Are you considering taking the leap and moving out of your apartment or parents' home to purchase your first property? It's natural to have some fears when buying a home for the first time. There is a lot of money involved and potentially many things that can go wrong. It can also be an exhilarating time, which could tempt you to make unwise decisions that harm your long term financial life.
Let's investigate some of the first time home buying tips you need to know to avoid problems.
Setting Your Budget
It is no good looking at homes that are out of your price range. It will leave you disappointed when you discover you can't get a mortgage to cover the cost. It could mean you are more likely to overstretch your finances and struggle to meet your monthly payments.
You should look at paying no more than a quarter of your monthly earnings on mortgage payments. This will give you enough to cover the other expenses that owning a house brings.
Once you know what you can afford, you can begin to search for a home. If you find a home you like online, send it to your real estate agent, so they have a better understanding of what you want. They can then check the MLS to find the home you want in your chosen area.
Buying a house for the first time is likely to be more expensive than you imagine, and certainly more costly than renting. To give you the best chance of avoiding getting into a difficult financial situation that could risk you losing your home to foreclosure, you should make sure your finances are ready.
Before you start the home buying process, work on removing your debts and building an emergency fund to see you through the difficult times. This will be on top of a down payment that you'll need to get a loan.
Increasing Your Credit Score
Along with bringing down your debt load, it is also advisable to work on increasing your credit score before purchasing a home. Your credit score will have a significant influence over the terms and conditions you receive on your mortgage from the lender. Over the life of the loan, the amount of interest you pay is substantial. A more favorable interest rate means ultimately paying less for the property.
If you are in the unfortunate position of not having the best credit score, you might want to consider using the services of a company like Credit Karma. Credit Karma makes it easy for consumers to understand how their credit decisions will impact their score. Something as simple as closing a credit card could influence your score in a negative fashion. Obviously, not something you want when you're striving to become a homeowner.
Credit Karma is a free service that is worth exploring if you don't have an understanding of how credit scoring companies work. Getting your credit score up should be a priority when purchasing a house.
The Down Payment
If you can save 20% of the price of a home, it will save you a great deal in the long run. This will allow you to avoid paying private mortgage insurance and should get you lower interest rates on your loan too. This reduces your monthly costs and the overall amount you will have to pay for the mortgage.
If you can't raise 20% when buying a home for the first time, there are still some options. Mortgage programs like FHA and VA Loans could offer down payments of 3.5% to zero. Though you will need to pay mortgage insurance with FHA Loans, and there are other fees with the VA Loans program.
Adjustable-Rate Mortgages also offer low down payments to new buyers, but you could find the interest rate rising faster than you might like. This will lead to higher monthly payments, that could have you wishing you'd opted for private mortgage insurance after all.
On top of the down payment, you will need money saved for the closing costs. This could be as much as 4% of your purchase price and covers things like the home inspection, appraisal, and attorney fees. You will need to pay this on the day your home purchase closes.
Get Your Pre-approval Done Early
When you have savings to cover the down payment and other costs, you can shop around for the best loan. You should get preapproved by the lender so that you can show you are a serious buyer.
Pre-approval will involve the lender checking your financial details and credit report. Once you have the pre-approval letter, you still need to be careful with your credit so you can get approved for a loan when you need it. The pre-approval letter doesn't mean you can't get refused at a later date.
What this means is you need to keep your spending to a minimum. Do not charge large purchases on your credit cards, and do not make a car purchase. It is not without question that the lender could take away your mortgage approval.
Choosing Your Neighborhood
It isn't only the house you have to consider. The neighborhood is significant too. Ask your Realtor to show you the crime rates, check your likely commute times, and visit the area at different times of the day.
If, after your research, the area is still somewhere you want to live, you should aim to purchase a home near the bottom of the range of prices in the neighborhood. This will give you the chance to make improvements gradually that increase the value of your home.
Do a Home Inspection!
One of the more essential stages of purchasing a home is having a professional home inspector look over the property. As a first-time homebuyer, the last thing you need is to be investing in a money pit.
A home inspection will give you an excellent overview of exactly what you're purchasing. It will not only give you an education on all aspects of the structure but a rundown of all the mechanicals as well.
In hot real estate markets, some buyers will skip a home inspection. It is certainly not advisable to do so and could cost you a significant amount of money later in unexpected repairs. Think twice about waiving an inspection.
Closing the Deal
When you have a home that you love in a great neighborhood, it's time to make an offer. Your real estate agent should be able to offer some valuable advice to help you secure the home.
When your offer is accepted, there is still a lot to do before you can move in. Ask your Realtor any questions about the process you don't understand, and before you know it, you'll be moving into your new home.
Hopefully, you have enjoyed these first-time homebuyer tips—best of luck with your purchase.