First-time homebuyer tips

Wed Jun 02 2021

A smiling woman sits in her new home surrounded by moving boxes

Looking to buy your first home? It's a huge milestone – and one that takes careful planning. These first-time homebuyer tips can help you achieve your goal of homeownership faster.

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When you buy a home, you generally have to come up with a sizable down payment. This can range anywhere from three to 20 percent of the cost of the home. To put that amount in perspective, for every $100,000 of home you purchase, you need anywhere from $3,000 to $20,000 for your down payment.

This can be one of the biggest obstacles to buying a new home. If you can’t save that much in the timeframe you’re looking to buy, and you don’t qualify for a zero-down loan program, you may have to look at other options, like getting a gift from your parents or tapping into your 401(k). Either way, make sure you’re prepared for the down payment.

Decide what your budget is

It’s one thing to peruse the pages of Zillow and fantasize about the home you’ll buy, and another thing altogether to know which homes you can afford. Use one of the many online mortgage calculators that estimate your monthly mortgage payment based on the cost of the home, downpayment, and interest rates.

Once you have an idea of how much your mortgage might be, you can get a better handle on the types of homes you might actually be able to buy. This makes your search much more focused and can help you make decisions further on down the road.

Raise your credit score

Most lenders prefer credit scores of 680 or higher, but the Federal Housing Administration accepts credit scores as low as 500 if you can put 10 percent down. If your credit is less than perfect, you want to work on improving it now. This may mean:

  • Dealing with late payments or delinquencies.
  • Disputing errors.
  • Paying down debt.

Not only does your credit score determine your ability to qualify for a loan, but it also determines the rate of the loan. Basically, the higher your credit score, the lower your interest rate is. That’s important because better rates can save you thousands in interest over the course of the loan.

Research your mortgage options

Learn what types of mortgage options there are and decide which is the best option for you. One place to look is towards the federal government. Its home loan programs are usually designed with first-time homebuyers in mind, including programs from:

  • Federal Housing Administration.
  • US Department of Veterans Affairs.
  • US Department of Agriculture.

These loan programs generally have lower credit and down payment requirements. However, if you have great credit and enough for a 20 percent down payment, you might find your best rates in conventional mortgages. Knowing what you are most likely to qualify for can help you best plan for your new home.

Find a realtor

Even if you aren’t ready to buy just yet, you may want to develop a relationship with a realtor that you trust. They can help you:

  • Understand different market conditions that suggest good times to buy.
  • Point you in the right direction for neighborhoods to consider.
  • Keep an eye out for your perfect home.

You need to be able to trust that your realtor has your best interests in mind. Get to know them before you shop in earnest to get a sense of how a working relationship might go.

For more pointers, check out 22 Questions to Ask When Buying a House.

Research neighborhoods

While your realtor points you in the direction of neighborhoods and homes that fit your needs, it’s best to do your own due diligence. Depending on your top concerns, you probably want to look into:

  • Area schools.
  • Crime.
  • Local eateries.
  • Parks.
  • Distance from your work or school.

When researching neighborhoods, you need to determine where you feel safe, how conducive the area is to your lifestyle, and whether it fits your work needs.

Get a pre-approval letter

Many agree that before you even start shopping for a new home, you should talk to a mortgage broker and get your loan pre-approved. The pre-approval letter makes you a better prospect as a buyer because sellers know you’re serious and can meet the loan requirements. Some won’t even accept an offer without a pre-approval letter.

This is different from using online loan calculators. While those can get thinking about a budget, a pre-approval letter defines it because the lender factors in your:

  • Personal credit.
  • Debt-to-income ratio.
  • Income.

All of this helps determine the top end of what you can afford. Plus, it doesn’t commit you to a particular lender or loan.

Plan for closing costs

We’ve already talked about the down payment, but you also need to save money for the closing costs. These can be anywhere from two to five percent of the purchase price and include fees like:

Sometimes you can roll some or all of your closing costs into the final loan balance. While it’s nice to not have to come up with the extra cash, you should run the numbers to see how much this may cost you in additional interest. In most cases, you’re better off paying these costs at closing if you can.

Budget for homeowners insurance

Depending on how far along you are in your home-buying journey, you may have already realized that you need to factor the cost of homeowners insurance into your play. Mortgage lenders usually require you to get a policy before they offer a loan.

In many cases, you can have your homeowners' insurance premium paid from an escrow account that holds the balance until the renewals take place. Whether or not you choose to do this, make sure you shop around to get the best rate to keep your monthly costs down.

Learn about homeowners' tax breaks

Homeownership entitles you to some tax breaks you'll want to explore. For example, you can deduct your property taxes as well as the interest you pay on the mortgage. Closing costs may also be tax deductible, but you should talk to a tax adviser to determine which are – if any. Making the most of tax breaks can help homeowners pay for repairs and upkeep.

Planning ahead is essential to making homeownership affordable. Get your finances in order now, and you could be a first-time homeowner sooner than you think.


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