The process of buying your first home can be very exciting and, at the same time, a little scary. Don’t worry, that’s normal! However, to set yourself up for success and avoid some of the stress, there are some steps you can take as you become a homeowner.
First things first, you should start saving as soon as possible and work on boosting your credit score, if needed. You can get your official credit reports for free from Equifax, Experian, and Transunion. We recommend getting your reports at least three months before you intend to buy to allow time for clearing up errors. Lenders will look at your credit score and existing debts to determine your rate. Increasing your score and paying off debt can help get you a lower interest rate.
Down payment requirements range anywhere from 3% to 20% of a home’s purchase price, but the less you put down, the higher your monthly payments. Most mortgages are a 30-year commitment, so it’s essential to look at your budget and monthly payments to confirm you are ready to take on the loan.
Remember, you will have more than just your mortgage payment (i.e., property taxes, homeowners insurance, and repair costs) to think about as you update your budget.
Now you’re ready to explore mortgage options and find your home sweet home. Get your paperwork together, such as recent bank statements, pay stubs, two years of W-2s and tax returns, and documentation of any outstanding loans. Your lender may ask for additional documents as well. Then, follow these steps for success in your first home-buying venture.
1. Compare Loan Types
A conventional 30-year mortgage is the most common home loan extended to buyers; however, government-backed loan options such as FHA, VA, and USDA have less strict eligibility requirements concerning credit score and down payment. For example, a loan from the FHA allows a down payment as low as 3.5% of the purchase price. Your loan officer will steer you toward the best mortgage product for your needs.
2. Look into First-Time Homebuyer Programs
If you haven’t owned a home in three or more years, you may be eligible for first-time homebuyer programs like those through Fannie Mae and Freddie Mac. Additionally, state and local buyer assistance programs are available and designed to help community members save money.
3. Compare Lenders
Interest rates will be similar between lenders, but you should consult a few to get estimates for the same type of loan. With rates that change daily and multiple programs available, options can seem overwhelming; working with a knowledgeable and experienced loan officer can ease the process of buying your first home.
4. Get Pre-Approved
After your mortgage lender reviews your finances, you can get pre-approval before searching for your dream home. Pre-approval signals that your lender is prepared to give you a loan up to a certain amount, based on your current finances. Preapproval reassures you as you shop for homes and makes you an attractive buyer.
5. Find a Real Estate Agent
Good agents understand the housing market in and out. They know how to negotiate, and they can guide you through the escrow process. Ask for recommendations from your family and friends but go with your gut and someone you enjoy, as you’ll be spending an abundance of time with them during this process.
6. Search for Your Home Sweet Home
Your real estate agent will take you to open houses and make private appointments to tour homes. In a competitive market, you may have to move fast. Try not to get too attached—a dream home could be out of budget, multiple offers may be on the table, or an inspection might expose costly repairs.
7. Be Prepared for Closing Costs
Closing costs are the processing fees you pay your lender for finalizing your mortgage and range from 2% to 6% of the total loan. Other expenses include appraisal fees and title company fees. Don’t forget to budget for maintenance or Home Owners Association (HOA) fees if they apply.
Buying a home is an elaborate process, especially if it’s your first time. Luckily, with a solid education and a team of professionals, you can get the best mortgage for your situation and become the proud new owner of a home.