Four Tips for First-Time Homebuyers

A huge life milestone for many of us is buying a home for the first time. It’s exciting, but can also seem complicated - and even a little scary. But don’t worry! We’ve got four helpful tips that can alleviate every first-time homebuyer’s anxiety.

1) Check and manage your credit 

Credit is often one of the first things your lender will look at when you’re applying for a mortgage. So, it’s important to understand how credit works and how it affects the mortgage process.

When you apply for a mortgage, your lender is going to check your FICO® credit score. This is a number ranging from 300 to 850 that sums up your credit history, including your payment history, outstanding balances, length of credit history, types of credit used, and the number of credit inquiries. 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. (Pro-Tip! Your credit score can be found for free once a year on annualcreditreport.com.)

The higher your credit score, the better. If it is on the lower side, there are easy things you can do to raise your score.

2) Establish (and stick to) a budget 

Consider your monthly budget and decide on a housing budget moving forward. Depending on your debt-to-income ratio, your lender will qualify you for a certain dollar amount. You’ll get a loan estimate that shows your approximate monthly payment. Consider if you are comfortable with this amount every month and remember this amount does NOT include water, electric, cable, etc. 

Just because you qualify for a certain amount, you do not need to max out your budget. For instance, if you qualify for $250,000 and find your dream home for $225,000 — great! With a smaller monthly payment, you can save your extra money or spend it each month on something else. When setting a budget, you can also look at areas to cut on spending and to save your money. If you eat out a lot, consider cutting five or six meals a week out to just one or two. Even if you only save an extra $40 a week, those savings will add up!

3) Save for a down payment 

Many hesitate from buying a home because of the lack of cash for 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. 

Whether you’re planning to put 20% or 3.5% down, you should start saving NOW. It’s a good idea to have a separate savings account for home-related expenses. You’ll need funds for your down payment, as well as for any maintenance or emergencies once you become a homeowner. Will you have enough if your hot water heater breaks? What about if the roof starts leaking? It’s important for all homeowners to be prepared for anything!

4) Prepare for 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 including title and recording fees, prepaids, escrow, loan related fees, mortgage insurance, and third-party fees. You and your agent can try to negotiate with the seller to cover some of your closing costs. Just remember that the exact cost is dependent on the type of loan you get. 

And while your seller contributions may cover some or all closing costs, there may be some things you’ll have to pay for before closing. For instance, your home inspection and appraisal fees are due when the services are performed. (Pro-tip: Talk with your agent and lender about what you will and will not be reimbursed for at closing.)

If you’re prepared - especially if you’ve followed these four helpful tips, buying a home for the first time will be much more enjoyable and exciting!