Buying a home can be overwhelming for the first time. There are so many steps, tasks, and requirements and you may be anxious about making an expensive mistake. But first-time homebuyers actually enjoy some special advantages created to encourage new entrants into the real estate market. To demystify the process so you get the most out of your purchase, here is a rundown of what you need to consider before you buy and what you can expect from the buying process itself, plus tips to make life easier after you buy your first home.
When Preparing To Buy
It’s never too early to start saving. Consider these common costs when buying a new home:
- Down payment: Your down payment requirement will depend on the type of mortgage you choose and the lender you borrow from. Conventional loans aimed at first-time homebuyers with excellent credit allow as little as 3% down, but even a small down payment can be challenging to save. For reference, a 3% down payment on a $300,000 home is still $9,000. Use a down payment calculator to decide a goal and then set up automatic transfers from your checking account to your savings account to get started.
- 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.
- Move-in expenses: You’ll need extra funds after the home purchase. Set some money aside for immediate home repairs, upgrades and furnishings.
1. Deduce how much you can afford
- Figure out how much you can realistically spend on a house before starting to shop. You can use an online home affordability calculator to help with setting a price range based on your income, debt, down payment, credit score and where you plan to live.
2. Strengthen your credit score
Your credit score will be used to determine whether you qualify for a mortgage and can affect the interest rate lenders will offer. Strengthen your credit score by:
- Obtaining and reviewing your credit reports from Experian, Equifax and TransUnion. These are the three major credit reporting agencies and they offer these credit reports for free.
- Paying all your bills on time and keeping your credit card balances as low as possible.
- Keeping current credit cards open. Closing a card will increase the portion of available credit you use, which can lower your score.
- Tracking and monitoring your credit score.
3. Research first-time homebuyer assistance programs
- Many states and some cities and counties offer first-time homebuyer programs, which often combine low-interest-rate mortgages with down payment and closing cost assistance. Tax credits are also available through some first-time homebuyer programs.
4. Be sure to 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
So You’re Ready To Shop
1. Weigh the pros and cons of different types of homes
- Consider which type of home is best for your lifestyle and budget, both in the present and in the long term. A condominium or townhouse may be more affordable than a single-family home, but shared walls with neighbors may mean less privacy. Don’t forget to budget for homeowners’ association fees when shopping for condos and townhomes, or houses in planned or gated communities.
- Another option to consider is buying a fixer-upper — a single-family home in need of updates or repairs. Fixer-uppers usually sell for less per square foot than move-in-ready homes. However, you may need to budget extra for repairs and remodeling. Renovation mortgages finance both the home price and the cost of improvements in one loan.
- Think about your long-term needs and whether a starter home or forever home will meet them best. If you plan to start or expand your family, it may make sense to buy a home with extra room to grow.
- Check out potential neighborhoods thoroughly. Choose one with amenities that are important to you and test out the commute to work during rush hour.
2. Stick to your budget (really!)
- A lender may offer to loan you more than what is comfortably affordable, or you may feel pressure to spend outside your comfort zone to beat another buyer’s offer. To avoid financial stress down the road, set a price range based on your budget, and then strictly stick to it.
- Look at properties below your price limit to give some wiggle room for bidding in a competitive market.
Once You’ve Found ‘The One’
1. Invest in a home inspection
Professional inspectors look for potential problems so you can make an informed decision about buying the property. Here are some things to keep in mind:
- Standard inspections don’t test for things like radon, mold or pests. Understand what’s included in the inspection and what other inspections you might need.
- Make sure the inspector can get to every part of the house, such as the roof and any crawl spaces.
2. Purchase adequate home insurance
Your lender will require you to buy homeowners insurance before closing the deal. Home insurance covers the cost to repair or replace your home and belongings if they’re damaged by an incident covered in the policy. It also provides liability insurance if you’re held responsible for an injury or accident. Buy enough home insurance to cover the cost of rebuilding the home if it’s destroyed.