Buying a home is no small feat, especially the first time around. Taking out a mortgage is a lot of money getting passed around, and a mistake here can mean financial stress for years to come. But owning a home can be great, and the buying process can be smooth and stress-free if you know what to do.
Unfortunately, there is a lot to know as a first time home buyer. With mortgages, the law, the market and so many other variables, it’s no shame if you can’t keep it all straight. But keep it straight you must if you are to buy a home without cursing yourself with insurmountable debt. Follow these tips to follow when buying a home with a loan, and give yourself the chance to achieve the American Dream of that white picket fence.
The First Steps
Before you even call up an agent or look at homes and properties, there are many facts and figures you need to assess. If you know what you got now, you’ll know what you can afford to get. Arm yourself with knowledge before even stepping out of the door.
Find Out What You Can Afford
It’s a simple tip, but don’t let your heart write checks that your wallet can’t cash. It’s great to have dreams as a first time home buyer, but realistic dreams will serve you better than pipe dreams. Dreaming too big can bury you under a mountain of debt and interest.
Figure out what you can reasonably afford before choosing a home to buy, and not the other way around. Narrowing houses down to your price range will also make the process faster as you won’t be wasting time on the unattainable. To see what is in our price range, use a mortgage calculator or home affordability calculator. These free tools let you see what your payments will look like in the future so you can compare them to your current and future financial situations
Check Your Credit
Your credit score is a measure of how much you are trusted to pay back money that you have borrowed. Based on your history, lenders will decide what interest rate to charge you. The more late payments on credit cards or loans, the lower your credit score. The lower your credit score, the higher your interest rate.
Your credit score is much more complicated than this, but simply put, if you have not demonstrated to the credit companies your ability to pay off debt, you will be charged more for your home via interest. You can check your credit score with the big three companies by using credit check services available online, often for free. Avoid opening new credit accounts before going to a mortgage lender; it will dent your credit score temporarily.
Research Government Assistance Programs
The government wants people to buy homes. It keeps the home builders employed as well as all of the industries that rely on them. Local governments want people to move to their municipality and buy homes to bring their business. To those ends, state, local and the federal government offer assistance programs specifically for first time home buyers.
These benefits can include low interest down payment loans to get you started, tax credits and low-interest home loans. Eligibility requirements apply, and every state and local government is different, so you’ll have to do some research to see what’s available. You may want to consider looking for a home in an area you had not considered before because of the better government assistance.
Get Your Papers Together
You are going to need some documentation to prove that you have the ability to pay off a mortgage, beyond just your credit score. Each lender requires different paperwork, but usually, they require W-2 tax forms from the past couple of years and bank statements from the past few months. Make copies of these and any other documents that are required to prove your income.
At the Bargaining Table
Once you enter into negotiations with a lender or property owner, there are a few things that you can do to ensure that you are prepared for what comes next, and are getting the best possible deal. Mortgages are complex agreements, and getting the facts as well as planning for contingencies will save you more in the future, ensuring you are a first time home buyer and not the last time financially secure person.
Save Up for a Big Down Payment
When signing up for a mortgage, make sure to bring as big a down payment as you can afford. The more money you pay up front, the less you have to pay in the future. The lower the amount remaining for you to pay, the less interest you will end up paying.
You should shoot for at least 10 percent of the loan for your down payment, but ideally, you want to get to 20 percent or above. Why fork over such a big amount when the point is to buy with the money you don’t have? Well, if you put up less than 20 percent, you might be charged private mortgage insurance fees (PMI). This is insurance for the lender to protect their investment and is just another fee for you to pay.
If you can get to 20 percent for a down payment, you can avoid these fees and drastically reduce your interest payments over the life of the loan. If you can’t get up to that number, consider taking out a smaller loan to cover the down payment. It is likely that the interest on that loan will be cheaper than the PMI fees and increased interest from your mortgage that you will be paying off longer than the down payment loan.
Research Your Options
There are three main types of mortgages: Fixed rate, variable rate, and adjustable rate. Fixed rate mortgages lock in your interest rate for the entire duration of the loan. These are generally better for longer loans that will be paid off over 20 years or more.
Variable rate mortgages will have their interest rates adjusted over time to match industry averages. So if interest rates around the nation go down, so will yours. If they go up though, so will yours. These are good for the short term, less than 20 years if you have reason to believe interest rates will fall soon.
Adjustable rate mortgages are a combination of the two, wherein the loan begins at a fixed interest rate for some years before being unlocked later. This is a way for both sides to hedge their bets. Which type of mortgage is best for you depends on your payment plan and the state of the economy, so do your research or get some professional advice on the market before picking a type of mortgage.
Homes are like any other big ticket item you buy; You have to shop around to get a good price. The mortgages are anyway. Just because one lender approves you for a certain interest rate, it doesn’t mean you can’t get a better rate from the lender down the street for the same loan. There isn’t an MSRP on loans, it all comes down to what the lender thinks you are capable of and how much they are willing to risk.
Don’t jump at the first offer, no matter how good it seems. Take some time and ask around. A few extra days or weeks of shopping could save you thousands over the next several years.
Make Sure You Have Enough Left Over
Getting that big down payment out of the way is great, but don’t forget that there are a lot of costs to consider even after you have made the down payment and agreed on an interest rate. You don’t want to get surprised by these costs after making the biggest purchase of your life thus far.
Closing costs and lending fees can ambush you after you think you have everything figured out, so make sure to ask up front about these less than apparent costs of the lending process. And don’t forget all the stuff that you have to buy and pay for to get your home into living conditions. You could find yourself living in an empty home for awhile if you don’t set aside anything for furnishings.
Learn About Points and What Your Lender Offers
You may be able to pay off these closing costs by taking on negative points, or pay off points and lower your interest rate. What are points? Points are portions of interest that you can pay off in advance or add to your debt. Paying off these points can be beneficial, but that’s just more money you have to pay on top of your down payment.
Taking on negative points increases your payments down the road, but can help mitigate some upfront costs like closing fees if you don’t have the money. Research the points that your lender makes available to you and figure out which points, if any, are right for you.