Being a first time home buyer is as much of a skill as it is a privilege. Not unlike every other skill you have managed to acquire up to this point, buying your first home should be met with an acute attention to detail and a mind for due diligence. If for nothing else, home buying skills can be honed to the point that the scales will tip in favor of those that are the most prepared. That said, there are absolutely things you can do and learn to make the home buying process a positive one. If that sounds like something you could get behind, here are some first time home buyer tips you can’t afford to ignore.
Here are some of my favorite first time home buyer tips I feel everyone would be better off sticking to:
Start Early: The first time home buyer process starts well before you set foot inside your first open house, or even before you start looking at homes online. More specifically, I maintain that a first time home buyer should initiate their purchase at least 12 months prior to their impending transaction. That way, you’ll have ample time to get the things that matter the most in order: finances, credit score and expectations.
Differentiate Between Pre-Approval & Pre-Qualified: While a pre-approval may sound like a pre-qualification, the two indicators have significant differences that warrant your consideration. Receiving a pre-qualification from your bank is one of the first steps you should take as a first time home buyer, but it’s a very preliminary move. After all, a pre-qualification is nothing more than a ballpark estimate of the loan you might qualify for. Receiving pre-approval, on the other hand, is a bit more intensive. As the next step, pre-approval will have first time home buyers submit the appropriate credentials in exchange for the exact amount they will be eligible to receive. That way, you know exactly how much money you will have to work with.
Save, Save, Save: Buying a home is not cheap, especially with the historically high prices we are seeing today. That said, it’s in the best interest of perspective owners to save as much as they can. In addition to the down payment, which can range anywhere in the neighborhood of three to 20 percent, buyers will need to account for the costs that have become synonymous with homeownership. It also doesn’t hurt to have a “rainy day” fund for emergencies.
Land On A Price Point: Identify how much you are comfortable spending on a mortgage as soon as you can. Be sure to err on the side of caution, as not to overextend your finances early and often. Pay special considerations to your debt-to-income ratio (the banks certainly will), and use it to get a better idea of how much you are comfortable spending every month.
Check Your Credit: Be sure to check your credit early, as it is an important indicator banks will use to determine your ability to borrow. What’s more, credit score changes don’t happen overnight. Get to work on any imperfections in your credit score as soon as possible, as even small changes can take time to iron out. It’s also worth noting that you shouldn’t open any new accounts at this time. This may be the single greatest piece of advice that is most overlooked by new buyers.
Research Loan Options: First time home buyers are awarded the opportunity to choose from several different types of loans from different originators. That means it’s quite common for banks to compete for your business by offering different terms. As a result, I highly recommend shopping around for the loan you intend to use. Do not simply buy into the first one that comes across your table. Take your time and understand the terms available on each and proceed to make a decision only once you have examined all of your options.
Consider Working With An Agent: Far too many first time home buyers are eager to navigate the process by themselves; they assume that finding and buying a home is as simple as typing your criteria into an online search engine. Unfortunately, it’s not. In fact, buying a home is a complex process; one that can be made easier and more affordable with a professional. You see, while hiring a real estate agent may cost you more money upfront, their services can very easily pay for themselves. You may even find that working with an agent saves you more than the price it cost to hire them. On top of that, they will save you a lot of time and headache.
Make A List Of Needs And Wants: I highly recommend drafting a list of the things you want in your first home and the things you need. Obviously, prioritize the needs ahead of the wants, but be sure to reference your list when making the tough decisions. Perhaps even more specifically, don’t forego your needs for wants, as buying a home is typically a long-term decision. Having a wants and needs list will also help you in the decision making process when you are comparing similar properties down the road.
Always Have The Home Inspected: Despite whatever the current owner says, do not take their word for the condition the home is in. Instead, insist on having the property professionally inspected. That way, you will have an unbiased idea of the home’s status. The last thing you want is to move into a new home only to find out it has foundation issues.
