With the internet at the tips of our fingers almost at all times, we are just taps away from anything and everything we could ever want to know. While that’s usually an advantage, the web can offer up conflicting and confusing information…especially when it comes to buying your first home.
That’s why we’ve put together a list of our most relevant tips for first-time homebuyers from our mortgage experts who have decades of experience helping individuals, couples and families purchase their first home.
#1. Find your comfort level
Unless you work in the industry, you probably won’t know the Buying your first house comes with a lot of unfamiliar terms, processes and checklists. One way to ease the stress is to start with knowing what you will be comfortable with in terms of your budget, the location of your new place, and what features you might like at home.
Once you have your pre-approval letter in hand, consider what your budget will look like at different price points within the amount you’re pre-approved for. Make sure to include normal expenses along with what your mortgage payment would be to make sure you would still be financially comfortable each month. A new house might not be your only financial goal, so give yourself the confidence of knowing your comfort level before beginning your search.
Other things to think about in regard to your comfort level are the location of your future home and what it offers. Here are a few questions to ask yourself:
- Will my commute be manageable to and from my new neighborhood?
- Are there any major developments in the area that could affect my new home’s value?
- For my family, what’s the difference between a must-have feature and a nice-to-have feature?
#2. Explore your mortgage loan options
While buying a home is a common financial goal, actually entering into a mortgage loan agreement isn’t something most people do on a regular basis. That’s one reason why there can be a lot of confusion around the options available to you as a buyer. What works for one buyer at one point in time doesn’t necessarily mean it’s the only option available to you.
Here are some of the more common mortgage loan options on the market:
- Conventional mortgage – A private mortgage loan that can be sold to government-sponsored entities like Fannie Mae or Freddie Mac. Conventional loans typically require a credit score of at least 620, and down payments may range from 3% to 20%, depending on your lender
- FHA mortgage – A government-backed mortgage loan designed for people with lower credit scores, lower down payments, or financial issues like bankruptcy. FHA loans must be used for a primary residence.
- USDA mortgage – A government-backed mortgage available in eligible rural areas and funded by the United States Department of Agriculture. USDA loans can sometimes waive a down payment and include home improvement loans and grants.
- VA mortgage – A government-backed mortgage offered through the U.S. Department of Veterans Affairs for qualified veterans. VA loans feature competitive interest rates, little to no down payments, and limited closing costs.
The type of financial institution supplying your mortgage is another thing to keep in mind while exploring, too. While traditional banks feature federally insured funding, they tend to lack the personal care and connection you might find at your local credit union. They are also more likely to sell mortgages in bulk on a secondary market. Depending on your lender and how they conduct secondary market sales, this could mean the servicing–administrative pieces like record-keeping and management–of your loans might change. For instance, if your mortgage is sold, you may no longer pay the initial institution but work directly with the entity that bought out your loan.
On the other hand, credit unions offer flexible mortgage options along with personalized service. Credit unions also prefer to keep the loans extended through their mortgage solutions, meaning you will be able to get in touch with someone easily should you have a question about or issue with your loan.
#3. Know the True Cost of a Home Purchase
Your down payment isn’t the only cost to consider once you find your future home and make a successful offer to buy it. Hiring an inspector, paying realtor fees, and negotiating closing costs all add up to out-of-pocket expenses you might pay before you pack your first moving box.
There are two major items to consider building into your budget before you make an offer:
- Private Mortgage Insurance (PMI) – Some mortgage lenders will require you to pay PMI on top of your monthly mortgage payment if you elect to make a lower down payment. This insurance protects the lender (not the buyer!) in cases of defaulting on the loan. While traditional lending institutions often require this, credit unions can offer a reduced rate or sometimes eliminate PMI altogether because of their lower delinquency and default ratios.
- Closing costs – Closing costs cover third-party services and labor costs required to get a mortgage. When you buy a house, the lender requires an appraisal and a clear title search, among other things. Closing costs cover this activity and can be anywhere from 3% to 6% of your total loan. They are not part of your down payment. However, they may be negotiated with sellers to pay upfront, but it’s unlikely in a hot real estate market. If this happens, you might pay a higher interest rate for the life of your loan.
Buying a home for the first time is an exciting– and sometimes scary–experience, but it doesn’t have to be stressful.
Remember, knowing your comfort level when it comes to your finances will give you confidence in your decision-making. Exploring your mortgage options will provide you with flexibility in loan choice, and understanding the true cost of your home purchase will help you prepare for the home stretch before you move.