Last Updated on September 6, 2022
An impulse buy is fun when it’s a pack of gum in the checkout lane or a trinket from the clearance bin. But purchasing your first home, even in a hot market, is not the time to make an impulse buy. You want the confidence that comes with step-by-step preparation for this exciting journey.
Follow these start-to-finish tips and you’ll be a confident and prepared soon-to-be homeowner.
Tips for saving for a down payment
A realistic budget is indispensable when it comes to buying your first home. You’ll need to budget for a down payment, monthly mortgage payments (including property taxes and homeowners insurance), and closing costs. You’ll also want extra funds for moving costs and unforeseen repair expenses once you move in (anyone who has ever replaced a hot water heater will vouch for this one). Don’t forget those utility bills – they may be more than what you’ve been paying as a renter.
1. Coming up with a down payment
The first step in financial preparation comes with the down payment. Plan to put as much down as you can. Even a small percentage of most home prices turns out to be a chunk of money that you’ll probably need to save for.
2. Use tools to help you save
There are plenty of strategies out there for people trying to put aside money, including:
- Taking advantage of programs that help you save by rounding transactions up to the nearest dollar.
- Using an app like Clarity Money to identify where you can spend less and save more.
- Setting up an automatic savings plan that puts a percentage of your income into a separate savings account.
- Setting aside work bonuses.
- Saving, rather than spending, your tax refunds.
Tips for understanding the best loan programs for first time home buyers
Coming up with cash for a down payment can be tough as a first time home buyer. Thankfully, many programs exist and work well within many first time buyers’ budgets.
3. Take advantage of first time home buyer programs
As a first-time buyer, make sure you consider any national, state or county loan programs set up to help people just like you. Some of these programs offer low or even no down payment requirements, competitive interest rates, and lower credit score guidelines.
Here are three loan programs for first-time buyers in certain situations:
Federal Housing Administration loans allow down payments as low as 3.5% and may approve loans to buyers with lower credit scores.
U.S. Department of Agriculture loans require no down payment and are available to buyers in certain rural and suburban areas.
Veterans Affairs loans are an option for military members, veterans, reservists, National Guard members, and surviving spouses. They require no down payment, no minimum credit score, and no mortgage insurance, although they do require a one-time funding fee.
These are national programs, but there are also many state- and countywide programs for first-time buyers that provide down payment assistance, closing cost assistance, tax credits and discounted interest rates.
Tips for choosing a mortgage lender
Although the mortgage market may seem like a bottomless pool of options, choosing a lender doesn’t have to be overwhelming. Yes, the options are seemingly endless, but you just need to focus on finding the best fit for your situation.
4. Shop around for the right mortgage lender
A mortgage is like any other large purchase: it pays to shop around. Get rate quotes from at least three mortgage lenders to ensure you’re getting the best rates and terms available. The Consumer Financial Protection Bureau estimates that you can save up to $3,500 over the first five years of your loan by taking this one step.
Here are some questions to ask when you’re getting rate quotes:
What is the best interest rate you can offer?
What are your closing fees?
Can I buy discount points? (This means prepaying interest to secure a lower interest rate on the mortgage. This option doesn’t make sense for every first-time buyer, but if you have the savings on hand, after accounting for your down payment, and you plan to stay in your home long enough to save money on this upfront interest payment, it could be an option worth looking at.)
Once you have a handful of choices, make a pro/con list to help you compare and choose the best one for you and your budget.
Tips for starting the home buying process on the right foot
5. Check your credit rating before you apply for a loan
If you’ve never looked up your credit score, now is the time to start. Lenders use your credit score as a major factor to determine loan approval, interest rates and loan terms.
Each of the three nationwide credit reporting companies provides one free copy of your credit report every 12 months. You can order your report here the only authorized website for free credit reports, or call (877) 322-8228.
Now is the time to dispute any errors you find in your credit report. Take advantage of any opportunities to improve your score, such as paying down debts.
6. Calculate how much house you can afford
Once you’ve identified a lender, it’s time to start the application process. Start off on the right foot by getting a realistic sense of your price range. If you don’t calculate how much house you can comfortably afford, you’ll waste time and effort getting attached to homes that aren’t a good fit for your budget.
Save yourself the heartache and headache by doing some research up front. Once you know how much you have for a down payment, you can use a mortgage calculator like this one to figure out what home price you can afford.
The decisions you make when you set up your mortgage will also affect your monthly payment amount. The more you put down, the less you’ll be paying monthly. The term of your mortgage also makes a difference. A 30-year mortgage requires a smaller monthly payment than a 20- or 15-year mortgage, but you’ll be paying it down longer. If you can afford it, opt for a shorter term.
Remember to consider property taxes and homeowners insurance when you’re budgeting for a monthly mortgage payment. This home insurance calculator gives you an estimate of your total insurance cost based on your ZIP code, home price and other factors.
