Buying your first home is a major milestone! It’s an exhilarating step in your life that you’ve probably been saving up for, and contemplating, for quite a while. However, for a lot of first-time home buyers, the entire process is overwhelming. You are most definitely not alone in feeling this way. It’s likely the most expensive and complex financial transaction you’ve made to date.
So, if you’ve decided you’re ready to purchase your first home, here are six tips that will set the stage for a low stress home buying experience that will get you to the closing table!
- Figure out what you can afford
Before you even start looking online, it’s important to figure out what your budget allows for a monthly mortgage payment. Initially, use a mortgage calculator to get a ballpark estimate of how much of a monthly payment you can afford. Then, to get a more solid understanding of what you can afford, meet with a lender. A lender will walk you through different loan options and down payment scenarios to help you get your monthly payment where you feel comfortable.
As a first-time home buyer, the goal is to get a loan with a comfortable monthly payment. You should be more concerned with your monthly payment as opposed to the purchase price of the home!
- Save for closing costs
Your down payment does not cover closing costs, so this an additional expense you will need to budget for. It’s important to know about these additional expenses upfront. Nobody likes surprises at the closing table!
Closing costs, which normally total approximately 3% of the home’s purchase price, include the appraisal fee, transfer fees, loan origination fees and any other costs associated with the transaction. Your lender will provide you with a specific number so you know exactly what you need to bring on closing day.
- Explore different financing options
Figure out how you’re going to finance your dream home BEFORE you find it. The time to explore different financing options is now. There are many loan options out there, it’s just a matter of consulting with your lender and weighing the pros and cons to find what’s best for you.
As a first-time home buyer, you may not have money set aside for a big down payment. Do NOT let that deter you from pursuing homeownership! There are many low-down-payment loan options that require as little as $1,000 down. Plus, as a first-time buyer, there are many programs that you can take advantage of. For example, some states offer first-time buyers down payment assistance, tax credits or home buyer grants (free money!). Some lenders even offer reduced mortgage rates for first-time buyers. Be sure to ask your lender to break down each loan option in detail, so you can make the best financial decision for you.
- Get your credit on point
Your credit is one of the deciding factors in your loan approval. Here are some preparation recommendations for buying your first home:
- Pay off your debt.
- Avoid opening any new credit accounts (like a credit card or auto loan).
- Avoid major purchases that increase your outstanding credit card balance and yes, that includes new furniture for your home, as tempting as that may be.
The lender’s mortgage decision is based on your credit score and your debt-to-income (DTI) ratio, which is the percentage of your income that goes towards monthly debt payments. So, the higher your credit score and the lower your DTI, the better your interest rate and financing terms. Know your situation and request a free credit report from one of the three main credit bureaus: Equifax, Experian and TransUnion. Review the credit report and double-check that it’s accurate.
- Shop lenders
Before you look for your new home, you’ll need to secure a lender. Your lender will be one of your most trusted advisors, so choose wisely. Take the time to get to know them and make sure they get to know you and your financial goals. You will save yourself a whole lot of money and stress by taking the time to choose the lender that is perfect for you.
Interest rates, closing costs, loan origination fees and financing incentives vary from one lender to the next. When meeting with lenders, ask them to draft your estimated closing costs. This could be a deal breaker, as there may be a big difference between two quotes.
All mortgage applications initiated within a 45-day window will count as just one credit inquiry on your credit report. The government is also encouraging you to shop lenders!
- The 75% rule
Too often, first-time home buyers are disappointed that they cannot find a home that has everything on their wish list. Unfortunately, that’s just how it works.
A good rule of thumb: Your new house should satisfy, at a minimum, 75% of your must-haves and DON’T BUDGE on these. Regarding the remaining 25%, you can always update and remodel your home over time. It might totally disgust you to live with those outdated kitchen cabinets, however is it worth it to stay in an awesome school district or to live in an up-and-coming area? Absolutely!
Buying your first home is a major undertaking, but you can do it! Stick to these steps and you’ll be well on your way to becoming a happy first-time home owner. All the best!