Tips for First-Time Home Buyers
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Buying a home can be nerve-racking, especially if you’re a first-time home buyer.
These tips will help you navigate the process, save money and avoid common mistakes. We organized them into four categories:
•Mortgage down payment tips.
•Mortgage application tips.
•House shopping tips.
•First-time home buyer mistakes to avoid.
Mortgage down payment tips
Start saving for a down payment early
It’s common to put 20% down, but many lenders now permit much less, and first-time home buyer programs allow as little as 3% down. But putting down less than 20% may mean higher costs and paying for private mortgage insurance, and even a small down payment can still be hefty. For example, a 5% down payment on a $200,000 home is $10,000.
Play around with this down payment calculator to help you land on a goal amount. Some tips for saving for a down payment include setting aside tax refunds and work bonuses, setting up an automatic savings plan and using an app to track your progress.
» MORE: Down payment strategies for first-time home buyers
Explore your down payment and mortgage options
There are lots of mortgage options out there, each with their own combination of pros and cons. If you’re struggling to come up with a down payment, check out:
•Conventional mortgages that conform to standards set by the government-sponsored entities Fannie Mae and Freddie Mac, and require as little as 3% down.
•Federal Housing Administration loans, which permit down payments as low as 3.5%.
•Veterans Affairs loans, which sometimes require no down payment at all.
The amount you put down also affects your monthly mortgage payment and interest rate. If you want the smallest mortgage payment possible, opt for a 30-year fixed mortgage. But if you can afford larger monthly payments, you can get a lower interest rate with a 20-year or 15-year fixed loan. Use our calculator to determine whether a 15-year or 30-year fixed mortgage is a better fit for you. Or you may prefer an adjustable-rate mortgage, which is riskier but guarantees a low interest rate for the first few years of your mortgage.
» MORE: Compare adjustable-rate and fixed-rate mortgages
Research state and local assistance programs
In addition to federal programs, many states offer assistance programs for first-time home buyers with perks such as down payment assistance, closing cost assistance, tax credits and discounted interest rates. Your county or municipality may also have first-time home buyer programs.
» MORE: Find first-time home buyer programs in your state
Mortgage application tips
Determine how much home you can afford
Before you start looking for your dream home, you need to know what’s actually within your price range. Use this home affordability calculator to determine how much you can safely afford to spend.
Check your credit and pause any new activity
When applying for a mortgage loan, your credit will be one of the key factors in whether you’re approved, and it will help determine your interest rate and possibly the loan terms.
So check your credit before you begin the homebuying process. Dispute any errors that could be dragging down your credit score and look for opportunities to improve your credit, such as making a dent in any outstanding debts.
To keep your score from dipping after you apply for a mortgage, avoid opening any new credit accounts, like a credit card or auto loan, until your home loan closes.
» MORE: Get your free credit report to check recent credit activity
Compare mortgage rates
Many home buyers get a rate quote from only one lender, but this often leaves money on the table. Comparing mortgage rates from at least three lenders can save you more than $3,500 over the first five years of your loan, according to the Consumer Financial Protection Bureau. Get at least three quotes and compare both rates and fees.
As you’re comparing quotes, ask whether any of the lenders would allow you to buy discount points, which means you’d prepay interest up front to secure a lower interest rate on your loan. How long you plan to stay in the home and whether you have money on-hand to purchase the points are two key factors in determining whether buying points makes sense. You can use this calculator to decide whether it makes sense to buy points.
Get a preapproval letter
You can get pre-qualified for a mortgage, which simply gives you an estimate of how much a lender may be willing to lend based on your income and debts. But as you get closer to buying a home, it’s smart to get a preapproval, where the lender thoroughly examines your finances and confirms in writing how much it’s willing to lend you, and under what terms. Having a preapproval letter in hand makes you look much more serious to a seller and can give you an upper hand over buyers who haven’t taken this step.
»MORE: Get preapproved for a mortgage
House shopping tips
Hire the right buyer’s agent
You’ll be working closely with your real estate agent, so it’s essential that you find someone you get along with well. The right buyer’s agent should be highly skilled, motivated and knowledgeable about the area.
» MORE: How to find a good buyer’s agent
Pick the right type of house and neighborhood
You may assume you’ll buy a single-family home, and that could be ideal if you want a big yard or a lot of room. But if you’re willing to sacrifice space for less maintenance and extra amenities, and you don’t mind paying a homeowners association fee, a condo or townhouse could be a better fit.
But even if the home is right, the neighborhood could be all wrong. So be sure to:
•Research nearby schools, even if you don’t have kids, since they affect home value.
•Look at local safety and crime statistics.
•Map the nearest hospital, pharmacy, grocery store and other amenities you’ll use.
•Drive through the neighborhood on various days and at different times to check out traffic, noise and activity levels.
Stick to your budget
Look at properties that cost less than the amount you were approved for. Although you can technically afford your preapproval amount, it’s the ceiling — and it doesn’t account for other monthly expenses or problems like a broken dishwasher that arise during homeownership, especially right after you buy. Shopping with a firm budget in mind will also help when it comes time to make an offer.
In a competitive real estate market with limited inventory, it’s likely you’ll bid on houses that get multiple offers. When you find a home you love, it’s tempting to make a high-priced offer that’s sure to win. But don’t let your emotions take over. Shopping below your preapproval amount creates some wiggle room for bidding. Stick to your budget to avoid a mortgage payment you can’t afford.
Emily Starbuck Crone
May 7, 2018
