Buying a home can be challenging for a first-timer. After all, there are so many steps, tasks, and requirements, and you may be anxious about making an expensive mistake. But first-time homebuyers actually enjoy some special advantages created to encourage new entrants into the real estate market. To demystify the process so you get the most out of your purchase, here is a rundown of what you need to consider before you buy and what you can expect from the buying process itself, plus tips to make life easier after you buy your first home.
Just because you’ve been approved for a $400,000 mortgage doesn’t mean you should buy a $400,000 home. You’ll need to consider expenses for closing costs, taxes, insurance, repairs and monthly bills.
Save a down payment
If saving up to pay cash for the total price of a house isn’t reasonable for your family’s timeline, at least save for a down payment of 20% or more. Then you won’t have to pay for private mortgage insurance (PMI), which protects the mortgage company in case you can’t make your payments and end up in foreclosure. PMI usually costs 1% of the total loan amount, and you’ll be charged that 1% every year. So it can really add a lot to your monthly mortgage payment.
If a 20% down payment seems out of reach for you, first-time home buyer programs that offer single-digit down payments may sound tempting. These options will cost you more in the long run. Here are some low-to-no down payment mortgage options to avoid:
Adjustable-Rate Mortgages (ARMs): ARMs might seem great with a low initial interest rate, but they allow lenders to adjust the rate to transfer the risk of rising interest rates.
FHA Loans: You may be able to get an FHA mortgage with as little as 3.5% down, but you have to pay a mortgage insurance premium for the life of the loan. That’s thousands of dollars that won’t go toward paying off your mortgage.
VA Loans: VA loans allow veterans to buy a home with no down payment. But if the real estate market shifts, you could easily owe more than the market value of your home. These loans also carry a bunch of fees and usually charge interest rates that are higher than those for conventional loans.
Get Preapproved For A Mortgage
When you’re ready to start house hunting, it’s time to get preapproved for a mortgage. When you apply, your lender will give you a preapproval letter that states how much you’re approved for based on your credit, assets and income. You can show your preapproval letter to your real estate agent so they can help you find homes within your budget.
To get preapproved, you need to apply with your lender. The preapproval process typically involves answering some questions about your income, your assets and the home you want to buy. It will also involve a credit check.
Start looking for your house
Your real estate agent will help you hunt for houses within your budget. It’s a good idea to make a list of your top priorities
Here are some things you might want to consider when searching for a house:
- Square footage
- Home condition and possible need for repairs
- Access to public transportation
- Number of bedrooms
- Backyard/swimming pool
- Local entertainment options
- Local school district ranking
- Property value trends
- Property/real estate taxes
Set a true budget and stick to it
Before you even think about scheduling a home tour, you’re going to need to get in the weeds about your financials. Often, real estate agents won’t work with buyers until they have a pre-approval letter in hand from a lender, because doing so will inform how much house they can afford. That said, even after tackling this step, you need to do some careful budgeting.
When looking for homes, you will find that some sellers are more motivated than others. Some people will place their home on the market but don’t really care if it sells or not. If not, they are happy to continue living there and will try again later. With this type of sale, there is not usually much room to move on the price.
Staying true to your priorities will be important in finding the right home for you and your family. Location, lot size, bedrooms, bathrooms and kitchen are as important to your enjoyment of the home as they will be for the resale.
Understanding the age and condition of the home, appliances and components will help you determine how much work will be needed to maintain it over time. Once you know this, you can look at possible price offers that could make it a worthwhile investment for you.