BUYING YOUR FIRST HOME can be exciting--and also terrifying! Where do you start? How do I pick an agent? How much should I put towards the down payment? Will I qualify for a loan? What goes into writing an offer? I've found that the best first step you can take is figuring out your mortgage situation. It sets the stage for everything you'll consider when it comes to deciding which home is right for you. The checklist below is a good reference to start with--we'll go through them in some detail below:
Pay down as much debt as possible.
Determine your home buying budget and get pre-approved for a mortgage.
Learn about the in's and out's of the home buying process.
Build a good savings account buffer in at least one of your bank accounts.
Budget for expenses beyond your mortgage.
Decide what type of mortgage is right for you.
Start putting together your paperwork/documentation to support your application.
Paying Down Your Debt
Paying off or paying down debt is first on the list of what to do if you want to buy your first home. And while you're at it, checking your credit score and credit report are musts. Focusing on paying down your credit cards and paying your bills on time can be a quick way to see your credit score move in the positive direction.
You could get a mortgage with a FICO credit score as low as 500, and 620 is typically the minimum for a conventional mortgage. But the higher your score, the more likely you are to get the best interest rate and terms for your mortgage.
Know Your Budget, and Get Pre-Approved for a Mortgage
Look at your income and budget, including how much house you can afford, before you choose a down payment, type of mortgage or house--or anything else.
A mortgage pre-approval can give you a solid idea of your mortgage eligibility and how much money you could borrow. This letter also signals to sellers that your lender is on board and you're ready to buy. A pre-approval typically doesn't impact your credit score, but ask your mortgage broker to be safe.
Keep in mind that the maximum amount you are approved for by a mortgage lender isn't necessarily what you can afford.
Understand the Homebuying Process
Being aware of the steps in the mortgage process can be helpful. It will help you prepare for what's ahead.
Generally, the steps are:
Get pre-approved for a mortgage by a lender or mortgage broker.
Shop for a home and make an offer.
Secure a mortgage.
Have the home inspected and appraised.
Complete mortgage underwriting and closing.
Have Money in the Bank
Having a good cash cushion is helpful not only for your down payment but also to help pay for closing costs, maintenance/repairs, and emergencies.
How much money do you really need to put down on your first home? It depends.
Most experts suggest that you have at least 20% of the purchase price saved as a down payment. You can buy a house without putting 20% down – and many people do – but there are good reasons to put at least 20% down. It means you'll avoid paying for private mortgage insurance, or PMI. A bigger down payment also reduces the amount you will need to finance and pay interest on.
If a 20% down payment is out of reach or would prevent you from paying closing costs or expenses after the sale, you have options. Some government agencies and lenders offer first-time homebuyer programs that can help with down payments and closing costs.
Budget for Expenses Beyond Your Mortgage
A home loan is a long-term, monthly expense you're taking on, and having a financial cushion after closing is key. Be prepared to make payments after a job loss or another hardship.
Good and bad times lie ahead, and you want to be covered on your mortgage either way.
Figuring out what you can afford means adding:
Property taxes
Homeowners association fees
Potentially higher utility costs if you're buying a larger home
Amenity upkeep, such as a lawn or pool
Decide What Type of Mortgage Is Right for You
Even as a first-time homebuyer, you have an array of mortgage options to choose from. Do you want a government-backed or conventional mortgage? Do you prefer adjustable or fixed interest rates?
A government-backed mortgage guarantees your loan, protecting the mortgage lender from losses if you default on it. The Federal Housing Administration, U.S. Department of Veterans Affairs and U.S. Department of Agriculture typically offer these programs.
For those who qualify, this type of loan can offer lower approval requirements than conventional mortgages and low or no minimum down payment. But conventional loans may have lower interest rates compared with government-backed mortgages.
Another big choice is between adjustable- and fixed-rate mortgages.
An adjustable-rate mortgage, or ARM, has an interest rate that can fluctuate over the life of the loan along with benchmark rates. A fixed-rate mortgage, on the other hand, has an interest rate that never changes, even if rates fall.
Some homebuyers are wary of ARMs and for good reason. The rate for your ARM could adjust – and with it, your monthly mortgage payment – to well beyond what you can afford.
But ARMS can make sense for some borrowers. If the interest rate is low and you won't live in your house for long, an ARM might be a good fit for you.
Limits on how often ARMs can adjust may make them more appealing to some buyers. But overall, a fixed-rate mortgage can be a safer, more predictable choice for first-time buyers.
Consider the Length of Your Home Loan
Most homeowners choose between a 15- or 30-year mortgage, though other durations may be available depending on the lender.
A 30-year mortgage may offer a more affordable monthly payment, but a 15-year mortgage may reduce long-term interest and help you pay off the loan much earlier. Still, the monthly payment on a 15-year mortgage can be a barrier for some homebuyers.
Start Gathering Paperwork
Applying for and closing on a mortgage requires a lot of documents, and working to get ahead can't hurt.
Here are some documents needed for a mortgage:
Federal income tax records for the past couple of years
Recent paycheck stubs
Canceled checks for rent or utility payments
Also, you'll want to gather any other documents a mortgage lender might want to see, such as credit card and student loan account statements.