Congratulations! Buying your first home is not only exciting, but it may be just a little bit scary, too. Afterall, this is the biggest purchase you will make in your lifetime. That being said, in the midst of all the excitement, it is crucial to slow down instead of rushing into the homebuying process and a 30-year mortgage. Moving forward without the right knowledge can often lead to costly mistakes as a first time buyer, and that’s the last thing you want to happen after all your hard work preparing to finally being a homeowner.
What Every First-Time Buyer Should Know
1. Know How Much House You Can Afford
It is important to thoroughly assess your financial situation before you even begin house shopping! This is necessary to determine how much you can afford to spend on your new home. Your community bank can help determine how much house you can afford and ensure you accurately assess your needs versus wants to avoid being “house poor.”
2. Understand Key Mortgage Terms
First-time homebuyers should educate themselves on some of the important terms used when discussing their mortgage and home purchase. Here are a few that are commonly misunderstood that will help clarify the process a bit and prevent surprises including: the amount of money you will need to provide and when, monthly payment information, and financing terms.
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Down Payment: This is the amount of money a buyer is required to pay upfront toward the purchase of a home, which can range from 3%- 20% of the purchase price.
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PMI: Private mortgage insurance (PMI) is an additional cost added to your mortgage payment and is required by lenders when a down payment of less than 20% is made by buyer.
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Closing Costs: Fees associated with buying a home are called closing costs, which are usually 2%-5% of the home's purchase price. This can include attorney fees, property appraisals, and mortgage fees and can be negotiated between the buyer and seller about who will pay the costs.
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Escrow: A real estate purchase escrow is a special account that collects and holds funds for real estate transactions. Typically, a neutral party like an attorney holds funds in this trust account until specific conditions are met, releasing the funds once all agreed-upon conditions are satisfied.
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Fixed-Rate vs. Adjustable-Rate Mortgages: A fixed-rate mortgage offers the same interest rate throughout the loan, whereas the interest rate with an adjustable-rate mortgage may go up or down over the life of the mortgage.
3. Watch Out for Hidden Costs
In addition to your monthly mortgage payment, there are some other costs that come along with home ownership you should be familiar with to avoid the financial stress of unexpected expenses. You will also have the cost of property taxes and homeowners’ insurance, which can be set up as part of your mortgage payment. You may also have annual or monthly HOA fees, and of course there will be things like home maintenance and the dreaded unexpected home repair to plan for.
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4. Improve Your Credit Before Applying
Having a good credit score and payment history is the only way to ensure competitive interest rates and a mortgage loan approval from your community bank. Remember that the higher the credit score, the lower the interest rate will be for your mortgage. Before house shopping even begins, be sure to pay down debt, avoid new credit accounts, and correct any errors on credit reports for a better chance of approval and the best mortgage rates.
5. Avoid New Debt During the Process
When you are preparing to buy a home, it is important to avoid making big purchases or opening new credit cards while applying for a mortgage. Your mortgage approval is directly related to your credit score and debt-to-income-ratio and any new use of credit can cause your mortgage to be denied. So, while it is tempting to buy furniture for your new home, please wait until after closing day!
6. Choose the Right Lender and Loan Option
It is important to shop around for a lender for the purchase of your first home. If you are a customer at a community bank, that is a great place to start. The team there can help you with any information you may need on your mortgage as well as loan programs like first-time buyer or low-to-moderate income options you may qualify for. Your local bank is a great resource that can offer a personalized mortgage solution that is best for your unique situation.
7. Get Pre-Qualified Before House Hunting
It is a smart move to get pre-qualified for a mortgage from your community bank before house hunting so you know exactly what you can afford and to let sellers know you are serious about your offer. Your bank will analyze things like your credit score, debt-to-income ratio, and lifestyle to determine your home budget. You will also need to talk to your lender about the funds you have available for your down payment and closing costs to make sure you are able to move forward after you get pre-qualified.
What Every First-Time Buyer Should Know – Middlesex is Here to Help
With a little preparation, a clear understanding of terms, and the right lender, first-time buyers can avoid mortgage “horror stories” and achieve homeownership confidently. Contact your local bank today to learn more about how you can become a homeowner! Get in touch with a Middlesex Federal Home Loan Specialist today!