Being a first time home buyer is both an exciting and stressful time. If you don't do your research you could end up in the wrong house, or worse, in a foreclosure. Below is a list of do's and don'ts that you will want to follow come your first home purchase.
DO: Calculate the price you can afford for a house AND get a mortgage pre-approval
As a first time home buyer, it is vital to calculate how much money you can afford to spend on a house. For a rough estimate, experts recommend that you should pay NO more than 28% of your gross monthly income. However, an estimate will not suffice if you are seriously looking to purchase your first home. So before you start looking at houses and get your heart set on one, take a trip to see a lender for mortgage pre-approval. Not only will this be the most accurate measure of the price you are able to pay for a home, but it will give you a competitive edge by exemplifying to sellers that you have the credit and finances for a loan to backup your offer. Pro tip: Just because you qualify for a certain amount for a loan, doesn’t mean that you can afford it. Factor in other financial burdens that wouldn’t necessarily be on a credit report to determine what you can actually afford.
DON’T: Only talk to one lender
Just like shopping for a house, you wouldn’t buy the first one you see (or at least you shouldn’t) and the same goes with lenders. If you do not meet multiple different lenders, then you could potentially be missing out on thousands of dollars in savings. We recommend that you visit with at least three different lenders and a mortgage broker in order to compare rates, lender fees, loan terms, and customer service.
DO: Plan ahead and check your credit
Buying a house is a huge commitment that you don’t want to jump the gun on. There are several factors that you will want to consider before purchasing your first home. First and foremost, it is crucial to plan at least a year in advance in order to being saving for a downpayment and closing costs. It is common to put a down payment of 20%, but some lenders and mortgage types require as little as a 3% down payment.
Putting down a smaller down payment might prove to be even more costly due to higher costs and paying for mortgage insurance. Therefore, saving for a higher down payment will pay off in the long-run. You will also want to check your credit in order to dispute any errors that could be harming your credit score and pay off any current debts in order to boost your credit score. In the year preceding your search for your first home and your mortgage pre-approval, it is important to hold off on getting new loans or credit card accounts. This will increase your chances of getting pre-approved for a mortgage and getting the house that you want.
DON’T: Overlook the costs of homeownership
Sadly, buying a house costs more than just the monthly principal and interest payments. As a new homeowner you will have to pay property taxes, mortgage insurance (if your down payment is less than 20%), homeowners insurance, HOA’s if applicable, maintenance and repairs, and utilities among other bills. In order to be prepared for these costs, sit down with your agent or a lender to calculate how much you will pay in taxes, utilities, and insurance. As a rule of thumb, it is recommended to set aside at least 1-3% of the home’s purchase price for maintenance and repairs.
DO: Explore your mortgage options
Some first-time buyers might assume that they have no financing options if they do not qualify for a conventional loan. This is hardly the case though with government-insured loan programs such as the Federal Housing Administration (FHA), US Department of Veterans Affairs (VA loans), and US Department of Agriculture (USDA).
The FHA loans require a 3.5% down with a minimum credit score of 580, however, it does require mortgage insurance, paid both annually and upfront at closing.
You are eligible for a VA loan if you are active-duty or veteran military service members and their spouses. These loans do not require a down payment but some do require a funding fee.
In order to qualify for a USDA loan, you must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Similar to VA loans, USDA loans do not require a down payment for eligible borrower with low incomes.
Many states offer assistance programs for first-time home buyer in addition to the federal programs. These local programs can help with down payments, closing costs, tax credits, and lower interest rates. Check out the CHFA loan if you are a Colorado resident.
DON’T: Wait for the perfect house
A perfect house does not exist unless you are designing and building it yourself. Buying your first home is all about compromise. If you have your mind set on the perfect home, you may pass up houses that would be a perfect match for you if you put a little bit of work into it. Keep an open mind when you are looking at houses, but we urge you not to compromise the location of your house. The perfect house is not so perfect if it is in a neighborhood with high crime and low ranked schools. Before you choose your house, visit the neighborhood at different times to get a sense of the atmosphere, the noise, and the neighbor interactions.
DO: Find the right real estate agent
There is a whole lot of steps and money involved in purchasing a home and while you may not be seasoned in this trade, a real estate agent is. You will want to find a real estate agent that is familiar with the area that you are planning to move to and who you get along with. After all, you will be spending lots of time with them and they will be your trusted expert in the field.