Buying your first home is a huge accomplishment! It’s an exciting step in your life that you’ve probably been thinking about (and saving up for!) for a long time. But for most first-time buyers, buying a home can feel overwhelming – and you’re certainly not alone in feeling this way.
So if you’re getting ready to purchase your first home, here are six tips to help you prepare for a successful, stress-free home-buying experience!
- FIGURE OUT WHAT YOU CAN AFFORD
Before you do anything else, it’s essential to figure out what your budget is looking like. Start by using a mortgage calculator to get a rough estimate of what it’ll take to get you to your desired monthly payment. Then, meet with a lender to get a more solid understanding of what you can afford. They’ll walk you through different loan options and down payment scenarios, which will help you set savings goals and prepare you for other home-buying expenses.
For most first-time buyers, the goal is to find a comfortable monthly payment (including taxes, HOA fees, etc.), so consider your monthly payment more than the purchase price!
- SAVE FOR CLOSING COSTS
I know, I know—another thing to pay for. Your down payment does not cover closing costs, so this money must also be set aside. Hey – I’m just trying to save you from any surprises!
Closing costs, which usually total around 1-3% of the home’s purchase price, include the appraisal, transfer fees, loan origination fees, and other costs associated with the transaction. Your lender will give you a specific number so you know exactly what you need to bring on closing day.
Are you going new construction? The builder’s preferred lender may help cover some of your closing costs!
- EXPLORE DIFFERENT FINANCING OPTIONS
Please don’t wait until you’ve found your dream home to figure out how you’re going to finance it. The time to explore different financing options is now. There are many loan options out there – it’s just a matter of weighing the pros and cons to find what will work best for you.
As a first-time homebuyer, you may not have a ton of money set aside for a big down payment, but that doesn’t mean you have to delay homeownership! There are many first-time homebuyer perks that you can take advantage of. For example, some states offer first-time buyers down payment assistance, tax credits, or home buyer grants. Some lenders even offer reduced mortgage rates for first-time buyers. Be sure to ask your lender to break down each loan option in detail, so you can compare apples to apples and make the best financial decision.
- GET YOUR CREDIT ON POINT
Your credit is one of the critical factors in your loan approval – the better your credit score, the better your loan terms. What can you do to prep for buying your first home? Here are my recommendations:
- Pay off debt. A great place to start is to get your credit card balance as low as possible.
- Avoid opening new credit accounts (like a credit card or auto loan).
- Avoid major purchases that increase your outstanding credit card balance. I know it’s tempting to invest in new furniture for your soon-to-be home but hold off until you have the keys to your new house in hand.
The lender’s mortgage decision is based on your credit score and your debt-to-income (DTI) ratio, which is the percentage of your income that goes towards monthly debt payments. So, the higher your credit score and the lower your DTI, the better your interest rate and financing terms. Request a free credit report from one of the three main credit bureaus: Equifax, Experian, and TransUnion. Review the credit report and double-check that it doesn’t have any errors.
- SHOP LENDERS
Before you shop for your home, you’ll want to shop for your lender. Your lender should be one of your most trusted advisors. Please get to know them and make sure they get to know you (and your goals), too. I’ve worked with too many transactional lenders, and let me tell you, you’ll save yourself a whole lot of money – and headaches – by taking the time to choose the right lender.
Interest rates, closing costs, and loan origination fees vary from lender to lender. When interviewing lenders, ask them for an itemized list of loan origination fees and your estimated closing costs. You may find a pretty big difference between the two quotes!
Pro tip! All mortgage applications made within a 45-day window will count as just one credit inquiry. The government is encouraging you to shop lenders!
- THE 75% RULE
Too often, first-time homebuyers are disappointed that every. Single. House. is missing just one thing. Well, I hate to break it to you, but that’s just how it works.
My rule of thumb: Make sure the house satisfies at least 75% of your must-haves (don’t budge on these!). As for the remaining 25%, you can continually update your home over time. I know it might suck to live with those hideous countertops, but is it worth it to stay in the same school district or to live in an area that’s appreciating more quickly? Heck yes!
Buying your first home is a big deal, but I know you can do it! Follow these steps, and you’ll be well on your way to becoming a happy first-time homeowner. Let’s do this!