Before buying your first home, learn the tips that can help you be successful. Finding the right home and securing the proper financing can feel overwhelming, but these tips can help make it easier.
1. Always get Pre-Approved
Getting pre-approved for a mortgage does a couple of things for first-time buyers:
- It tells you how much you can afford
- Shows sellers you are a serious and capable homebuyer
- It helps you understand what conditions you must clear to close the loan
However, note that there’s a difference between getting pre-qualified and pre-approved. A pre-qualification is an estimate of what you can afford. It’s based on the verbal information you provide; the lender doesn’t verify anything.
A pre-approval requires you to provide proof of your income, assets, liabilities, and credit score. Lenders clear your personal qualifying factors, leaving only the home you purchase to pass the underwriting process.
A pre-approval is what sellers and real estate agents look for when you make an offer on a home.
2. Don’t Commit to More than you can Handle
It’s tempting to borrow as much money as a lender offers, but you could get in over your head. Before getting pre-approved or applying for a mortgage, evaluate your budget. Decide what you can comfortably afford without stressing yourself out.
Make sure your employment, income, and living situation are somewhat stable. For example, a mortgage lasts for 15 – 30 years; you mustn’t bite off more than you can handle, or you could find yourself in default and at risk of losing your home.
3. Save for a Down Payment Early
Buying a home is one of the most significant purchases you’ll make. Not only do you need money for a down payment, but also your closing costs and the cost of keeping up a home.
The more money you have to invest in the home, the easier it is once you are a homeowner. Ideally, you’ll save 20% for a down payment, but a lower down payment may also work. The key is to put down what you’re comfortable with while keeping money to cover closing costs and regular home maintenance.
Figure closing costs will be 3% – 5% of the sales price and regular home maintenance costs an average of 1% of the home’s value annually.
The earlier you save, the more you’ll have to handle these costs easily.
4. Strengthen your Credit
The first thing lenders consider is your credit score. A high credit score means you’re financially responsible and unlikely to default on the loan. However, a low credit score means you have a higher default risk.
The higher your credit score is, the better rates and terms lenders can offer. A lower interest rate can save you thousands of dollars over the life of the loan.
To strengthen your credit, pull your free credit reports, and look for any of the following:
- Payments that are over 30 days late – Bring the accounts current and keep making the payments on time
- Credit lines with over 30% of your credit line outstanding – Pay your credit card balances down to less than 30% of your total credit line
- Collections – Work out an arrangement with the collection agency, and ask them to remove the collection from your credit report
- Too many inquiries – Avoid applying for new credit unless it’s necessary
5. Compare your Loan Options
First-time homebuyers have many loan options available. Consider all your options, comparing them side-by-side to ensure you take the best loan.
Some loan options you may have include:
- Conventional loans – First-time buyers can put down as little as 3% and get competitive rates, but you’ll need good credit and a low debt ratio to qualify
- FHA loans – This is the most popular conventional loan alternative. You don’t need perfect credit and can put down as little as 3.5% and still get competitive rates and terms.
- VA loans – Current and past military members may qualify for VA financing with no down payment and flexible underwriting requirements.
- USDA loans – These loans are for homebuyers who don’t currently own a home and don’t mind living in a rural area.
Buying your first home doesn’t have to be overwhelming. The key is to know what you can afford and to maximize your chances of securing the best rates and terms. In addition, increasing your credit score, saving money for a down payment, and sticking to your budget can help you make buying your first home a fun experience.