Avoid the same mistakes 87% of new home buyers make when purchasing their first home.
Whatever your reasons for buying a house, you may be quite a few steps from the moment you can kick back and enjoy your home purchase. Here’s my best advice for first-time home buyers looking to embark on the journey to homeownership in our current market.
FIRST TIME HOME BUYER ESSENTIAL TIPS
Start Saving Early
Check and strengthen your credit
Choose a real estate agent carefully
Explore mortgage options
Compare mortgage rates and fees
Research first-time home buyer assistance programs
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1. Start Saving Early
Here are the main costs to consider when saving for a home:
Down payment: Your down payment requirement will depend on the type of mortgage you choose and the lender. Some conventional loans aimed at first-time home buyers with excellent credit require as little as 3% down.
Closing costs: These are the fees and expenses you pay to finalize your mortgage, and they typically range from 2% to 5% of the loan amount. In a buyer's market, you can often ask the seller to pay a portion of your closing costs.
Move-in expenses: Having an extra reserve when entering your new home is always ideal. Especially if there are any improvements or renovations you seek to complete. Set some money aside for immediate home repairs, upgrades and furnishings.
2. Check and strengthen your credit
Your credit score plays a significant role in the overall qualification process as well as the interest rates lenders will offer. Having a higher score will generally get you a lower interest rate, so take these steps to strengthen your credit score to buy a house:
Get free copies of your credit reports from each of the three credit bureaus — Experian, Equifax and TransUnion — and dispute any errors that could hurt your score.
Pay all your bills on time, and keep credit card balances as low as possible.
Keep current credit cards open. Closing a card will increase the portion of available credit you use, which can lower your score.
3. Choose a real estate agent carefully
A good real estate agent will scour the market for homes that meet your needs and guide you through the negotiation and closing process. Get agent referrals from other recent home buyers. Interview at least a few agents, and request references. When speaking with potential agents, ask about their experience helping first-time home buyers in your market and how they plan to help you find a home. You might also ask how they find homes that aren't yet on the market, which can be a handy skill when buyer competition is fierce.
4. Explore mortgage options
A variety of mortgages are available with varying down payment and eligibility requirements. Here are the main categories:
Conventional mortgages are not guaranteed by the government. Some conventional loans targeted at first-time buyers require as little as 3% down.
FHA loans are insured by the Federal Housing Administration and allow down payments as low as 3.5%.
USDA loans are guaranteed by the U.S. Department of Agriculture. They are for rural home buyers and usually require no down payment.
VA loans are guaranteed by the Department of Veterans Affairs. They are for current and veteran military service members and usually require no down payment.
You also have options when it comes to the mortgage term. Most home buyers opt for a 30-year fixed-rate mortgage, which is paid off in 30 years and has an interest rate that stays the same. A 15-year loan typically has a lower interest rate than a 30-year mortgage, but the monthly payments are larger.
When interest rates are increasing, you might consider an adjustable-rate mortgage, or ARM. ARM rates are often lower than fixed rates, enabling you to buy a more expensive home for the same monthly payment, but they can also increase (or decrease) over time.
5. Compare mortgage rates and fees
The Consumer Financial Protection Bureau recommends requesting loan estimates for the same type of mortgage from multiple lenders to compare the costs, including interest rates and possible origination fees.
Lenders may offer the opportunity to buy discount points, which are fees the borrower pays upfront to lower the interest rate. Buying points can make sense if you have the money on hand and plan to stay in the home for a long time. Use a discount points calculator to decide.
In a buyers’ market, some motivated sellers may offer to pay some or all of the buyer’s points to close the deal.
6. Research first-time home buyer assistance programs
Many states and some cities and counties offer first-time home buyer programs, which often combine low-interest-rate mortgages with down payment assistance and closing cost assistance. Tax credits are also available through some first-time home buyer programs.
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