There’s nothing quite like the combination of stress, and exhilaration that comes from buying a home for the first time. For most people, the home will be the largest purchase of their lives, so it’s only natural to feel anxious about making any buying decisions. Not only that, the entire process of buying a home is fraught with complexities, technical terms, and ‘hidden’ costs, making the experience a frustrating one for the average person.
If you’re not quite sure where to start, you can follow this basic 6-step guide that will help guide you through the process of buying a home for the first time.
1. Start Saving for a Down Payment ASAP
Ideally, you should be able to put 20 percent down on your home loan. But this is easier said than done, which is why many lenders allow for lower down payments, even offering programs for first-time homebuyers with 3 percent down.
Just remember that putting down less than 20% comes with a trade-off, higher costs and higher private mortgage insurance frees.
2. Decide How Much You Can Realistically Afford
Before you even think about shopping for a home, you need to have a clear price range in mind. Shoot for a range that’s within your spending capabilities.
3. Check Your Credit Score
Your credit status will greatly impact your chances of getting your home loan approved. It will also affect your interest rate (a higher score makes you less of a credit risk, which in turn, can get you a lower interest rate) and even the terms of the loan.
4. Hold Off on Taking Any New Loans or Opening New Lines of Credit
When you open a new line of credit or take out any loan, the lender will run an inquiry on your credit, which also has the effect of lowering it, albeit temporarily. Bottom line? Hold off on doing anything that might ding your credit if you plan to apply for a mortgage anytime soon.
5. Look for Applicable Loan Options
If you need to buy a home right away but are struggling to put together a 20 percent down payment, you can check out first-time home buyer programs, such as government-backed loans such as:
- Federal House Administration (FHA) loans- Homebuyers can qualify for an FHA loan with a credit score of 500-579 and pay 10 percent down, and 3.5 percent for higher scores.
- USDA Home Loans - Offers government-backed, zero down payment loans to help low- to moderate-income families purchase homes in eligible rural areas.
- VA Loans-Veterans Affairs loans are available to active service members, veterans, and surviving spouses of veterans, allowing them to qualify for flexible and zero-down payment loans backed by the VA.
6. Set Aside Money for Closing Costs
Aside from saving for a down payment, you also need to budget for the closing costs of your mortgage, which can run anywhere between 2 and 5 percent of the loan amount. So, be sure to look for lenders and compare closing expense, which includes home inspections, title searches, and insurance. You can also negotiate to have the seller or listing agent shoulder part of your closing costs, depending on the circumstances of your purchase.
Although these pointers are by no means comprehensive, they should give you a good idea of what you should do before attempting to buy a house. When in doubt, get in touch with mortgage advisor Chris Lamm to know what your best options are.