Trust In Nearby Comparables: Comparables, or “comps” for short, are essentially similar properties to the one you intend to buy. They are, for all intents and purposes, your best barometer for how much a home should cost. That said, analyze the comps in your area to make sure your home is priced correctly. In doing so, you may find some leverage in negotiating a lower price.
I want to make it abundantly clear: first time home buyer tips can range from the utterly useless to the invaluable. Those I hit on above lean towards the latter, but they are far from the only tips you should take to heart. Buying a home is a complex process that is made easier by understanding as much as you can. So in addition to what I spoke of above, do your best to educate yourself on the process.
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Here are some of the most common first time home buyer mistakes, and how to avoid making them yourself:
Not Working With An Agent: One of the single greatest mistakes first time home buyers can make is to neglect the services of a professional real estate agent; namely, because the right person can save you a considerable amount of time and money. You see, far too many inexperienced home buyers think they will save money by foregoing the assistance of an agent, but their assumptions couldn’t be more wrong. While it’s true, working with an agent does come with an inherent cost, it’s well worth the price of admission. More often than not, a good agent can simultaneously save you more money than their services cost, find you a home that meets all of your needs, and save you a considerable amount of time. Real estate agents are, in themselves, an investment.
Shopping For A Home Before A Mortgage: Before you even consider setting foot inside of a model home or searching for your dream house online, you must first identify how much home you can afford. Consequently, far too many first time buyers get their order of operations reversed; they are too excited and start looking at homes immediately after they decide they want to buy — all that will do is lead to disappointment. Instead of looking for a home first, you should shop for mortgages. Get pre-qualified and pre-approved, that way you know exactly how much money you will have at your disposal when the time comes. Doing so will prevent you from wasting time looking at homes that were never in your price range to begin with.
Starting Too Late: I recommend initiating the buying process at least a year out. In other words, I don’t want you to find yourself short on time when the moment comes to make a decision. Buying a home is one of the biggest decisions you will ever make; it only makes sense that you will put some effort into it. That said, give yourself the time to get things in order. Do not start looking right before you want to buy, and instead give yourself enough time to do it right. That way, you will have time to get finances in order, and even make sure your credit score is up to par.
The first time home buyer credit score is one of the most important indicators lenders use to gauge a borrower’s trustworthiness. It is the credit score, after all, that best defines a person’s history with borrowing. That said, it’s in the best interest of first time home buyers to have a credit score that meets the minimum requirements of today’s lenders.
First time home buyers should have a credit score of at least 620 if they hope to receive a conventional loan, and a minimum credit score of 500 if they intend to qualify for an FHA loan.
The first time home buyer down payment will depend largely on the type of loan in question. FHA loans, for example, require a down payment of at least 3.5% for those with a credit score of 580 or higher. If, however, you apply for an FHA loan with a credit score between 500 and 579, you will be required to pay at least 10% down. Conventional loans, on the other hand, will require a downpayment somewhere in the neighborhood of 5% and 20%, as long as you meet the minimum credit score requirement: 620. It is worth noting, however, that most lenders will require borrowers that pay less than 20% down to pay what is known as private mortgage insurance (PMI) — it’s the lender’s method of protecting themselves from defaulting borrowers. According to BankRate, “PMI fees vary from around 0.3 percent to about 1.5 percent of the original loan amount per year, depending on the size of the down payment and the borrower’s credit score.”
Here are some of the most common first time home buyer loans and grants:
Not surprisingly, these are a few of the most common loans made available to today’s first time buyers. That said, there are more loans out there if you don’t see the one you like.
Mortgage rates are constantly changing, which makes calculating your future mortgage a bit more challenging. Fortunately, there are several dependable sites that provide their own first time home buyer mortgage calculator for your convenience. Zillow, for example, has a simple, easy to use first time home buyer mortgage calculator that will help you identify your own payments. Of course, it’s worth pointing out that Zillow’s mortgage calculator (and all others) should only be used by those looking for a ballpark estimate. For a better idea of what you could expect your own mortgage to be, you should consult the bank you intend to borrow from. Only they will be able to give you the exact number you are looking for.