Thinking about buying your first home? That’s exciting! It’s also a little scary – first-time home buyers face a big financial commitment and a whole lot of new information. Don’t worry about the information, though. We have some insider secrets to help you sort out what you need to know and do.
Here are 21 tips to help you get ready to buy a home.
1. Start Saving Early
Getting a mortgage requires you to put skin in the game by making a down payment on your home. That’s typically from 3% of the purchase price to 10-20%, depending on the loan.
Start saving by slashing expenses and creating a budget to help you reach your goal. You also could ask family members if they can help out. If money is an issue, check out loans with small down payments such as FHA and VA loans to find options that fit your situation. Additionally, some government programs help first-time buyers with down payments (see Tip 7).
2. Start Working on Your Credit Score as Soon as Possible
Your credit score plays a role in getting a mortgage. Almost everyone has room for improvement. Start by paying off or paying down credit cards: the higher your available credit and the lower your utilization, the higher your score. Three to six months before you reach out to a lender, review your credit reports from all three major agencies: Equifax, Experian and TransUnion. Each will show different credit history items. You’re entitled to an annual free report from each agency, available from AnnualCreditReport.com. Look for errors such as old debts you’ve paid off or items that aren’t yours. Take steps to dispute errors, and follow up to make sure they’ve been corrected. Challenges to reports take time to resolvIf you need to build credit, look into getting a secured credit card.
3. Try Not to Finance Anything New Before Buying a Home
How much you owe will affect how much you can borrow. Financing a large new purchase before you get a mortgage (a new car, for example) reduces your loanable amount. You also may negatively impact your credit score with a large purchase, since you’re increasing utilization and lowering your available credit. That could have a bearing on home loan terms, such as interest rate. It’s best to stay away from other major purchases when you’re about to make the biggest purchase of your life.
4. Decide How Much Home You Can Afford
What price home are you in the market for? In addition to estimating monthly mortgage payments that you think are doable on your income, have you factored in other expenses such as insurance, property taxes, utility payments, and maintenance costs? What you can afford may be less than the online mortgage calculators are showing.
When you talk with lenders, they’ll help you understand the maximum mortgage you qualify for. Then you’ll need to make a decision about what price house and which loan amount up to that maximum feels most affordable for your lifestyle.
5. Explore Mortgage Options
A good start for exploring different mortgages is to compare conventional loans to FHA loans. An FHA loan for first-time home buyers, for example, allows lower qualifying credit scores and a lower down payment than conventional loans do. A conventional loan, however, can have fewer restrictions. If you are an active-duty service member or veteran, another option is VA home loans. These have generous benefits and terms.
There are many mortgage products available. Your best bet is to work with an experienced loan officer who asks the right questions and finds loans that best fit your situation. Then you’ll have everything you need to make a decision.
6. Get Familiar with First-Time Home Buyer Programs
Like the FHA loan mentioned above, there are first-time home buyer programs that can save you money. Here are a few to ask your lender about:
- USDA loan: The U.S. Department of Agriculture guarantees mortgages to home buyers in some rural areas.
- Fannie Mae and Freddie Mac: These real estate entities fund the HomeReady® and Home Possible®mortgage programs, respectively.
- Fannie Mae’s HomePath and Freddie Mac’s HomeSteps have programs for buying foreclosed homes that favor first-time homebuyers.
7. Find Out About First-Time Home Buyer Assistance in Your State
Certain government programs are set up to help with first-time home purchases (i.e., down payments, closing costs). Programs are often for buyers with low-to-moderate incomes and can be grants (that you don’t have to pay back) or loans. Learning what is available – and when – can help you time your purchase to take advantage of financial assistance:
- Affordable Housing Programs (AHP): Work with a lender from a Federal Home Loan Bank (FHLB) like Capital Bank, NA to access these funds.
- FHA down payment grants for 2023
- Housing and Urban Development (HUD) homebuying programs by state
- First-time home buyer programs by your state
8. Get Your Loan Paperwork Together
A stress-free home purchase is all about being prepared. You can get ahead of the game by gathering your financial paperwork: all bank account statements, 30 days of pay stubs, two years of W-2s and of tax returns, 12 months of rent payments and lease, documentation of any outstanding loans, and more, are required.
Don’t be freaked out if you get asked for some of these twice! Different companies may need to get the information directly from you rather than sharing documentation (i.e., your mortgage lender and the loan underwriter).
9. Compare Mortgage Lenders
It’s good to ask family and friends for recommendations but important to choose your own lender. Know what you’re looking for: best interest rates only? A loan officer to work closely with you? Here’s a guide to finding a mortgage lender that can deliver the best loan terms, interest rates, and service for your money.
10. Avoid Interest-Only and Adjustable-Rate Mortgages
Interest-only mortgages and Adjustable-Rate Mortgages (ARMs) are two of the riskiest types of financing, and downright stressful for first-time home buyers. Although the two are different, the reason for getting these loans is the same – to start home ownership by making the lowest possible monthly payments (and put off paying the principal cost). The thing is, you may not be able to afford higher payments when they come due or if interest rates rise.
In general, first-time home buyers are the wrong borrowers for risky loans. If you have a lender who is trying to steer you to one of these products, then you have to ask yourself some hard questions: what price house can I really afford and is this the right lender to help me get there?
