Buying your first home is a big decision, often as stressful as it is exciting. It’s important be patient, and move through the process methodically. A wrong decision can leave you with buyer’s remorse, something every first-time home buyer wants to avoid. By following a sensible plan of action, everyone can have a successful homes purchase.
We put together essential tips to help you navigate the home buying process with confidence and avoid common pitfalls, and organized them into three categories:
- Mortgage application and down payment
- Searching for your ideal home
- Common firs-time home buyer pitfalls and how to avoid them
Mortgage Application & Down Payment
1. Save for your down payment & closing costs
While mortgage loans generally require 20% down, it’s not difficult to find lenders that require as little as 3%. While it is tempting to pay less upfront, it will cost you a lot more in the long term. More mortgage means more interest payments and higher origination fees. Additionally, mortgages with low down payments often require mortgage insurance, adding to your monthly costs.
Along with your down payment, you will also need to cover closing costs. On average, closing costs are 3-5% the purchase price of your home. If they are higher than 5%, you may be paying too much. Your lender will give you an exact number so you know precisely what to expect when it comes time to sign. Closings costs cover many essential steps in the home buying process, including:
- Independent Appraisal
- Home inspection
- Attorney fees
- Homeowner’s insurance
- Title fees
- Prepaid costs
Our recommendation is that you save for your down payment and closing costs as early as possible. Put any optional expenses on hold. Any money you save upfront means more money in your pocket in the long run. You’ll be grateful at the end of the day. Financial restraint always pays off.
2. Research your loan options
There are many types of mortgages. Which ones you qualify for depends on many factors, including the size of your down payment, income history, and credit history. Typically, you will end up with one of these three mortgage types:
- Conventional mortgage
This is the most popular type of mortgage, and for good reason. Conventional mortgages tend to carry low interest rates, especially if you can afford a 20% down payment. However, you can still qualify with as little as 3% down, but only with the additional cost of mortgage insurance.
- FHA loans
Insured by the Federal Housing Administration, they are designed for low to moderate-income borrowers. FHA loans only require a 3.5% down payment, and a credit score of 580. If your credit score is lower, you can still qualify with a higher down payment.
- VA loans
Guaranteed by the Department of Veterans Affairs, these loans come with many benefits. In most cases, no down payment required or mortgage insurance is required. They also carry lower interest rates, and place limitations on buyer closing costs, among many other benefits.
In most cases, a 30-year fixed mortgage is your best option. If you want to pay your mortgage off sooner, and can afford higher payments, consider a 15-year fixed mortgage.
On the other hand, if you only plan to stay in your home for a few years, consider an adjustable-rate mortgage. It guarantees a low interest rate for the first few years of your loan.
3. Find out if you are eligible for federal and state assistance programs
The federal government as well as states offer assistance programs for first-time home buyers. Benefits include down payment assistance, tax credits, discount interest rates, closing cost assistance, and more flexible loan qualification requirements. Additionally, many local counties and municipalities offer first-time home buyer incentives. The more you take advantage of these opportunities, the more money you will save.
4. Get pre-approved for a loan and find out how much house you can afford
It’s easy to get pre-qualified for a mortgage. You are not making a financial commitment, and you’ll get a clear idea of how big a mortgage you qualify for. This determination is made based primarily on your income and debt obligations, among other factors like work history.
When your home search gets serious, it’s time to get a pre-approval letter, where a lender thoroughly examines your finances and states in writing how much they are willing to lend you and under what terms. With a pre-approval letter in hand, you can search homes for sale with confidence, knowing exactly what you can afford, and what may be financially out of reach.