Tips for First-Time Homebuyers
If you’re in the market to become a first-time homebuyer, congratulations! Your hard work is paying off.
Purchasing your first home is an exciting process. Understanding what to expect and how to prepare facilitates the process. The following information can help.
Determine How Much Home You Can Afford
Determine the target price range of your home based on your income, debts, and expenses. Knowing how much you can comfortably afford for a monthly mortgage payment impacts the home you purchase.
Save for Upfront Home Expenses
Purchasing a home requires the following upfront payments:
Down payment: The money you pay upfront to secure a mortgage, which could be 0% to 6% of the home's price.
Closing costs: The fees you pay to finalize the home purchase, typically 2% to 6% of the mortgage amount.
Moving costs: The cost of moving your belongings from your current home to your new one.
Improve Your Credit Score
Your credit score impacts your ability to secure a mortgage. A higher score typically gets you a lower interest rate, saving money.
These tips can help improve your credit score:
Get a free copy of your credit report from each of the three credit bureaus – Experian, Equifax, and TransUnion – to review your information and dispute any errors, which can impact your credit score.
Pay your bills on time.
Keep your credit card balances as low as possible.
Avoid opening new credit accounts while applying for a mortgage, as hard inquiries can hurt your credit score.
Research First-Time Homebuyer Assistance Programs
Many states offer first-time homebuyer programs that combine low-interest mortgages, financial assistance, and closing costs. Assistance might include a deferred or low-interest loan, a grant you don’t have to repay, or mortgage credit certificates that provide tax credits to reduce your home’s cost.
Understand Your Mortgage Options
Different mortgage types have varying eligibility requirements and down payments. The main categories include:
Conventional loans: The most common type of mortgage requires at least a 3% down payment and private mortgage insurance (PMI) until the homeowner has 20% equity.
Federal Housing Administration loans: An FHA loan allows down payments as low as 3.5% and requires FHA mortgage insurance for the life of the loan
Department of Veterans Affairs: A VA loan is available to current or former service members, requires no down payment, and includes a VA funding fee in the closing costs
United States Department of Agriculture: A USDA loan can be used to purchase a home in a rural or suburban area by buyers who fall below the area's household income limits. No down payment is required.
You can choose the mortgage term and whether you want a fixed-rate or adjustable-rate mortgage (ARM). Most homeowners choose a 30-year fixed-rate mortgage.
Compare Mortgage Lenders
Shop around to compare mortgages, interest rates, origination fees, and other costs from at least three lenders. Or, hire a mortgage broker to do the work for you.
If you compare lenders on your own:
When looking at sample interest rates on a lender’s website, check whether discount points are included.
Discount points are prepaid interest that lowers your mortgage interest rate but increases your upfront costs.
Lenders sometimes use discount points to make their advertised rates appear lower.
Secure Mortgage Preapprovals
A mortgage preapproval is a lender’s offer to loan you a specific amount under certain terms. This letter shows home sellers and real estate agents that you’re a serious buyer who’s financially ready to purchase a home.
Apply for preapproval with multiple lenders to compare interest rates and borrowing power. Because lenders will review your finances in detail, the process creates a hard inquiry on your credit reports and can temporarily lower your credit score. However, if you submit your preapproval applications within 30 days, the credit bureaus should recognize that you’re shopping for mortgage preapproval and count the inquiries as one pull
Select a Real Estate Agent
An effective real estate agent will search the market for homes that meet your budget and needs, and guide you through the negotiation and closing processes:
Consider asking recent homebuyers for agent referrals, or searching online for an agent who specializes in your preferred type of home or neighborhood.
Interview a few agents.
Ask agents about their experience helping first-time homebuyers in your market.
Determine how the agent plans to help you find a home.
Request references.
Stay Within Your Budget
Purchase a home based on the amount you can afford so you can comfortably pay back your mortgage. A lender might offer you a loan outside your spending limit, or you might feel pressure to spend more to beat another buyer’s offer in a bidding war. Resisting this urge will help you remain financially comfortable while you find the right home.
Advice for staying within your budget includes:
In a competitive market, consider looking at homes below your price limit to allow room for bidding.
In a buyer’s market, consider viewing homes slightly beyond your budget and asking your real estate agent to make a lower offer.
When you’re ready to make an offer, talk with your agent about including contingencies to protect yourself and perks that could entice the seller, such as a guaranteed closing timeline if your lender can provide one.
Include a Home Inspection
A home inspection is a thorough evaluation of the home’s structure and mechanical systems. An inspector looks for potential problems so you can make an informed decision about whether to purchase the home.
Tips for your home inspection include:
Understand what’s included in the inspection. For instance, standard inspections don’t test for radon, mold, or pests. Ask your real estate agent which other inspections you might need.
Ensure the inspector reaches every part of the home, including the roof and any crawl spaces. Depending on the weather, full access is not always possible. Note any areas the inspector could not review.
Be present for the home inspection. You can better understand the home and ask questions. If you can’t attend, review the reports and ask questions about the findings.
Negotiate with the Seller
Work with your real estate agent to understand the local market and strategize accordingly:
Consider asking the seller to pay for repairs before closing or lower the price to cover repairs you’ll have to make later.
Ask the seller to pay some of the closing costs.
Although the seller typically pays the buyer’s and seller’s real estate agent commissions, the seller might counter by asking you to pay some of the cost.
Your negotiating power depends on the local market, such as when there are more buyers than homes for sale.
Purchase Homeowner’s Insurance
You are required to purchase homeowner’s insurance before closing on the property. The policy covers the cost to repair or replace your home and belongings if they’re damaged by an incident covered in the policy, and provides liability insurance if you’re held responsible for an injury or accident. Consider purchasing an umbrella policy to cover your home, car, and other assets.
*This information is for educational purposes only.
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