Thinking about buying a home for the first time? There are some things you need to know beforehand. Here are ten things you must do before buying your first home.
10. Save Up for a Down Payment
When purchasing a home, you’ll need to save for a down payment. Financial advisors at The Motley Fool recommend aiming for at least 10 percent of the total purchase cost. The ideal amount to aim for is 20 percent, but that’s not a viable option for everyone. If this is the case, you can take advantage of Private Mortgage Insurance (PMI). With PMI, you pay 1 to 2 percent of your home’s value annually each month until your home has 20 percent equity.
If you find you’re still having trouble, you can always look for down-payment assistance, which is often for certain buyers, like those purchasing a home for the first time. Bankrate recommends searching online using terms like “down payment assistance,” “first-time homebuyers” or “homebuyer’s assistance.”
9. Improve Your Credit Score
To qualify for an FHA loan, you’ll need a credit score of at least 580. However, a score between 700 and 720 will get you a much better deal. If you want the best rates on the market, your credit score will need to be no less than 750. If your score is below 660 or 680, you’ll either have to pay large fees or make a high down payment.
If you’re not sure what your credit score is, you should check it, as well as your entire credit report, using all three major credit bureaus. Each agency’s report may have different information, so you need to check all three for any discrepancies. If you do find any errors, dispute them prior to applying for a home loan. Once you’ve fixed any errors, work on paying down your debt. The amount you owe your creditors accounts for a huge percentage of your credit score, so paying down that debt will improve your score.
Lastly, don’t apply for new credit at least a year before you apply for a mortgage. New credit applications can adversely affect your score. On the same note, resist closing any lines of unused credit. This will lower your score as well.
8. Get Your Finances in Order
Make sure you don’t have any unpaid bills, taxes or other debts. Also, make sure you get your financial statements in order. Your lender will most likely want to know if and how you’re making ends meet. If your bank account statement includes one-time bonuses, commissions or anything similar, make sure you have the proper documentation to verify those numbers. Lastly, keep in mind that your lender will likely need to see statements each month from ALL of your accounts until you close on the home.
7. Get Pre-Approved
Before buying your first home, you should get pre-approved for a mortgage. According to financial advisors at The Motley Fool, sellers prefer buyers who have been pre-approved for a mortgage. The pre-approval process is simple: The lender will check your credit history and ask you some basic questions to see if you’re likely to qualify for a mortgage of a specific size. NOTE: This does NOT mean you will be approved. The process simply determines how likely you are to be approved for a mortgage.
6. Research the Market
Do some basic research on Zillow or Realtor.com for homes within your budget. It’s good to know the cost of homes in the area(s) you’re interested in living. It’s also a good idea to look for any unique rules or laws of the area(s). For example, Daniel Kline, of The Motley Fool, found out from a real estate agent in Florida that he’d need a 25 percent down payment for most condo units in the area because “several condo projects had gone bankrupt during the housing crash, prompting banks and other lending institutions to tighten their lending standards for those types of properties.”
5. Go Bargain Hunting
Foreclosure and fixer-uppers can be appealing options for cash-strapped buyers. Keep in mind that foreclosures may be fixer-uppers too, since it’s highly likely that the previous homeowner may not have had the funds to spend on repairs. Fortunately, the FHA has a rehab loan program that allows borrowers to get up to $35,000 for upgrades and improvements. There is one stipulation, though: The work must be done by licensed contractors. If you plan on purchasing a foreclosure, HGTV recommends buying one that has already been through the foreclosure process and is currently owned by a bank. That way you’ll work with a lender or broker rather than the homeowner.
DID YOU KNOW?
Foreclosures can take 3 months or more to close. Sometimes they don’t close at all. So, if you’re looking to move into a home right away, a foreclosure might not be the best option.
4. Consider ALL Costs
Not only will you need money for a down payment, you’ll also need money for furniture and other moving expenses, like a U-Haul truck or movers. Closing costs should be considered as well. According to Bankrate’s latest survey, “the national average for closing costs for a $200,000 mortgage is $2,084.” Get an estimate from your lender long before the closing date so you’ll be prepared.
Depending on where you decide to live, you might have to pay a homeowner’s association fee. This expense typically covers things like lawn maintenance, snow removal, and other amenities.
Lastly, being a homeowner also means being your own landlord. You’ll be responsible for fixing and paying for anything that breaks down. Your homeowner’s insurance policy will cover damages from natural disasters and such, but any other repairs will need to be paid for out of your own pocket.
3. Consider the Size of Your Home
Make sure the size of your home meets your long-term needs. For example, you may be single right now, but perhaps you might get married in the future. Or, maybe you’ll have kids some day. Or, several pets. Getting a home that’s larger than what your current needs require will help you save thousands of dollars in the long run. “When we bought our first few houses, we kept our budget smaller than we needed to. That left us with houses that only met our short-term needs. Because we were too careful, we ended up moving more often than we otherwise would have. That cost us more money in closing fees, commissions, and moving than we would have spent to buy a house that fully met our needs in the first place,” Kline said in an article on The Motley Fool’s website.
2. Make Sure the Timing is Right
If you work or travel a lot, it’s probably not the right time to sink your savings into an expensive home that you won’t even be spending that much time in. Instead, consider purchasing a small condo or something similar without the hefty price tag and maintenance expenses.
Plus, if you move around a lot, or expect to be moving within a couple of years or so, making a big investment like this may not be the best option. The first few years of your mortgage payments will go toward paying off interest, so you won’t have built up much equity in your home. In this case, you’d be better off renting instead of buying.
1. Do Your Own Inspection
It’s okay, and highly recommended, that you get an inspector to see what improvements and repairs need to be done. But, that doesn’t mean you can’t do a little inspecting of your own. If, for example, you want to know if your dream home has any plumbing problems, you can do a simple check by flushing the toilets. “If the water flow is weak, that may be a sign of an emerging plumbing problem. Yes, a good home inspector may pick this up, but home inspections are about finding existing problems — not ones that are developing. If a toilet does not flush well, it’s a sign something may be wrong,” an article on The Motley Fool’s website says.
Even if you don’t find anything wrong, you should still ask if there have been any problems. “We once sold a house that had a minor plumbing issue… we learned that the pipes were directly under our living room, and a major problem would require digging them up. That’s not something that needed to be disclosed, but it’s information we would have volunteered if someone had asked, ‘Is there anything that worries you about the house?’,” Kline said.
This list is not meant to be exhaustive, but it will help you get started. In the meantime, make sure you find a knowledgeable real estate professional to work with. Thanks for reading, and happy house hunting!