1) Apply for a mortgage before looking for a home
You can get pre-qualified for a mortgage, which simply gives you an estimate of how much a lender may be willing to lend based on your income and debts. But as you get closer to buying a home, it’s smart to get a preapproval, where the lender thoroughly examines your finances and confirms in writing how much it’s willing to lend you, and under what terms. Having a preapproval letter in hand makes you look much more serious to a seller and can give you an upper hand over buyers who haven’t taken this step.
2) Talk to multiple lenders
First-time buyers might get a mortgage from the first (and only) lender or bank they talk to, potentially leaving thousands of dollars on the table. The more you shop around, the better basis for comparison you’ll have to ensure you’re getting a good deal. Shop around with at least three different lenders, as well as a mortgage broker. Compare rates, lender fees and loan terms. Don’t discount customer service and lender responsiveness; both play key roles in making the mortgage approval process run smoothly.
3) Don’t break your budget just because you qualify
Look at properties that cost less than the amount you were approved for. Although you can technically afford your preapproval amount, it’s the ceiling. This ceiling doesn’t account for other monthly expenses or problems like a broken dishwasher that arise during homeownership, especially right after you buy. Shopping with a firm budget in mind will also help when it comes time to make an offer. In a competitive real estate market with limited inventory, it’s likely you’ll bid on houses that get multiple offers. When you find a home you love, it’s tempting to make a high-priced offer that’s sure to win. But don’t let your emotions take over. Shopping below your preapproval amount creates some wiggle room for bidding. Stick to your budget to avoid a mortgage payment you can’t afford.
4) Plan ahead / map out your home buying strategy at least a year out
Buying a home can be complex, particularly when you get into the weeds of the mortgage process. Rushing the process can cost you later on. Map out your home-buying timeline at least a year in advance. Keep in mind it can take months (even years) to repair poor credit and save enough for a sizable down payment. Work on boosting your credit score, paying down debt and saving more money to put you in a stronger position to get preapproved.
5) Leave a savings reserve / don’t drain your savings
Spending all or most of their savings on the down payment and closing costs is one of the biggest mistakes first-time homebuyers make. Homebuyers who put 20 percent or more down don’t have to pay for mortgage insurance when getting a conventional mortgage. That’s usually translated into substantial savings on the monthly mortgage payment. But it’s not worth the risk of living on the edge. Aim to have three to six months of living expenses in an emergency fund. Paying mortgage insurance isn’t ideal, but depleting your emergency or retirement savings to make a large down payment is much riskier.
6) Protect your credit
When applying for a mortgage loan, your credit will be one of the key factors in whether you’re approved, and it will help determine your interest rate and possibly the loan terms. So check your credit before you begin the homebuying process. Dispute any errors that could be dragging down your credit score and look for opportunities to improve your credit, such as making a dent in any outstanding debts. To keep your score from dipping after you apply for a mortgage, avoid opening any new credit accounts, like a credit card or auto loan, until your home loan closes.
7) Neighborhood over house
Even if the home is right, the neighborhood could be all wrong. So be sure to:
- Research nearby schools, even if you don’t have kids, since they affect home value.
- Look at local safety and crime statistics.
- Map the nearest hospital, pharmacy, grocery store and other amenities you’ll use.
Drive through the neighborhood on various days and at different times to check out traffic, noise and activity levels.
- Time your drive to and from work
8) Logic vs Emotion
When you’re touring homes during open houses, pay close attention to the home’s overall condition, and be aware of any smells, stains or items in disrepair. Ask a lot of questions about the home, such as when it was built, when items were last replaced and how old key systems like the air conditioning and the heating are. If other potential buyers are viewing the home at the same time as you, don’t hesitate to schedule a second or third visit to get a closer look and ask questions privately.
9) Look at all available down payment options
The long held belief that you must put 20 percent down payment is a myth. While a 20 percent down payment does help you avoid paying private mortgage insurance, many buyers today don’t want (or can’t) put down that much money. In fact, the median down payment on a home is 13 percent, according to the National Association of Realtors. Delaying your home purchase to save up 20 percent could take years, and you could limit cash flow that could be put to better use maximizing your retirement savings, adding to your emergency fund, or paying down high-interest debt. What to consider instead: You can put as little as 3 percent down for a conventional mortgage (note: you’ll pay mortgage insurance). Some government-insured loans require 3.5 percent down or zero down, in some cases. Also check with your local or state housing programs to see if you qualify for housing assistance programs designed for first-time buyers.
