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Seven Tips for First Time Home Buyers

Seven Tips for First Time Home Buyers


Many first time home buyers are intimidated by the hefty mortgage they’ll be paying off for the next few decades. The most effective solution to such anxieties is to conduct thorough research to ensure you are buying the most affordable home with the most reasonable financing. These seven tips will help you make informed decisions about one of your biggest purchases.

1. Determine Exactly What You Can Afford

Generally speaking, you can afford a home priced two to three times your gross income. Be sure to consider the costs every homeowner must cover. Such costs include property taxes, insurance, maintenance, utilities, community association fees (if applicable), and costs specific to your family’s needs, such as daycare if you have, or plan to have, children.

2. Make A “First Home” Wish List

Distinguish between home features you must have and which you’d like to have. For example, handicap accessibility for an aging parent or special needs child is a necessity, while granite countertops and stainless steel appliances are luxury items. Write down your top five must-haves and top five wants to help focus your search and ensure you make a logical decision when home shopping.

3. Decide Where You Want to Live

Compose a list of your top five community priorities, such as commute, schools, recreational facilities, etc. Then, your REALTOR® will help you identify a few target neighborhoods which fit your needs.

4. Save, Save, Save!

Make sure you have saved enough money to both qualify for a mortgage, and cover your down payment. You should ideally have about 20% of the purchase price set aside for the down payment. Some lenders may allow as little as 5% down, and others even offer 0% down (e.g. USDA Rural Development). A smaller down payment will help preserve your savings for emergencies. However, keep in mind that the lower your down payment, the higher the loan amount you’ll need to qualify for, and if you still qualify, the higher your monthly payment will be. Your down payment size may also influence your interest rate and the type of loans you will qualify for. Finally, if your down payment is less than 20%, you’ll be required to purchase private mortgage insurance which can add hundreds to your monthly payment. Check with your lender or your state and local government for more information about mortgage and down payment assistance programs for first-time buyers.

5. Ask About All the Costs Before Signing

Down payments are just one cost in the home buying process. A REALTOR® or lender can tell you what other costs buyers commonly pay in your area — including home inspections, closing fees, lender’s title insurance, and transfer fees from 2% to 7% of the home price. Don’t forget to consider the cost of any extras you’ll want to buy after you move-in, such as window shades and furniture.

6. Get Your Credit in Order

Credit reports detail your borrowing history, including late payments and bad debts, and typically include your credit score. Lenders rely heavily on your credit report and credit score to determine whether you qualify for a loan, how much loan money you qualify for, and what interest rate you should be charged on your loan for a home. The minimum credit score you can have to qualify for a loan depends on many factors, including the size of your down payment. Talk to a REALTOR® or lender about your particular circumstance. You’re entitled to free copies of your credit reports annually from the major credit bureaus: Equifax, Experian, and TransUnion. Preview Properties recommends you order and closely examine your credit reports to ensure the information is accurate, and try to correct any errors before you buy. If your credit score isn’t satisfactory, the easiest ways to improve it are to pay all of your bills on time and to pay down any high credit card debt.

7. Get Prequalified

Meet with a lender to get a prequalification letter stating that you are qualified to purchase a house within a specified price range. Start collecting the paperwork your lender says they need to prequalify you. Most lenders want to see your W-2 forms to verify your employment and income, copies of pay stubs, and two to four months of banking statements. If you’re self-employed, you’ll need to provide your current profit and loss statement, a current balance sheet, and personal and business income tax returns for the previous two years. Be sure to consider your financing options; the longer the loan, the smaller your monthly payment. Fixed-rate mortgages offer payment certainty, while an adjustable-rate mortgage (ARM) offers a lower monthly payment. However, an adjustable-rate mortgage may adjust dramatically, so be sure to calculate your affordability at both the lowest and highest possible ARM rate.