When thinking about buying your first home it can feel like you are standing at the bottom of a very big hill. It’s daunting and can be confusing with numerous potential pitfalls on the way.
The nerve-wracking begins because not only is this probably going to be the biggest purchase decision of your life, but the process is complex, employing unfamiliar lingo and confronting you with expenses that can be an unpleasant surprise.
Millions of people do it every year so it’s not impossible, but we could all benefit from some signposts to ease what can be an arduous journey. Here are some tips to make the ride as smooth and cost-effective as possible.
Save early and save often
In general, you’ll be expected to put down 20% of the purchase price, but a lot of lenders have relaxed and are now permitting less. Indeed, some first-time home buyer programs are even allowing just 3% as a deposit. However, less than 20% could mean inflated costs and the need to pay for private mortgage insurance. To help you save for your down payment try to set aside any tax refunds and bonuses you get at work, set up an automatic savings plan and use one of the many apps that are available to track your progress.
Keep on top of your credit score
When taking out a mortgage loan, the level of your credit is a key factor in whether a lender approves of you. It will also help determine the interest rate you end up paying and in some cases the terms of the loan. This is why it’s important to check your credit before you start the home purchase process. There may be errors that could drag down your credit score that you can ask to be rectified. Also look for any opportunities that could improve your credit, like paying down any debts that are outstanding.
Don’t open any new credit accounts
Whenever you open a new credit account like an auto loan or a new credit card, the lender will leave a foot print on your credit file by running a hard inquiry. When you know you will be applying for a mortgage, try to avoid opening any new credit accounts so your score doesn’t dip.
Check your price range and down payment options
You need to be aware of what is within your price range so use a “home affordability calculator” to see how much you can afford.
If you struggle to achieve enough money for your down payment, check out first-time home buyer programs. These are plentiful and include federal Fannie Mae and Freddie Mac mortgage programs with that allow loans with just 3% deposits. There are also Federal Housing Administration and Veterans Affairs loans worth exploring. People are now increasingly trying crowd funding as well as asking family members to see who is willing to pitch in.
Many states also offer assistance programs for first-time buyers with perks like low down payment loans, tax credits, and interest free loans. Your municipality or county may also be able to help.
Don’t be caught out: Budget for the costs of closing
As well as saving for the down payment, you also need to budget for any money that will be required to close any mortgage. Closing costs in general amount to between two and 5% of the loan amount. By shopping around and comparing prices for closing expenses, like homeowners insurance, home inspections and title searches you can choose the most competitive. Costs can also be defrayed by asking the seller to pay a portion of your closing costs or negotiating commission with your real estate agent.
Do you have the money for after you move-in?
It’s important not to lose sight of the fact that you will need to pay for the furniture and fixtures that will go into the house. Furnishings, rugs, appliances, decorating and any other of those touches that you’ll want all cost money.
Research your mortgage options
What is the loan that is right for you? It is a 30-year, fixed-rate mortgage, or is some other loan type right for you? Those people who can afford larger monthly payments, can get lower interest rates with 20-year or 15-year fixed loans. Others may prefer adjustable-rate mortgages, which are riskier but guarantee low interest rates for the early years of a mortgage.
A lot of homebuyers obtain quotes from just one lender, but the Consumer Financial Protection Bureau says comparing quotes from at least three lenders can save a first-time buyer as much as $3,500 or more over the early years of a loan.
Decide if paying points makes sense
Some lenders allow first-time buyers to purchase discount points, prepaying interest upfront in order to secure lower interest rates. Others offer optional negative points, so the lender pays some of the buyer’s closing costs in exchange for higher interest rates. One of the key factors in determining whether buying points is a good idea is the length of time you plan to stay in the house.
Obtain a Pre-approval letter
Being prequalified you can obtain an estimate of how much a lender could be willing to lend based on your financial situation: income and debts. As your home purchase comes closer getting a preapproval letter is smart, because the lender examines all your finances and is able to confirm in writing how much you will be lent and on what terms. Pre-approval letters make the buyer look much more serious to a seller and can provide that all important upper hand over any buyers who haven’t bothered.
Hiring the right buyer’s agent
Because you will work closely with the real estate agent handling the sale, it’s essential you get along with them. The buyer’s agent you want is one that is highly skilled, knowledgeable about the area and motivated.
Buy a home with which to grow
It’s good advice to look at properties that not only meet your current needs but also could accommodate the family that you may be planning to have. By considering your future needs and wants will stop you having to move on too soon.
After all, as you will be finding out, buying homes is not a straightforward business.
If you’re want to see how much you’ll pay over the lifetime of your mortgage, use our calculator.