Purchasing your first home is an exciting step in your life, but it can also be overwhelming. That’s why in this blog article we’re going to touch on some key considerations and offer tips for first-time home buyers.
1. Understand mortgage requirements
Many folks might like to purchase their first home, but feel intimidated by the process and fret that they’ll be turned down for a mortgage. However, a recent report from Fannie Mae shows that many potential first-time home buyers have misperceptions about mortgage qualification requirements.
The study found that many Americans overestimate the minimum credit score required to qualify for a mortgage. Additionally, many would-be home buyers also overestimate the minimum down payment necessary to qualify for a mortgage. We will address Private Mortgage Insurance and different down payment programs in a subsequent article.
The first step in securing your first mortgage should be working to understand the process and knowing the facts about credit scores and the mortgage application.
2. Shop around for the best mortgage rate
This second tip dovetails off the last point. It might seem like common sense, make sure to shop around and get a few different mortgage rate quotes rather than assuming that “all lenders are the same”. The mortgage loan business is very competitive and there is a range of products to meet different needs.
As a result of many Americans overestimating mortgage requirements, many home buyers might be tempted to snatch up the first offered financing they get without shopping around. Make sure to get multiple quotes to ensure that you’re minimizing your mortgage payment and maximizing savings.
Remember—a mortgage could be more attainable than you think, and you don’t want to leave any extra money on the table!
3. Only take out a mortgage you can afford
We all remember what happened during the housing crash of 2008. It can be tempting to upgrade to a larger space, especially when it’s a buyer’s market. However, pushing for a few more extra square feet could be financially perilous if it’s also pushing the upper limits of your budget!
Make sure you never get caught carrying a mortgage that’s outside your means of living. Check out this calculator tool from Nerd Wallet to estimate what you can afford to spend on a home. It will help you establish a price range for when you start looking at homes.
And remember, it’s important to note that this is just an estimator tool and isn’t meant to replace advice from a trusted financial advisor or accountant.
4. Check credit and pay down debt
Do you know what your credit score is? Of course, it’s a good idea to check your credit before applying for a mortgage. It’s equally important to assess your amount of debt and work to eliminate as much of it as possible before applying for your loan.
Additionally, avoid new credit activity such as taking out a new credit card or auto loan until after you’ve secured your mortgage and made the purchase. This will help prevent your credit score from dropping during the mortgage application process.
Meeting your financial commitments is difficult with excess debt. This is especially true when you take into account extra costs associated with being a home owner, such as basic maintenance and repairs that a landlord would cover if you were renting.
5. Establish emergency funds
Purchasing your first home is one of the greatest feelings you can have. However, that feeling will quickly evaporate if you’re not prepared for the eventuality of an emergency repair. You should always do your due diligence with a quality home inspection before purchasing your home, but even so, the unexpected always seems to happen!
If your water heater or furnace were to give out tomorrow, do you have enough saved to replace it? During the warmer months, a broken furnace might only be an inconvenience, but in the wintertime, not having an emergency fund could threaten your home’s livability.
Conventional wisdoms suggest a good rule of thumb is to have 3-6 months of expenses saved in case of an emergency. Do you have enough emergency savings to keep paying your mortgage in the event of layoffs or downsizing at work? It’s important to consider worst-case scenarios so you can plan accordingly, and consult a financial advisor who can help you choose the best path forward.
6. Save for closing costs
According to Zillow, home buyers can expect to pay between 2-5% of the home’s overall value on closing costs. If you purchase a$200,000 home, that means you can expect to pay somewhere between $4,000 and $10,000! Not taking this into account can be a nasty, albeit avoidable surprise.
Also, make sure to ask for a Closing Disclosure agreement before the date of your closing. This should outline all closing fees, some of which might be negotiable, such as administrative costs. Make sure to ask your real estate agent about anything in the agreement that you don’t understand.
For more information about the closing process, check out this in-depth article.
7. Consider the 30-year term over the 15-year term
One point I’d like to emphasize is that, especially for first-time homebuyers, I believe firmly that the 30-year term is the way to go with your mortgage. While the interest rate is a little higher for the 30-year term, if you’re not already accustomed to paying a mortgage, the payment will be a lot lower than a 15-year.
Thus for young families starting out, the 30-year term allows you to have greater flexibility as you will have more available for non-mortgage expenses every month. If you’d like to, you can still pay off your 30-year note like it’s a 15, but the key is you don’t have to do so. That’s where the flexibility that having a lower required monthly mortgage payment comes in. Additionally, programs that schedule payments on a biweekly or semimonthly basis are worth a look, because they save you a lot of interest over time.
8. Consult with a trusted financial advisor
Navigating your first mortgage can be intimidating, especially if your financial situation is complicated. If you’re uncertain of how to proceed, or what you can afford, consult with a trusted financial advisor or accountant who can help you better understand your options.
Or, if you’re not sure where to turn for expert financial advice, speak with us today for expert advice and guidance. Contact Holdfast Wealth Management.