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Being a first-time home buyer is exciting – but it can also be extremely overwhelming!
There are so many steps, tasks, and requirements you need to consider to ensure you don’t
make any expensive mistakes.
Even though home buying can come with trials and tribulations, 93% of homeowners in
2019 said owning a home is well worth the challenge it took to get there.
This guide will help demystify the home buying process by giving advice for first-time
home buyers so you get the most out of your purchase and reduce the stress and anxiety
that comes with home buying.
We sorted our tips into four main categories:
• Prepare your finances
• Find the right loan for you
• The buying process
• The closing process
Determine what you can afford
Arguably, the most crucial step for a first time home buyer is to make sure you have all
your finances in order so you have a clear picture of what you can realistically afford. By
using a mortgage calculator you can gather a good estimate of your budget based on
income, debt, student loans, savings, and other financial commitments. Don’t forget, the
cost of buying a home isn’t just in the property price – you need to be wary of closing fees
and other costs, such as closing costs, removal costs, and property taxes.
Property taxes, which are collected twice a year, will vary depending on the state in which
you live. Make sure you do your research and factor these costs into your monthly
Think about your down payment
It’s common to have a 20% down payment, but many lenders may take much less.
However, putting down less than 20% could leave you with higher monthly payments and
you will need to pay for private mortgage insurance (PMI). PMI usually costs 1% of the
total loan value and is added to your monthly payments – meaning you will end up paying
more in the long run for your property. If you are able to, try saving for a 20% down
payment, as it will make your monthly payments lower because you won’t have to pay for
Think about your mortgage options
If getting together a 20% down payment is unrealistic, then be careful about which
mortgage options you choose. The following mortgage options may be available to you if
you have a low down payment:
• Adjustable-Rate Mortgage (ARM) can be a good option for some buyers, especially as
they tend to offer a low initial interest rate. But the downside is that lenders can adjust
the rate, and monthly payments, to transfer the risk of rising interest rates to you.
• FHA loans are loans that are insured by the Federal Housing Administration and allow
down payments as low as 3.5%.
• A VA loan is a $0 down mortgage option that is issued by private lenders and partially
backed, or guaranteed, by the Department of Veterans Affairs. It is available to active
and veteran service personnel and their families.
Fixed-rate mortgages can offer buyers consistency and help make it easier to set and stick
to a budget. Having a fixed rate means that your total monthly payments and interest rate
will stay the same depending on how long you have the fixed-rate loan. The main
advantage of a fixed-rate loan is that you are protected from sudden and potentially
significant increases in monthly mortgage payments if interest rates were to rise.
The downside of a fixed-rate mortgage is that if you are buying a house during a time when
interest rates are high, it may make it harder for you to qualify for a loan as the payments
may be less affordable – plus, you are then committed to monthly repayments at a high
interest rate for the term agreed. Traditionally, lenders offer fixed-rate mortgages for a
variety of terms, but the most common are 15, 20, and 30 years.
Research state and local assistance programs
A crucial step in your journey to becoming a homeowner is to explore local and national
first-time buyer assistance programs.
Many state housing authorities combine down payment grants, or minimum down
payment mortgages, with interest rates that are favorable and can sometimes even offer
federal tax breaks. These programs are designed to help boost buyers’ chances of owning
homes in particular states or cities or help buyers in certain professions, such as educators,
or active-duty military and veterans.
Find out how your credit history can affect mortgage interest rates
When you apply for a mortgage loan, your lender will look at your credit history. Your
credit history is a record of how you have managed your credit in the past, including total
debt, a number of credit cards, and any late payments. Your credit history will give you a
credit report with a credit score, and lenders will consider your score as an indicator of
how likely you are to repay your mortgage. Those with good credit tend to get better
mortgage rates and more loan options as they are seen as a lower risk to lenders in
comparison to buyers with bad credit.
Get pre-qualified and pre-approved
Before putting in an offer on a home, make sure you get pre-qualified for your loan first.
Pre-qualification is a preliminary evaluation of a potential borrower by a lender to
determine an estimate of what the lender would be willing to lend you. As you get closer to
buying a home, it would be wise to get pre-approved. A pre-approval offer will state the
specific loan amount that you are eligible for, rather than a pre-qualification offer, which
states an estimate of what you can borrow.
Having a pre-qualification or pre-approval can make you more attractive to sellers and can
give you the upper hand over other buyers who may not have taken this step.
Compare mortgage rates
The more mortgage lenders you explore when you are shopping around for mortgage rates,
the more likely you are to find one with a lower interest rate. You could save yourself
thousands of dollars over the life of your mortgage simply by finding a lower interest rate.
Find the right real estate agent
Finding the right real estate agent to work with can make a world of difference. A good real
estate agent by your side can help you get your dream home at the right price. Agents have
knowledge and experience of the local market and can act as an advocate for you during the entire home-buying process. As a first-time buyer, they can offer invaluable knowledge,
not just on the local housing marketing, but on the whole buying process.
If you are looking for an agent, make sure you choose one who is an Accredited Buyer
Representative (ABR) – as they have met certain qualifications and criteria by the Real
Estate Buyer’s Agent Council in order to qualify. You can search for an accredited