Buying your first home is a major life change. This type of purchase lets you set down roots but can have a profound effect on your finances. These first-time home buyer tips will help you through the home-buying process and maximize the chances you’ll get the right house — and home loan — for your needs.
If you’re looking for more in-depth information, check out this comprehensive Home Buyer Checklist.
1. Start saving early for your down payment
Taking time to save up can help you prepare for some of the costs associated with buying a home, including the down payment.
A down payment is money you put down when buying a home. Some lenders allow as little as 3% down or even no down payment. But you’ll have more choice of lenders with at least 10% down. If your down payment is below 20%, you will probably have to buy mortgage insurance. This insurance protects lenders — not you — in case of foreclosure, although you pay for it.
A larger down payment can also help you qualify for a loan at a lower interest rate. And it will reduce the chances you’ll end up owing more than your home is worth. Since it takes time to save up that much, start working on your saving early on. Our guide to home down payments can help you learn more.
2. Maximize your credit score
Good credit can help you qualify for a mortgage loan at a competitive rate. To help raise your credit score before applying for a loan, make sure you:
- Know the best credit score for the mortgage you’re looking for
- Check your credit report and score
- Correct mistakes on your report
- Pay your bills on time
- Reduce your credit utilization ratio
- Ask lenders to remove any black marks on your credit report. Some lenders are more than willing to do this as a gesture of goodwill.
If you have a low credit score, it doesn’t mean you can’t buy a home. Check out our guide to the best mortgage lenders for poor credit to see what options are available to you.
3. Decide on your home-buying budget
Your mortgage lender will most likely approve you for the maximum loan amount they feel you can repay. But you may not want to borrow that much, especially if doing so will interfere with other financial goals. So it’s important to know how much you want to borrow before you apply for a loan.
When deciding how much to spend, look at both monthly payment and total loan costs. Experts recommend keeping total housing costs below 30% of income. You may not want to spend even this much if you don’t have to. If you’re trying to keep your monthly costs low for your first mortgage, it may be a good idea to look at starter homes. These homes are typically less expensive.
Consider how the payment will fit into your budget, and review this article on “how much house can I afford?” to help you decide.
4. Explore mortgage loan types and shop around for rates
Loans with favorable terms keep borrowing costs and payments low. There are different types of mortgage loans for first-time buyers, including:
- Government-backed loan: The FHA loan, VA loan, or USDA loan has lower down payment requirements. Check out this first-time home buyer’s guide to FHA loans to learn more.
- Conventional mortgage: This loan type isn’t guaranteed by the government and can be harder to qualify for.
Also, decide on your loan term and whether you want a fixed-rate mortgage (with steady payments for the entire payoff period) or an adjustable-rate mortgage. ARMs only have a fixed payment for a limited time, after which rates adjust and could rise. Sometimes first-time buyers take the risk of an ARM if it provides a low starting rate.
Shop around with several lenders and compare loan offerings and rate quotes to find the most affordable loan. If you still need more help, look into these types of first-time home-buyer loans.
5. Obtain a pre-approval letter
When you’ve found a mortgage lender offering the most competitive rate and terms, formally submit an application for pre-approval.
This involves providing financial information so your lender can evaluate your mortgage application, give you personalized rates, and determine loan eligibility.
Pre-approval doesn’t guarantee a loan. But as long as the home is valued high enough to guarantee the loan and nothing has changed in your finances it does set you up for final approval once you’ve found a property.
Many home sellers also require pre-approval before accepting an offer. To get a pre-approval, check out our mortgage pre-approval page.
6. Find the right real estate agent
Most home buyers work with a real estate agent, especially first-time buyers. As your advocate throughout the home-buying process, they will help you in so many ways, including finding properties and negotiating a fair price.
When you’re ready to find a real estate agent:
- Look for an agent who is familiar with first-time buyers.
- Make sure they work in the area where you’re purchasing your property.
- Check the number of past sales they’ve had in your price range.
And make sure you ask about fees. As a buyer, you do not have to pay a real estate agent. The seller will pay the agent a commission that’s usually equal to 3% to 6% of the value of the home you purchase. For more information, check out our guide to finding the best real estate agent.
7. Research properties carefully
Before you start looking for homes, make sure you know what’s important to you. Research daily commutes. If you plan to start a family soon after moving in, research school districts. If you plan to use the property for a specific purpose, such as to run a home-based business, check zoning laws. The key is to be prepared. In addition to the price of a home, consider location, school district, home size, and other factors such as whether the property is in a homeowners association neighborhood.
8. Make the right offer
It’s up to you to decide how much to offer for a property you’re interested in. In a seller’s market with lots of competition, you may want to offer the asking price or even more. If the house has been on the market for a long time with no interest, you may decide to offer below asking price.
When you make an offer on a house, your offer will include details beyond price. Specify who pays closing costs and the date you want to close on the house. Consider including contingencies, too. These are conditions that must be met for the sale to be completed. The offer may be contingent on an inspection, your ability to get financing, and a home appraisal showing it’s worth what you’re paying. If you want to learn more, be sure to read our advice about how to make an offer.
9. Be prepared for closing costs
There are transaction fees involved in buying a home. You’ll usually pay them at closing, when you transfer money to the seller and the seller transfers ownership of property. Closing costs can add up to 2% to 5% of the value of your home loan. This guide to closing costs explains what’s included in these fees.
Follow these tips and you’ll give yourself a solid start to home ownership. If you’d like even more information on the home-buying process, look into local first-time home-buyer courses, which can walk you through the process and offer regional tips.
SOURCE: The Ascent – Motley Fool