check and Strengthen Your Credit
If you haven’t checked your credit score recently, visit annualcreditreport.com, a government-mandated site, to get a free copy of your credit report. The report will include information from all three credit bureaus — Experian, Equifax, and TransUnion. If you notice anything wrong, contact the bureau immediately to dispute the error. Then, consider how your score stacks up on the overall scale. According to Equifax, scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good, and 800 and up are considered excellent. If your score is on the lower end, be sure to pay all bills on time. And, don’t close (or open) any credit cards. Despite what you may think, closing credit cards can actually lower your credit score since it reduces the amount of available credit you have in your name.
10. Try Not to Finance Anything New Before Buying a Home
In addition to not opening any new credit cards, it’s important not to make any other large purchases that require a loan. Need a new car? Pay for it out-of-pocket or wait until you’ve been in your new home a year or so. Want to finance a lot of furniture? You may be tempted by a furniture store’s zero percent interest rate – but that purchase will be on your credit report and lower your credit score. A lower credit score can not only affect how much you can finance for your new home – but it can also affect the interest rate you get on your mortgage.
11. Get Your Loan Paperwork Together
Taking out a mortgage is a large and long-term commitment, and securing financing requires paperwork and documentation like nothing else. To secure pre-approval, you will likely need to provide the bank with several years of your financial history: proof of employment (and salary), bank statements, tax returns, and brokerage account information. These are likely minimum requirements; every bank will have a different – and long list – of paperwork they need from you. From there, the loan officer will prepare the loan documents. These include dozens of pages of financial disclosures and information that you’ll need to read and sign.
12. Be Aware of Closing Costs
During the pre-approval process, your mortgage lender will prepare a list of mortgage terms that include expenses you’ll need to pay at closing. These costs cover things like loan processing fees, prepayment of property taxes and homeowner’s insurance, and appraisal costs. When shopping for a home loan, compare these costs from lender to lender. They can vary widely, and sometimes, a lower interest rate might come with higher closing costs – offsetting the savings the lower rate seems to deliver. Some states offer closing cost assistance to help first-time homebuyers save money.
Are You Ready to Move into Your Home?
Buying your first home is both exciting and stressful at the same time. On the one hand, you can’t wait until you move out of your apartment and into your first home. But on the other, it’s a significant purchase that comes with a lot of paperwork and long-term responsibility. To help you understand the big-picture, download our first-time home buyer infographic. You can print or save it to your desktop, phone, or tablet.
The more you know about the home buying process, the better you’ll feel when you speak to mortgage lenders about getting a mortgage.
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