The location and property value assessment of your prospective home will determine the amount of your property taxes. Property tax amounts are public record, which means you should be able to find information by contacting the county assessor (or tax collector) office for the property you’re researching. Some county tax collectors have online portals where all you have to do is enter the property address to find an accurate property tax history.
7. Consider getting pre-approved for a mortgage
You’ve done your homework and you have a good sense of what you can afford and how your credit score rates. Now it’s time to get pre-approved.
A pre-approval is an analysis of your finances and it’s a written confirmation of the loan amount and terms the lender is willing to offer. Getting pre-approved could give you an advantage in a situation where you’re competing with multiple offers on a home.
Consider your pre-approval amount as the uppermost point of your home price budget. Remember, that amount doesn’t include home improvement and other monthly expenses.
Home Search Tips
8. Find the right Realtor® for you
Once you’ve done your financial homework, you get to start shopping, which means it’s time to find a Realtor®. Your Realtor is your ally, negotiator, and expert in your home search. You want to make sure your agent is the right fit for you, so try these tips when selecting your Realtor.
9. Make a Wish List
Don’t spend precious time looking at houses that don’t make sense for you. Narrow your search by making a wish list for your dream home and ideal neighborhood. Looking to move into a specific school or school district zone? This will help you focus your search. Want to simplify home maintenance and yard work? Limit your search to condos or townhouses.
Will your property maintain its value? Research crime statistics to find out which areas you may want to avoid. Even if you don’t have children, it’s a good idea to research the neighborhood schools in your search area. Low school ratings will affect property values of houses in that school zone.
Make sure your target neighborhood has all the amenities and resources you’ll want in the long run. Is there a highly rated hospital nearby? What will your grocery options be? How bad does traffic get during the morning and evening rush hours?
10. Ask lots of questions
Come prepared to every open house and showing with a comprehensive list of questions. Your Realtor can help you come up with questions, but your list should always cover when the house was built, plus the age of the HVAC systems, the hot water heater, and the roof.
11. Revisit your budget during your home search
Now that you’re visiting actual properties, you can get a clear picture of what your monthly expenses will be. Your Realtor can help you find out the property taxes, homeowners association or maintenance fees, and utility bill history for any property that sparks your interest. Knowing these expenses may help you decide between two different homes on your list.
Remember to budget for closing costs. Yes, it is possible in some situations for the seller to cover closing costs, but you shouldn’t depend on it. Expect closing costs to run between 2-5% of your loan amount. Ask your Realtor for closing cost coverage options that may be available.
Tips for making an offer that will stand out
12. Know the market
Currently, in most areas of the country, we’re in a sellers’ market. A sellers’ market exists because there is more demand than the total inventory of houses and when that happens you will often see multiple offers on each home.
13. Make a clean offer with few contingencies
Come to the table with your highest and best offer and don’t ask for a lot of favors. It’s also advisable to know what your top budget is so you aren’t tempted to go over it in a multiple offer situation.
14. Get pre-approved ahead of time
A pre-approval is a full mortgage loan commitment, subject to a fully executed purchase contract and the completion of an appraisal. In a tight inventory market, don’t count on winning a bidding war without having a pre-approval in place. Sellers want to know that the transaction will close, and having a pre-approval in place is almost as good as an all cash offer.
Tips for Sealing the Deal
15. Use the offer phase to negotiate
You’ve found your dream home, and it’s within your budget. Congratulations! Now it’s time to negotiate. This is your best opportunity to ask for what you want, whether it’s the seller covering repairs, help with closing costs, or buying a house below asking price from motivated sellers. Your Realtor is your ally here – look to his or her expertise and experience and don’t be afraid to put your wishes on the table.
16. Attend the inspection and ask questions
Once your offer has been accepted, it’s time for the home inspection. Make sure you find out what’s included in the inspection. You have a right to attend the home inspection and to make sure the inspector has adequate access to all parts of the property, including the roof and crawl space. You’re also allowed to ask questions, so don’t miss out on the opportunity to share your inquiries and concerns with an expert (in this case, the inspector).
17. Leave your credit score alone until after closing
During the home buying process, avoid doing anything to lower your credit score. This includes opening new credit cards, buying furniture or appliances on credit, or taking on a car loan.
Avoid doing anything to lower your credit score until after your closing date. The lender will check your credit again before closing, and anything that changes your credit score during this period could result in a delayed closing, a change in interest rate, or additional fees.
18. Get multiple home insurance quotes
You’re in the home stretch, but you still have some important decisions to make when insuring your home. Just like when you were looking for a mortgage, it’s best to get a few quotes from different insurance providers to be confident you’re getting the best option. Cheaper does not always mean better when it comes to home insurance. Saving on your premiums could mean less protection overall, and more out-of-pocket costs if you file a claim. If your home is in an area that’s prone to floods, you will need to purchase a separate policy for flood insurance.
We hope these tips help you feel assured that you’re getting the best deal possible on the home you’ve always dreamed of owning. Congratulations on taking this exciting step!
