Purchasing a property to call your own is a significant investment. The process can seem intimidating, but if you’re buying for the first time, you’re not alone. Last year, 33% of home buyers purchased a home for the first time.
To do this, you’ll need to do some financial planning and make some smart moves. Here are a few tips to help you buy your first home.
1. Determine Your Budget
Before you even find a loan, you should understand your own financial limits. It’s important to do this first since many traditional loans require 20% down payments.
If you know the price range you can afford for your first home, you’ll know whether you can afford certain loans.
Not all loans require a 20% down payment. However, they may instead require mortgage insurance. In that case, you’ll need to get this first to qualify for them.
2. Find the Right Loan
Two of the most common mortgages are conventional loans and FHA (government-backed) loans.
Conventional loans have more interest rate options than FHA loans, but they’re still generally higher. Here’s a few key features in conventional loans:
- Medium to high credit score requirements
- Down payments of 20% maximum
- Fixed and adjustable rates
- Jumbo loans (non-conforming loans)
FHA loans are issued by the Federal Housing Administration. It can be easier to meet requirements for an FHA loan than a conventional loan. Here’s how they differ from conventional loans:
- Lower credit score requirements
- Mortgage insurance
- Down payments of less than 20%
- Fixed rates only (15-year or 30-year terms)
Other mortgages such as USDA loans lend to home buyers in rural areas. Borrowers with veteran status may also qualify for VA loans.
3. Compare Loan Rates
Once you find the type of loan you need, it’s time to find lenders and compare their rates.
Don’t immediately settle for the first loan you find. You can save thousands even if the difference between rates is just half a percent.
For example, getting an interest rate of 4.0% instead of 4.5% could save you $3,500 in mortgage payments.
4. Strengthen Your Credit
Making your credit look good improves your chances of getting approved. Government-backed lenders may approve borrowers with low credit, but it can still be a barrier to entry.
Payment history determines 35% of your credit score. So, making timely payments is key.
However, the amount of outstanding debt also largely determines your credit score. So, even if you make timely payments but you have substantial outstanding debt, you may score lower.
In addition to making timely payments, work on lowering your total debt.
5. Get Your First Home Inspected
An inspection can alleviate some concerns related to the overall cost of your first home. However, this comes later in the buying process. Note that you’ll need to get the seller’s permission for an inspection first.
A buyer’s inspection occurs after an offer’s been made to the seller, but before the sale closes. This gives you time to officially evaluate the home’s condition by a professional.
If the inspector discovers any significant issues, you can make a more informed purchasing decision.
Start Preparing for Your First Home!
All of these action items may seem overwhelming. However, there are some small steps you can take toward your goals.
Work on your credit while you research loans. Also, find a realtor who aligns with your buying interests and helps you calculate costs.
Making your first home feel like yours on the inside is also part of the process. Need some inspiration to get you started? Take a look at some design articles to start customizing!