You have just made a really big decision. The decision to stop renting from someone else and buy your own home. Buying your first home is not only a big life decision it is a big financial decision. It will change the way you spend money and your priorities within your budget. But it’s also exciting to have a place to call your own. A place where you can paint the walls without asking anyone for permission. A place where you can change out the faucets just because you feel like it. If you are embarking on this process here are some first-time homebuyer tips you don’t want to miss.
First Time Homebuyer? Do Not Miss These Helpful Tips
Buying a home is usually the largest financial decision a person makes. But following our homebuyer tips will help get you through the mortgage process. The first thing to do is to save enough money for both the down payment on the property and all of the costs that come up while trying to close the deal. Once you’ve saved the money run your own credit check before any potential lenders do to assess your credit score and catch anything that has been reported in error. Once you are confident in your credit, visit several lenders and become pre-approved for a mortgage. That makes you more attractive to sellers.
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Ideally, you are paying yourself first out of every paycheck and are building savings. In order to buy a home, your lender is going to require a cash down payment, usually of 20 percent of the purchase price. According to the real estate website Zillow, the median price of a home in the United States is $247,084. While certainly there are some areas where houses are less expensive and other areas where houses are more expensive, 20 percent of the median price of $247,084 is a down payment of almost $50,000.
Even if you have been saving regularly, you may not have enough for the full down payment. So if you are committed to purchasing your own home, you may have to readjust your budget to divert more money to savings. This might be a time to set a financial goal of having a certain amount of down payment money saved by a specific date.
It’s also not enough to just save the amount of the down payment. You will also need enough cash on hand to pay the costs associated with closing on the property.
Check Your Credit Score
If you are going to try and qualify for a mortgage you should probably do your own credit checkup first. Check with some of the major credit reporting agencies like Experian, Equifax, and TransUnion to see what your credit score is like. A credit score is generally calculated as a three-digit number. Scores that are in the high 600s are thought of as good credit and scores in the middle 800s are considered to be excellent. Higher credit scores give you access to mortgages with lower interest rates.
One of our first-time homebuyer tips is to do your own credit checkup you can also catch potential problems in advance and get them resolved. Maybe a credit agency reported that you made a late payment when you didn’t. Or maybe there is something on the report that doesn’t have anything at all to do with you. If you see the problems in advance you have the opportunity to address them and clean up your credit history.
Get Pre-Approved for a Loan
Once the down payment money is saved and you’ve checked on your credit score one of our next first-time homebuyer tips is to get approved for a residential mortgage. This is where you begin encountering the paperwork portion of this process. In order to get pre-approved for a home loan, you will need to provide a prospective lender with:
- Social Security Number
- Tax returns from the last 2 years
- W-2s from employers for the last 2 years
- 30 days worth of paycheck stubs
- 60 days worth of bank account activity statements
During the pre-approval, process lenders will dig into your financial well-being. They want to establish your creditworthiness, your debt-to-income ratio, employment history, current income and a tally of your assets and liabilities. Once they pre-approve you they will you a letter that says that. Many sellers want to see that letter before they will consider an offer. The letter is generally good for 60 to 90 days.
You aren’t limited to just visiting one lender for pre-approval. You can shop around to several.
Find Your New Home
Once you have saved enough money to cover the down payment and closing costs and you have been pre-approved for a mortgage it is time to go shopping for that new home. You can start to get a feel for the housing market where you want to live by taking advantage of online listings. One of our first-time homebuyer tips is to browse through the real estate listings at Realtor.com, Trulia and Zillow. You can see what the inventory is like that is in your price range. How many bedrooms? How many bathrooms? Are you looking at single-family or multi-family dwellings? What are prices like in the center of the city as opposed to 15 miles away in the suburbs?
The photos and virtual house tour videos let you get a real glimpse of what you’ll find inside. Is the kitchen hopelessly outdated in harvest gold and avocado or has it already been updated with more modern finishes? Do the bedrooms have walk-in closets or are they much smaller? Are the bathrooms small or spa-like?
Once you get a better feel for where you want to be and what you can afford one of our first-time homebuyer tips is to engage a buyer’s agent in your search. Buying a property is a major financial and emotional investment. Experts agree that a first-time homebuyer needs an agent in their court. A real estate professional can interpret the market, explain trends, comb through the legalese and negotiate on your behalf. You want a real estate agent making offers on your behalf and evaluating any counter-offers. Your realtor should be able to tell you when the time is right to sign on the dotted line and when you shouldn’t.
How Do I Find a Real Estate Agent?
The best place to get a referral to a real estate agent is through word of mouth. If you have had any friends or colleagues rave about their recent home buying experience, find out who their agent was. Another one of our first-time homebuyer tips is to select a realtor that is connected to you or your circle.
If you don’t know anyone who has a great real estate agent, look for an agency with positive reviews. And keep in mind there are different realtors with expertise in different parts of the market. You might not want to engage with a specialist in million-dollar homes if the top of your budget is $250,000. That agent may have different expertise than you need.
One of our homebuyer tips during the search is to remember that there might not be a perfect home. To satisfy your budget you might have to compromise. A garage might have been tops on your wish list until you find that perfect cottage with a gravel driveway. A fireplace might have been non-negotiable until you found that townhouse with the family room built-in bookcases instead.
Trust your instincts. You will be living in the house. When you feel like you have found the perfect place, you probably have. This is the part where you need a professional real estate agent to guide you through the process of making an offer on the property and potentially having to come up with a counteroffer. Expect some back and forth before you come to an agreement.
