Buying a house is an exciting investment, but where do you start? For first-time homebuyers especially, the process can seem complicated (and even a little scary). But don’t worry! If you do your homework and prepare, you’ll have the keys to your new home in no time.
Let’s talk through four helpful tips for every first-time homebuyer.
1. Check and Manage your Credit
Your lender is going to check a few factors, and your FICO® credit score is one of the most important. But what is your credit score? It’s a number ranging from 300 to 850 that sums up your credit history, which includes your payment history, outstanding balances, length of credit history, types of credit used, and the number of credit inquiries.
Why does your credit score matter? Your credit score shows your lender your credit worthiness and the risk of lending to you. It may also affect your interest rate and loan type, too. Basically, the higher your credit score, the better. Don’t know your credit score? You can pull it for free once a year on annualcreditreport.com.
If your credit score is on the lower side, check out these tips to building your credit. Also, don’t hesitate to ask your lender or a financial professional for advice. After all, that’s what they’re there for. They should be your go-to mortgage resource for all questions and concerns throughout the process.
2. Determine what you can afford
You should look at your monthly budget and decide on a housing budget moving forward. What do you currently spend on rent and housing each month? Are you comfortable with this amount? Depending on your debt-to-income ratio, your lender will qualify you for a certain dollar amount. They’ll give you a loan estimate that shows your estimated monthly payment. Really consider if you’ll be comfortable with this amount every month and don’t forget that number doesn’t include water, electric, cable, etc.
Remember, just because you qualify for a certain amount, doesn’t mean you have to max out your budget.
If you qualify for $250,000 and find your dream home for $225,000 — great! That just means you’ll have a smaller monthly payment and can spend your extra money every month on something else or save it. When you’re setting a budget, you can also look at areas you could cut spending and save. For example, do you eat out a lot? Maybe cut down five or six meals a week out to one or two. Even if you only save an extra $40 a week, that savings will add up.
3. Start Saving Money
One of the biggest factors that keeps people from buying a home is lack of a down payment. Conventional loans require a down payment of 20% to avoid PMI, but there are many loan options available that offer low and no down payment options for borrowers who qualify. FHA loans, for example, require a 3.5% down payment. So, for example, you’d only have to put down $7,000 on a $200,000 home with an FHA loan, as opposed to the $40,000 down you’d need for a conventional loan. A VA loan offers active and retired military members favorable loan terms with 0% down. Talk with your lender about your loan options so you know how much of a down payment you’ll need to make. Most likely, you’ll also need funds for closing costs, but we’ll talk about that later.
Whether you’re planning to put 20% down or 3.5%, you should start saving now. You’ll need funds for your down payment, but also for any maintenance or emergencies once you become a home owner. It’s a good idea to have a separate savings account for home-related expenses. Would you have enough to buy a new hot water heater should yours break? What about if the roof starts leaking? Being a home owner has it’s perks, but you also have to be prepared.
4. Don’t Forget about Closing Costs
While many loans offer low and no down payment options, buying a home may still involve some cash up front — closing costs. Closing costs are generally 2 to 6% of your purchase price and include things like title and recording fees, prepaids, escrow, loan related fees, mortgage insurance, and third party fees. You and your agent can negotiate with the seller to cover some of your closing costs, but how much exactly is dependent on the type of loan you get.
Additionally, while your seller contributions may cover some or all of your closing costs, you may have to pay some things before closing. Your home inspection and appraisal fees, for example, are due when they’re performed. Talk with your agent and lender about what you will and will not be reimbursed for at closing.
If you’re prepared and educated, buying a home should be an exciting time! For more home buying and homeownership tips and tricks, head over to the Atlantic Bay Blog.