8 Tips for First-Time Home Buyers: It’s exciting — and a little scary — to think about buying your first home. Even when you know you’re ready to buy a house, you might not be sure where to begin. These tips for first-time home buyers will help you navigate the process from start to finish.
Preparing to buy tips
1. Start saving early
When calculating how much money you need to buy a house, consider one-time expenses as well as new, recurring bills. Here are the main upfront costs to consider when saving for a home:
Down payment: The amount of money you must put down may vary depending on the lender and the type of mortgage you pick. Some conventional loans intended for first-time homebuyers with good credit only need a 3% down payment. But it might be difficult to save for even a tiny down payment. For instance, $9,000 is a 3% down payment on a $300,000 house. Decide on a goal using a down payment calculator, and then start saving by setting up automatic payments from your bank account.
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Closing costs: These are the charges and expenditures you incur to complete your mortgage; they generally represent 2% to 6% of the loan amount. For a loan of $300,000, closing expenses might range from $6,000 to $18,000. You would have to spend more money on top of your down payment to achieve that. In a buyer’s market, you may frequently negotiate for the seller to cover a percentage of your closing costs, and you can compare prices to avoid paying certain expenditures like home inspections.
Budget for moving fees, which for the majority of local movers may reach up to $2,500. (Long-distance migrations might cost a lot more money.) After buying a property, you’ll need some cash. Set aside some cash for urgent house improvements, repairs, and furnishings.
2. Decide how much home you can afford
Figure out how much you can safely spend on a house before starting to shop. NerdWallet’s home affordability calculator can help with setting a price range based on your income, debt, down payment, credit score and where you plan to live.
3. Check and polish your credit
If you are eligible for a mortgage, your credit score will help lenders decide what interest rate to give you. Consider taking the following actions to improve your credit score in order to decrease your interest rate and buy a home:
- Get free copies of your credit reports from each of the three credit bureaus — Experian, Equifax and TransUnion — and dispute any errors that could hurt your score.
- Pay all your bills on time, and keep credit card balances as low as possible.
- Keep current credit cards open. Closing a card will increase the portion of available credit you use, which can lower your score.
- Avoid opening new credit accounts while you’re applying for mortgages. Opening new accounts could put a hard inquiry on your credit report and lower the overall average age of your credit accounts, which could hurt your score.
- Track your credit score. NerdWallet offers a free credit score that updates weekly.
Mortgage selection tips
4. Explore mortgage options
A variety of mortgages are available with varying down payment and eligibility requirements. Here are the main categories:
- Conventional mortgages are the most common type of home loan and are not guaranteed by the government. Some conventional loans targeted at first-time buyers require as little as 3% down.
- FHA loans are insured by the Federal Housing Administration and allow down payments as low as 3.5%.
- USDA loans are guaranteed by the U.S. Department of Agriculture. They are for suburban and rural home buyers and usually require no down payment.
- VA loans are guaranteed by the Department of Veterans Affairs. They are for current military service members and veterans and usually require no down payment.
Regarding the length of the mortgage, you have choices as well. The majority of purchasers choose a 30-year fixed-rate mortgage, which has a fixed interest rate and is repaid in 30 years. Although the monthly payments are higher with a 15-year loan than a 30-year mortgage, the interest rate is often lower.
Consider an adjustable-rate mortgage, or ARM, if you only intend to live in the house for a short period of time. You may purchase a more costly property with the same monthly payment thanks to ARMs’ frequent lower fixed-interest introductory rates, but these rates can also rise (or fall) over time.
5. Research first-time home buyer assistance programs
First-time home buyer programmes are available in many states, certain towns, and counties, and frequently include low-interest loans, down payment help, and closing cost aid. You may be eligible for a grant or a forgiving loan if you fall under the low- to moderate-income range.
Some first-time home buyer programmes also offer tax credits, commonly referred to as mortgage credit certificates.
6. Compare mortgage rates and fees
Plan to compare three to five mortgage estimates from different lenders as you browse around. You may save paying hundreds of dollars in interest by doing this throughout the course of the loan.
To evaluate expenses, including interest rates and potential origination fees, the Consumer Financial Protection Bureau advises receiving loan estimates for the same kind of mortgage from many lenders.
Discount points, which the borrower pays up advance to reduce the interest rate, may be available from lenders. If you have the cash and want to live in the house for a long time, buying points may make sense. To make your choice, use a discount point calculator.
In a buyers’ market, some eager sellers could offer to cover all or a portion of the buyer’s closing costs.
7. Gather your loan paperwork
Your lender will want certain financial documents to confirm your income, possessions, and debt before approving your mortgage, including:
- Proof of income and employment, such as tax returns, W-2s and 1099s.
- Statements for bank, retirement and brokerage accounts.
- Records of debt payments, such as student loans, auto loans or any real estate debt.
- Documentation of other events that impact your finances, such as divorce, bankruptcy or foreclosure.
You’ll need these documents when you apply for the loan as well as for a mortgage preapproval, so gather them in advance to keep organised throughout the process.
8. Get a preapproval letter
An offer from a lender to lend you money up front and on particular terms is known as a mortgage preapproval. A preapproval letter can provide you an advantage over other house buyers who haven’t taken this step yet by demonstrating to home sellers and real estate agents that you’re a serious buyer.
When you’re ready to begin looking for a house, submit an application for preapproval. A lender will do a credit check on you and go over the paperwork you organised in the previous stage. If you apply for preapproval from multiple lenders to compare rates, as long as you do it within a set time period, such as 30 days, it shouldn’t adversely affect your credit score.