Choose the Right Mortgage
When this process began you learned where to shop for a mortgage by visiting several lenders to get pre-approved for a loan. Once you have settled on a purchase price you have to go back to these lenders and formally apply for a loan. They will likely have some mortgage options for you.
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A fixed-rate mortgage has one pre-determined interest rate that lasts for the life of the loan. The payment on a fixed-rate loan doesn’t change over time. That means the payment will be a consistent financial obligation for the homeowner.
This type of mortgage begins with lower interest rates but will be adjusted in the future to correspond with current market trends. An adjustable-rate mortgage is like a game of chance. After a certain amount of time, the interest rate and the payments could go up, or they could go down. Adjustable Rate Mortgages are often favored by buyers who want to get into a home in the least expensive way but are prepared to increase their financial commitment down the road.
Balloon mortgages are the least common types of mortgages. They have a fixed monthly payment but at the end of the loan an extra payment, usually a very large one, is due.
There are some federally backed mortgage options for those who qualify.
These loans are guaranteed by the Federal Housing Administration. They were created for low to moderate-income homebuyers. FHA loans require smaller down payments than conventional loans and usually have lower interest rates. FHA loans have strict terms but they are popular with first-time homebuyers because of the reduced down payment.
U.S. Armed Forces veterans may qualify for loans from the Department of Veterans Affairs. Sometimes the VA loans will act as a bank and provide direct loans for veterans. Other times the VA will guarantee a portion of the loan that is made by a private lender.
What are the Terms of a Mortgage?
Lenders usually write mortgages for either 15 or 30 years. The longer the loan the more you will pay in interest, but your monthly payments will be lower.
What is Private Mortgage Insurance?
Private Mortgage Insurance, or PMI, is purchased when the buyer is making a down payment of less than 20 percent of the selling price. It protects the lender in case the borrower defaults on the loan. The lender arranges for this type of coverage with a private insurance company. Sometimes the total cost of the PMI is due in one big payment at the closing. More commonly it is rolled into the monthly mortgage payment. One of our first-time homebuyer tips is to monitor how much equity you have built up over time by making mortgage payments. When you get to a certain amount you will be able to cancel your PMI.
What are Mortgage Points?
Mortgage points are fees homebuyers pay to lenders to get a reduced interest rate on a mortgage. That’s why they are also known as discount points or a way to buy down the interest. Generally, each point is worth 1 percent of the amount of the loan. Financial experts often recommend this strategy for homebuyers who are planning to stay in their homes for a lengthy amount of time because it lowers the interest. One of our first-time homebuyer tips is to calculate whether or not you should pay points for the interest rate deduction you by looking for your “break-even” point. Divide the cost of the points by the monthly savings you get from the points to find out how long you have to stay in the house to make it financially worthwhile.
After the seller has accepted your offer and your lender is exploring mortgage options there is one very important step to take. Another of our first-time homebuyer tips is to schedule a home inspection. A professional home inspector is trained to look for things that may already be a problem with the home or things that are about to become a problem. Having a home inspection helps to eliminate surprises after the deal is closed.
Home inspectors generally look at the quality of the roof and whether or not there is any termite damage or damage from other pests around the home. They can look at the well or water system, the septic system and test for radon. They also look at fireplaces, chimneys, HVAC systems, the condition of the windows and more.
Once you have the home inspection report in hand you will be able to make decisions about repairs and whether to ask the seller to take care of some things before closing. Sometimes sellers will hire someone to do the work that was uncovered in the home inspection. Sometimes they will reduce the selling price but leave it up to the buyer to make repairs.
Don’t Underestimate Closing Costs
It is quite an accomplishment to save enough money for a down payment on a house. But the costs associated with buying a home don’t stop there. There are costs associated with trying to get a mortgage including an application fee, an origination fee and a fee for the lender to run a credit check. The lender will require an appraisal of the property to determine its value and that is a cost that is absorbed by the buyer. The buyer will pay for the home inspection. The property lines also have to be surveyed before the sale and the buyer pays for that. The buyer will also have to place in escrow a deposit that is generally equal to two months worth of property taxes. The buyer also has to purchase homeowner’s insurance in advance and pay any fees to transfer membership in the home owner’s association.
If your state requires an attorney at the closing you’ll pay that as the buyer. There will be a fee that covers the closing and maybe even a courier fee for transporting documents.
So another one of our first-time homebuyer tips is to save more money than you think you need to cover both the down payment and all of the costs that can be associated with closing on a property.
Take your time shopping for a home and learn all you can about the market where you want to live. Engage a real estate professional who can guide you every step of the way from searching for a home to unlocking the front door. Once you have a deal on a property go back to the lenders who pre-approved you and begin exploring mortgage terms and interest rates to figure out what works best for your budget. Take care of due diligence before the property is yours by ordering a complete home inspection. And before you sign the closing documents make sure you know how much money you have to bring to the table to walk away as a homeowner.
Carla Turchetti is a personal finance writer who lives in a world where dollars make sense. Some of her favorite topics include financial planning, budgeting, understanding taxes and the ins and outs of running a small business. Carla’s thoughts on money matters have appeared across digital, print and broadcast platforms including American Express OPEN Forum, Intuit’s Blog for Small Business, CanDo Finance, Progressive Insurance, Northwestern Mutual, Insperity, Kabbage and the Raleigh News & Observer. Carla budgets as much as she can to fuel her mad online shopping habit.