Buying your first home is a major life event. A house of your own offers stability, privacy, safety, and a firm foundation for starting a family. There are, however, many pitfalls to the process. If you are not careful, you could make a life-altering mistake.
So, what are the necessary steps you need to take before buying your first home? What does it mean to become pre-approved? How do you boost your credit score so you get a more favorable loan? Are there special kinds of loans for first-time homebuyers? How do you choose a home that can accommodate you and your plans but still be manageable and affordable?
Here’s a complete list of instructions on buying your first home.
Saving money
Almost all first-time homebuyers take out some kind of loan when acquiring their property. That doesn’t mean that they’re totally exempt from saving money, though.
Here are some of the things you’ll want to consider before signing the mortgage contract.
The down payment is the amount of money you will have to bring to the table in order to get a loan for a house.
As a general rule of thumb, a twenty percent down payment will get you favorable mortgage terms. That means that if you’re eyeing a $200,000 property, you’ll need to put twenty thousand dollars down.
That being said, there are certain types of mortgages that can be approved with just a 10% or 5% down payment. Some types of mortgages require no down payment at all. These types of mortgages, however, often carry a higher interest rate. These are the so-called VA loans and FHA loans.
Do some research to find out whether you are eligible for these kinds of loans, as well as whether the conditions of the mortgages are sustainable for you.
Before your mortgage is finalized and set in motion, you’ll need to take care of the closing costs. Often overlooked by first-time home buyers, they add up to 3-6% of the total mortgage amount. A $300,000 loan will need $9,000 to $18,000 in closing costs – not a negligible figure.
If your mortgage conditions are favorable, negotiating with the lender for them to cover the closing costs is often a plausible move. They won’t always cover the entire amount, but every penny counts.
Movers, home renovation, home inspections – always budget for these. Make sure you leave enough funds to make the home livable. Sleeping on a mattress for three months doesn’t do anyone any good.
Carefully estimate how big a house you can buy
This is the downfall for many first-time home buyers – buying a home way out of their price range.
Rational budgeting here is crucial. Be as honest as you can with yourself here. Take your income into account, the down payment, and the Annual Percentage Rate on your mortgage as well.
Some people make the following mistake – they can afford the down payment, so they think they can afford the mortgage.
Say you can afford a down payment for a six-bedroom house, but you only need three bedrooms – that’s great news! That means you’ll have more funds left over for the overheads – renovation and adaptation of the house to your style. It also means that you’ll get much more favorable conditions on your mortgage.
On the flip side, if you need a six-bedroom home and can only afford three – don’t rush. Save up for a larger down payment, bide your time, and don’t get yourself into debt that you can never pay back.
Do what you can to improve your credit score
One of the most important factors determining the conditions of your mortgage is your FICO credit score.
Make sure you take steps to improve your credit score before applying for a mortgage. Here’s a list of things you can do – some are instant fixes that bring an immediate boost, and some are long-term strategies to bolster your credit score.
If you pay your bills on time, that’s a great signal for potential mortgage lenders – it’s proof of financial stability and responsibility.
Make sure any old bank accounts with a history of timely payments, make sure that it’s visible on your report. Also, use a rent reporting service to make sure your on-time rent and utility payments are added to your credit score.
Even a small mistake, such as a wrong address, on your credit report, can mean the difference between being approved and denied for a mortgage.
Big mistakes, like untruthful truancy claims, have an even greater effect.
Make sure you dispute all mistakes on your credit score.
Credit utilization is the percentage of a loan you actually end up using. Say you take out a $3000 loan and you only spend $1500 of it. That’s a 50% credit utilization, and it’s a good signal to lenders.
For an instant fix of your credit score try this – ask your credit card providers for a higher limit. But here’s the catch: keep using your credit cards as you did before. This will instantly boost your credit utilization and as a consequence, your credit score.
If you have a number of monthly payments pending on different debts – debt consolidation can do wonders.
Basically, it means taking out a loan that will condense your multiple bills into one, and usually at a lower interest rate. This will boost your credit utilization ratio and your credit score.
Research the best mortgage for your situation
There are many different types of mortgages, some favoring first-time home buyers explicitly.
When applying for a mortgage, you’re usually looking at a 30-year commitment with a fixed interest rate.
Conclusion
A first mortgage is kind of a big deal – don’t rush in. Research as much as you can, and take everything into account – the neighborhood, the size of the house, the state of the house and the repairs needed.
Most of all – research the best real estate agent.
About The Author
Stacey is a freelance writer living in Minnesota with her cat, and she’s passionate about yoga, languages, home improvement, and drinking strong coffee. Find her on Twitter @StaceyShann0n
