- Start saving for a down payment.
- Build your credit score.
- Get pre-approved for a mortgage.
Read on for more!
Congratulations! You’ve taken the first step toward home ownership – deciding to buy one!
Now what?
Before you actually start hunting for your first house, start planning with some prep work to make sure when you do find the perfect place, you’re in the perfect position to buy it. You don’t want to have your heart set on a home and then have the financing fall through.
To help put you in that position, here are some tips and first steps first-time home buyers can take to prevent getting the home of your dreams from turning into a nightmare.
First Steps
1. Start saving for a down payment.
The larger your down payment, the smaller your mortgage payment, so start to save as soon as you can. (Just giving up that morning latte at the local coffee shop can go a long way toward your goal. 😉 While most lenders offer the best rates on mortgage loans to those who can make a down payment of 20% or more (and you won’t have to pay for private mortgage insurance either), there are several programs available to help first-time buyers who can’t put that much down. (More on that below.)
In a survey by NerdWallet, millennial homeowners who had bought a home in the previous five years said it took an average of 3.75 years to save enough to buy. So patience, young Grasshopper, is the key to making sure your down payment helps you secure a monthly mortgage you can actually make.
To help you save, now’s the time, too, to start a house-buying budget. One of the biggest mistakes first-time buyers make is not figuring out how much house they can comfortably afford. Use the 25% rule: Make sure your monthly housing costs (including your mortgage and HOA fees, taxes, insurance, etc.) won’t amount to more than 25% of your monthly income.
Other costs first-time buyers need to save and budget for include:
- Closing costs (typically 2-5% of the loan amount)
- Move-in expenses (moving costs, home repairs, upgrades, furnishings, etc.)
- Emergency fund (for things like when the water heater bursts. Try to save for 3-6 months of unexpected expenses.)
How much house can you afford? Calculate here.
2. Build your credit score.
Your credit score is one of the biggest factors lenders look at when you apply for a home loan. To make sure your score is as high as possible when you’re ready to shop for mortgages, add a debt reduction allowance to your house-buying budget to start paying off as much debt as possible. Be sure to keep making your credit payments on time and check your credit score often to correct any mistakes and clear up any discrepancies.
What credit score do you need to buy a home? Check these guidelines.
3. Get pre-approved for a mortgage.
Once you’ve saved a down payment amount you’re comfortable with, it’s time to start shopping for your mortgage. Like getting a second opinion from a doctor to ensure you get the best medical treatment, comparing rates and terms from competing lenders is an important step in finding the best loan to fit your budget and needs. It can help you save money, too.
There are a variety of mortgages and loan programs for first-time buyers available, all with different down payment and eligibility requirements. The most common types of loans are:
- Conventional mortgages – Not guaranteed by the government, some conventional loans available to first-time buyers require as little as 3% down.
- FHA loans – These are insured by the Federal Housing Administration and allow down payments as low as 3.5%.
- USDA loans – Guaranteed by the U.S. Department of Agriculture, USDA loans are for rural home buyers and usually require no down payment.
- VA loans – Guaranteed by the Department of Veterans Affairs, these are for current and veteran military service members and usually require no down payment.
You also have options when it comes to the term, or length, of your mortgage. Most home buyers go with a 30-year fixed-rate mortgage that you pay off in 30 years with an interest rate that stays the same over the life of the loan. A 15-year loan typically has a lower interest rate than a 30-year mortgage, but the monthly payments are larger.
Once you’ve settled on a lender, submit a formal loan application and request a pre-approval letter from them. Pre-approval doesn’t guarantee a loan but does help set you up for final approval once you find a home to buy. It also gives you an advantage over other buyers as many sellers now ask for pre-approval before accepting an offer.
Apply and get pre-qualified right here through Offerpad Home Loans!
Once you’ve taken the steps above comes the fun part – finding your first home! Look for the second part of this blog for “Next Steps & More Tips for First-Time Home Buyers,” posting soon here on Offerpad.com!
