Deciding you are ready to buy a home is exciting and overwhelming at the same time. There are many new terms you must know and facts you must consider. Before you let yourself get overwhelmed, consider the following top 10 tips for first-time homebuyers.
1) Know how much home you can afford
You should do this before you look at homes. You need to know what you can afford. This isn’t the number a lender throws at you, based on a few figures you verbally provided. This is after you sit down and look at your budget closely.
Remember, your mortgage consists of more than just principal and interest. You’ll also owe real estate taxes and homeowner’s insurance. If you put less than 20% down on the home, you’ll also pay Private Mortgage Insurance. If you have a concrete number in your head regarding what you can afford, you’ll resist the urge to take a larger mortgage.
2) Know your credit history
Knowing your credit history will help you know what type of loan and/or rate you deserve. The more information you have, the better! Pull your free credit report and look it over. Is everything accurate? If not, file a dispute.
Once you know everything is accurate, look at your history over the last 12 months. Do you have any late payments? Are your outstanding balances close to your available credit? Do you have too many credit cards? Each of these issues can negatively affect your credit score.
Aim to have no late payments in the last 12 months and have only 20% of your available credit outstanding. Also, the older your accounts are, the better it is for your credit score. When your credit is in good shape, you have a better chance of securing a good loan program.
3) Explore all of your loan options
If there’s one thing you do, shop around! Don’t let one lender tell you that you won’t find a program anywhere else. There are FHA, VA, USDA, and conventional programs to explore. Each offers its own benefits.
For example, you may qualify for a conventional loan, but if you don’t put 20% down, you’ll pay PMI. The FHA loan might provide a better option for you depending on the cost of the PMI on the conventional loan. You won’t know which loan is right until you shop around and compare.
4) Get a pre-approval before shopping for a home
Bidding on a home without a preapproval will not win you the bid. Sellers only want qualified buyers. Otherwise, they could be wasting their time on someone that can’t even afford the loan. Do yourself a favor and shop around for lenders and programs before shopping for a home. Not only does it give you the leg up on the competition, it lets you know what you can afford before you start shopping for a home.
5) Estimate high for your down payment and closing costs
You likely know how much money you have for a down payment, but don’t forget closing costs. They can cost as much as 6% of your loan amount. If you don’t have any more cash, the money may have to come from your down payment. This could affect the loan program use.
When you determine how much you will need, estimate high. Closing costs are usually between 3-6% of the loan amount, but take the higher amount. This way you are prepared for anything when it comes time for the closing.
6) Determine if paying points makes sense.
Paying points may sound good to get a lower interest rate, but it depends on your circumstances. If you won’t stay in the home for at least 5 years, it may not make sense. Consider your long-term plans and go from there. Calculate how long it would take you to make up the cost of the point based on the monthly savings. If it will take too long, it doesn’t make sense to pay the point. You’ll move before you ever see the benefit of the lower rate.
7) Have contingencies on your purchase contract
Unless you know without a doubt that you can get a mortgage, include a financing contingency on your purchase contract. This gives you around 2 weeks to secure financing with no conditions. If your financing falls through, you can cancel the contract and not lose any money.
8) Compare rates and closing costs
Don’t focus only on the interest rate the lender quoted. Look at the closing costs too. Sometimes a higher rate makes more sense in exchange for lower closing costs. Looking at the APR provided on the Loan Estimate will give you a better idea of the cost over the loan’s life. Choosing the lower APR will save you the most money in the end.
9) Don’t take an adjustable rate mortgage for the low rate
An adjustable rate loan may seem tempting at first. That lower teaser rate looks good, but you have to think of the long term. That teaser rate will only last between 3 and 5 years. Then what? You’ll have a higher rate and payment that you may or may not be able to afford.
Compare the fixed rate and the adjustable rate side-by-side. Then ask the lender what the payment would be on the worst-case scenario (the maximum the rate would adjust). Only then can you make the right decision.
10) Plan for what you don’t know
When it comes to a mortgage and real estate, there are no givens. Always plan for the unexpected – have more money than necessary at the closing. Respond quickly to underwriter’s requests. Work closely with the seller. This way you are always in the loop and know what is going on.
You never know when you’ll have to provide more documentation or pay for another service. Planning for the worst can help you handle the speed bumps a little easier throughout the home buying process.