10) Understand the full power of the home inspection
After your offer is accepted, you’ll pay for a home inspection to examine the property’s condition inside and out, but the results will only tell you so much. Not all inspections test for things like radon, mold or pests, so be sure you know what’s included. Make sure the inspector can access every part of the home, such as the roof and any crawl spaces. Attend the inspection and pay close attention. Don’t be afraid to ask your inspector to take a look (or a closer look) at something. And ask questions. No inspector will answer the question, “Should I buy this house?” so you’ll have to make this decision after reviewing the reports and seeing what the seller is willing to fix.
11) Explore all loan options
First time buyers might be cash strapped in this environment of rising home prices and higher mortgage rates. As a result, it can be harder for them to qualify for a conventional loan and they might assume they have no financing options. That’s where government insured loans enter the picture. The three government insured loan programs backed by the Federal Housing Administration (FHA loans), U.S. Department of Veterans Affairs (VA loans) and U.S Department of Agriculture (USDA loans). Here’s a brief overview of each: FHA loans require just 3.5 percent down with a minimum 580 credit score. FHA loans can fill the gap for borrowers who don’t have top-notch credit or little money saved up. The major drawback to these loans, though, is mandatory mortgage insurance, paid both annually and upfront at closing. VA loans are backed by the VA for eligible active duty and veteran military service members and their spouses. These loans don’t require a down payment, but some borrowers may pay a funding fee. VA loans are offered through private lenders, and come with a cap on lender fees to keep borrowing costs affordable. USDA loans help moderate to low income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a downpayment for eligible borrowers with low incomes.
12) Understand all costs involved with home ownership and plan accordingly
In addition to saving for a down payment, you’ll need to budget for the money required to close your mortgage, which can be significant. Closing costs generally run between 2% and 5% of your loan amount. You can shop around and compare prices for certain closing expenses, such as homeowners insurance, home inspections and title searches. You can also defray costs by asking the seller to pay for a portion of your closing costs. Once you’ve saved for your down payment and budgeted for closing costs, you should also set aside a buffer to pay for what will go inside the house. This includes furnishings, appliances, rugs, updated fixtures, new paint and any improvements you may want to make after moving in. If you had sticker shock from seeing your new monthly principal and interest payment, wait until you add up the other costs of owning a home. As a new homeowner, you’ll pay for property taxes, mortgage insurance, homeowners insurance, hazard insurance, repairs, maintenance and utilities, to name a few. Your agent or lender can help you crunch numbers on taxes, mortgage insurance and utility bills. Shop around for insurance coverage to get compare quotes. Finally, aim to set aside at least 1 percent to 3 percent of the home’s purchase price annually for repairs and maintenance expenses.
13) Get any gift money sorted out as early as possible
Many loan programs allow you to use a gift from a family, friend, employer or charity toward your down payment. Not sorting who will provide this money (and when) can throw a wrench into a loan approval. Have a frank discussion with anyone who offers money as a gift toward your down payment about how much they are offering and when you’ll receive the money. Make a copy of the check or electronic transfer showing how and when the money traded hands from the gift donor to you. Lenders will verify this through bank statements and a signed gift letter.
14) Research state and local assistance programs
In addition to federal programs, many states offer assistance programs for first-time home buyers with perks such as down payment assistance, closing cost assistance, tax credits and discounted interest rates. Your county or municipality may also have first time home buyer programs.
15) Research Home Insurance
Before you close on your new house, your lender will require you to buy homeowners insurance. Shop around and compare insurance rates to find the best price. Look closely at what’s covered in the policies; going with a less-expensive policy usually means fewer protections and more out of pocket expenses if you file a claim. Also flood damage isn’t covered by homeowners insurance so if your new home is in a flood-prone area you may need to buy separate flood insurance.
16) Research different mortgage rates
Many home buyers get a rate quote from only one lender, but this often leaves money on the table. Comparing mortgage rates from at least three lenders can save you more than $3,500 over the first five years of your loan, according to the Consumer Financial Protection Bureau. Get at least three quotes and compare both rates and fees. As you’re comparing quotes, ask whether any of the lenders would allow you to buy discount points, which means you’d prepay interest up front to secure a lower interest rate on your loan. How long you plan to stay in the home and whether you have money on hand to purchase the points are two key factors in determining whether buying points makes sense.
17) Hire the right agent!
You’ll be working closely with your real estate agent, so it’s essential that you find someone you get along with well! The right buyer’s agent should be highly skilled, motivated and knowledgeable about the area. This person should also care deeply about the success and happiness of you and your family above just cashing a check. Read any available reviews and call references for any agent you plan to hire. The right real estate agent can literally change your life!