11. Don’t Forget about Closing Costs
When you’re estimating how far your cash will go toward buying a home, make sure you add in closing costs. Closing or “going to settlement” is the end of the home-buying process. That’s the day money changes hands to complete the sale. Your lender will give you an estimate of all costs early on, but many people are surprised by how much closing costs are. According to Zillow, closing costs vary depending on lender and locale, from 2-5% of your purchase price. For example, if you buy a home for $319,500 and closing costs are 3.3% of that, then you’ll pay $10,544 in closing costs.
12. Keep an Eye Out for Other Expenses
Your down payment and closing costs aren’t the only expenses of the mortgage process! You’ll have loan fees required by the lender, such as an appraisal fee to evaluate the property’s value and other fees; a title search fee, to make sure the seller has legal title to the property; and sometimes up-front money to prepay property insurance and taxes. Here’s a breakdown of costs associated with buying a home.
13. Make Sure You Are Financially Ready for a Home Loan
Most mortgages take at least 30 days to close. Having a mortgage can be as much as a 30-year commitment. Make sure you’re ready for a home loan by asking yourself a few hard questions:
- Are my finances in order? (Good credit, no/low debt, enough cash flow to meet monthly expenses)
- Have I saved enough for a down payment and closing costs?
- Can I qualify for mortgage payments that will comfortably fit my monthly budget?
- Is my income stable enough to afford a mortgage, property taxes and insurance, and other expenses?
- Will a home that I can afford now suit my/my family’s needs for the foreseeable future?
- Do I plan to stay in the home at least five years? (If you sell too soon, you may lose money because of the costs of buying and selling, as well as the short-term unpredictability of housing market growth.)
14. Get Pre-Approved for a Home Loan
Getting pre-approved for a home loan means a mortgage lender has reviewed all of your financial paperwork and is ready to give you a loan up to a certain amount – before you even find a home to buy. This not only reassures you that you can reach your goal of home ownership, it also is attractive to home sellers! Pre-approval shows sellers that you’re ready, willing, and able to buy their home. In a multiple-offer situation, a pre-approved buyer may win over a buyer who hasn’t started the application process.
15. Use Real Estate Apps to Look for Your Dream Home
Have you found where you’d like to live and understand how much homes cost there? Search on real estate apps such as Redfin, Realtor.com, and Zillow to narrow down the types of homes and areas you like, prices that fit your budget, and the neighborhood amenities you want. As well as looking at homes for sale, look at recent “sold” prices to find out what people really paid. This will give you a great start on understanding your top priorities in a home before you start working with an agent.
FYI: Some apps will show properties in your city or town, and some won’t. This varies by locale.
16. Find the Right Real Estate Agent for You
Good real estate agents understand the current housing market. They know neighborhoods, housing inventory, how to compare homes and help you make a decision, and how to present your best offer to a seller and negotiate in your best interest. They also guide you through the escrow to closing process. This means you want to hire someone knowledgeable, experienced, and plugged in.
Ask friends, family, and coworkers you trust for recommendations and talk with several agents. Go to open houses – you may meet an agent you like. You’ll be spending a lot of time with your agent for months, so choose someone you’ll enjoy working with!
17. Utilize Open Houses and Virtual Tours
Touring houses for sale can help first-time buyers figure out what they want in a home. Many homes for sale now post 3-D or video tours online. These make it easy to tour virtually and see the flow from one room to another. If you’re comfortable touring in person, that’s really the way to go. You’ll get a better feel for how you would live in a space when you’re standing there. Go to open houses with your agent when possible – they’ll show you what to look for and what to ignore (that wallpaper!).
If you go alone, here’s some advice: on-site agents work for the seller. Don’t give away personal information or your feelings about the house; the info could be used against you in a sales negotiation.
18. Don’t Be Afraid to Negotiate with the Seller
When you know what price home you can afford and what you need in a home to be happy, then it’s worth negotiating to get it. How you approach negotiations, though, depends on the starting sales price and the current housing market. For instance, in a hot market with low inventory and multiple offers per property, a low-ball offer isn’t going to get you a home. In general, it’s best to work through your agent – they have the experience to help you prepare a strong offer to buy, and to negotiate strategically on your behalf.
19. Try Not to Get Emotionally Attached to a Home
The reality of home buying is that you may not get the first home you want. In a competitive market, there can be multiple offers for each home – and only one buyer will get it. Sometimes sellers change their minds and take their homes off the market. Sometimes an inspection of the property shows too many expensive problems for buyers to overcome. And sometimes a dream home can be out of your price range.
Just keep looking! You’ll always find a home you like and once you make it yours, you’ll fall in love with it.
20. Save Physical Copies of Your Home Buyer Paperwork
If you think that was a lot paperwork you gathered to get a mortgage, wait until you see the enormous pile of documents to review and sign at closing! You’ll want to keep a physical file of all fully executed documents for reference, with signatures of all parties. For instance, legal questions could come up about your loan, or you may have to file a claim against the seller. When you eventually sell that home, the information will come in handy for tax purposes.
21. Make Sure You Budget for Home Maintenance
During the home inspection before you buy, you’ll get an idea of when you might have to replace the big mechanicals such as an HVAC or plumbing. Your seller may even offer an insurance policy to cover those costs within a one to three-year period as part of the sale. Beyond that, a general rule of thumb for a home maintenance budget is 1% of the purchase price, per year, for a newer well-built home. Older homes usually need more than that just for basic upkeep.
As a new homeowner, keeping your most valuable possession in good shape will be a priority.