The process of shopping for a home, negotiating a purchase price, applying for a loan, and closing a mortgage can be daunting and complicated for even a seasoned homebuyer. As a first-time homebuyer, everything about the process is new and unfamiliar. While your mortgage lender and local credit counselors can help you navigate the path to homeownership, the following do's and don'ts will help you avoid some of the more common mistakes and oversights that can trip you up on your way to buying your first home.
Depending on the type of mortgage loan you qualify for, you might have to save anywhere between 3.5% and 20% of your home's purchase price. A down payment alone can require a significant chunk of change. On a $200,000 home, you could need to save anywhere from $7,000 to $40,000 to cover your down payment. Even with minimal down payment requirements, paying more up-front will save you money in interest in the long run and might also prevent you from having to pay for private mortgage insurance, also referred to as PMI.
The savings needed to purchase a home don't stop with the down payment. You will also need to cover closing costs. Closing costs usually include a loan origination fee, an initial escrow payment, recording fees, transfer fees, appraisal fees, title insurance costs, and more. Plan to pay between 2% and 5% of your loan amount on closing costs. Your lender will provide a detailed list of fees before closing.
After closing your loan, you shouldn't owe the bank or title company any additional money (except, of course, your monthly mortgage payment). Owning a home, however, brings about all sorts of new expenses. Before purchasing a home, be sure to reserve some savings for furniture, new fixtures, fresh paint, appliances, home repairs, and improvements.
As a good rule of thumb, you should aim to have housing expenses (mortgage payment, taxes, insurance, and HOA fees) take up no more than about 25% of your monthly income. This rule ensures that you leave room to put money towards other things like a car or other transportation expenses, medical costs, emergency savings, vacation savings, clothing, and entertainment. Although you might get approved for a larger loan and monthly payment, it's usually financially safest not to purchase a home at the top end of your budget.
You can request a free annual report of your credit history from each of the nationwide credit reporting companies – Equifax, Experian, and TransUnion – to provide you with a free copy of your credit report, at your request, once every twelve months. You can order online at annualcreditreport.com. Beware of imposter websites; this is the only site authorized by law to provide the free annual credit report. Order all three at the same time, or spread them out.
Review your credit report to make sure the information is accurate and up to date. See if you have any past-due payments or collection accounts. Bring all credit payments current and pay off any collections. Be ready to have an honest discussion with your mortgage lender about any negative marks on your credit history and steps you can take to improve your score.
Multiple inquiries can lower your credit score. New loans, monthly payments, and credit card balances will increase the amount of debt you have to pay each month, hurting your debt to income ratio (total monthly debt divided by total monthly income). The debt to income ratio is one of the key factors lenders consider when evaluating a mortgage loan application; it helps determine a borrower's ability to repay the proposed loan.
Identifying a mortgage lender and real estate agent you want to work with before you start looking for your first home can be very beneficial. Both individuals can provide guidance.
Finding a mortgage lender that can review your credit score and finances in advance can save you both time and money. A mortgage lender can assist you with most of the steps listed here, providing you with the knowledge you need to move forward confidently and setting you up for a successful first-time homebuyer experience.
It's a common misconception that enlisting the help of a real estate agent is a waste of money. From shopping for homes and neighborhoods, understanding housing costs, and negotiating a buy-sell agreement to navigating the home loan approval and closing process, a real estate agent will save you time, money, and energy.
Inspections are part of the mortgage process. An inspection, however, doesn't always cover everything. Be sure to attend your inspection and pay close attention. It's important that your inspector can access all areas of the house (crawl spaces and attics). Ask your inspector upfront for an inspection checklist, and don't be afraid to ask them to take a closer look at something if you notice anything that seems amiss.
Look into the different loan options and packages available to you. In addition to federal programs like FHA, USDA, and VA home loans, be sure to research your state and local homeownership assistance programs. As a first-time homebuyer, you might find that you qualify for assistance with your down payment or other benefits.
If you wait to start the loan application process until you find the house that fits your dreams and budget, you might miss out. Meet with a mortgage lender in your area to apply for pre-approval or pre-qualification in advance. You'll want to know the home loan amount in advance and how it fits within your budget. With pre-approval, you will be able to negotiate a buy-sell agreement as soon as you find a house you love and have an offer accepted — without waiting for credit approval.
When looking for your first home, think about what your future housing needs might be. Do you want a house that will accommodate a big family or is close to a good school district? If you consider your future needs now, you will find a home that you can grow into.
We live in a society in which prices on most items are set in stone. Real estate prices, however, work differently. While you probably won't get a low-ball offer accepted, you do have some wiggle room with negotiations. Work with your real estate agent to discuss potential ways to work the seller's price down. You might be able to get them to cover some of your closing costs or even agree to handle certain repairs (cost and execution) before closing.
Terms and conditions
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal, or accounting advice. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this information should consult with a financial professional. The information contained in these articles was obtained from sources believed to be reliable and accurate at the time of publishing. We do not represent that it is accurate or complete, and it should not be relied upon as such. All opinions and estimates expressed in this article are as of publication date unless otherwise indicated, and are subject to change.