Best Practices to Follow When Buying Your First Home
Buying your first home is an exciting and significant milestone in life, but it can also feel complex and overwhelming. The journey to homeownership involves several steps and key decisions that must be made.
To help navigate first-time home buying with confidence, refer to the following tips and best practices. By implementing them into your home buying strategy, you will find that the process goes much more smoothly.
#1 – Get Your Credit in Order
Your credit score sets the tone for the entire home-buying process. The better your score, the better the loan terms and type you will qualify for. Considering that rates are especially high right now, getting your credit score in order should be a top priority.
You should start by pulling your credit report and reviewing what is negatively impacting your score the most. Typically, it is one of the following reasons:
- Revolving balances are too high in relation to limits and as compared to your income.
- Late payments.
- Insufficient payment or credit history.
- Accounts that are in collections.
Generally, the minimum FICO score necessary to qualify for a home loan is 620. However, home buyers should seriously consider improving their score as much as possible for the sake of securing a decent interest rate and conventional loan, which has higher score requirements.
For example, the payment on a $250,000 loan amount on a 30-year fixed mortgage with a 7% interest rate is $1,633, not including taxes and insurance. By comparison, the payment for the same loan amount and amortization schedule at 8% interest is $1,834. Working on your credit score can literally save you thousands of dollars in interest over the life of your home loan.
#2 – Save Up for a Down Payment to Buy Your First Home
Any real estate advisor near you will tell you that you should have a sizeable down payment ready to put down. But how much cash do you need exactly?
A good rule of thumb is to follow the 20% rule. For example, if you were attempting to buy a $500,000 home, you would want to put down at least $100,000 in cash for a down payment.
So, why is 20% the magic number? Because anything less results in the lender charging the borrower private mortgage insurance (PMI), which covers the lender if the borrower stops making mortgage payments. As a price-conscious consumer, you’re much better off saving up for a 20% down payment as opposed to paying PMI.
However, you can qualify for loans with lower down payment requirements, as little as 3% in some cases. Specialty loans for qualified buyers, such as VA loans, may not require any down payment.
#3 – Identify the Home that Meets Your Core Needs
To be candid, first-time home buying usually doesn’t end with the buyer finding their dream home. However, that isn’t to say the market lacks quality homes. When buying your first home, it’s helpful to think of things in terms of must-haves and nice-to-haves.
For example, having three bedrooms, two bathrooms, and a one-car garage may fall under must-haves, whereas a finished basement and two-car garage is considered a nice-to-have. If you decide to work with a real estate agent, this is the type of information they would want to know. After you’ve categorized your wants versus your needs, finding the right residential property becomes much easier.
#4 – Speak With Multiple Lenders with Programs for First-Time Home Buying
Your first instinct may be to speak with your bank or credit union about your home loan, and you should definitely explore that. However, don’t do yourself a disservice by investigating just one option.
A good best practice to follow is to compare the rates of three different potential lenders. This gives you a better idea of what your options are so that you can make an informed decision. After you decide on a lender, they can provide you with a preapproval letter. A preapproval letter shows how much the lender is willing to loan and conveys to sellers that you are a serious bidder.
Keep in mind that certain lenders may offer first-time home buyer mortgages with lower PMI, improved loan terms, or different down payment requirements. Ask potential lenders about all the loan products they offer.
#5 – Scrutinize Everything
One big mistake that first-time home buyers make is speeding through the process. Although getting into a home is a dream you want to realize as soon as possible, it’s important to scrutinize everything. Otherwise, you may wind up in a home or a mortgage that isn’t what you thought it was.
When buying your first home, be sure to:
- Avoid making an offer on a home you haven’t seen for yourself.
- Have the home fully inspected to ensure you don’t take on any expensive issues, such as structural problems or plumbing that needs to be replaced.
- Fully understand how much your payments will be with everything included.
- Read and understand any documentation before signing it.
- Understand the home buyer and real estate agent dynamic before agreeing to let them represent you.
- Avoid making any major purchases during the home-buying process, such as buying a new vehicle or opening a new line of credit. This can impact your FICO score and credit utilization rate and disqualify you from your loan.
Buying Your First Home Is a Worthwhile Challenge
After you’ve successfully navigated the process of buying your first home, you can relish all the joys of homeownership. Create a space that reflects your style, make lasting memories, and cherish the sense of pride that comes with owning your own piece of the real estate market.
As a homeowner, you also have the option to make improvements and renovations. Not only does this help elevate your home in terms of aesthetics and value, but it also can attract potential buyers when you eventually sell your home.
Remember, the path to homeownership may have its twists and turns, but with careful planning, a trusted real estate agent, and adhering to best practices, you can confidently navigate the journey to finding a home that meets the needs of you and your family.
