The process of shopping for a home, negotiating a purchase price, applying for a loan, and closing a mortgage loan can be daunting and complicated for even a seasoned home buyer. As a first time home buyer, everything about the process is new and unfamiliar. While your mortgage lender and local credit counselors can help you navigate the path to homeownership, the following do's and don'ts will help you avoid some of the more common mistakes and oversights that can trip you up on your way to buying your first home.
Follow These 12 Do's and Don'ts to Be a Successful First Time Home Buyer
1. Do Start Saving Early for Your Down Payment
Depending on the type of mortgage loan for which you qualify, you might have to save anywhere between 3.5% and 20% of your home's purchase price. A down payment, alone, can require a significant chunk of change. On a $200,000 home, you could need to save anywhere from $7,000 to $40,000 to cover your down payment. Even with no down payment requirements from first time home buyer programs, paying more up-front will save you money in interest in the long run and might also prevent you from having to pay for primary mortgage insurance.
2. A First Time Home Buyer Can’t Forget Closing Costs
The savings needed to purchase a home as a first time home buyer don't stop with the down payment. You will also need to cover closing costs when you sign at closing. These costs usually include a loan origination fee, an initial escrow payment, recording fees, transfer fees, appraisal fees, title insurance costs, and more. You will receive an estimate of these costs from your lender prior to closing but plan to pay between 2% and 5% of your loan amount.
3. Do Remember to Save for Additional Costs After Closing
After closing your loan, you shouldn't owe the bank or title company any additional money (except of course your monthly mortgage payment). Owning a home, however, brings about all sorts of new expenses. Before purchasing a home, be sure to reserve some savings for furniture, new fixtures, fresh paint, appliances, home repairs, and improvements.
4. A First Time Home Buyer Can’t Forget to Budget
As a good rule of thumb, you should aim to have housing expenses (mortgage payment, taxes, insurance, and HOA fees) take up no more than about 25% of your monthly income. This leaves you room to put money toward other things like a car and other transportation expenses, medical costs, emergency savings, vacation savings, clothing, and entertainment. Although you might get approved for a larger loan and monthly payment, it's usually financially safest not to purchase a home at the top end of your budget.
5. Do Run a Credit Check and Clean It Up
You can pull a free annual report of your credit history from each of the nation's major repositories. Take a look at yours to see if you have any past-due payments or collection accounts. Bring all of your credit payments current and pay off any collections. Be ready to have an honest discussion with your lender about any negative marks on your credit history.
6. Don't Take Out New Loans or Open New Credit Cards
Multiple inquiries can lower your credit score. In addition, new loans, monthly payments, and credit card balances will increase the amount of debt you have to pay each month, hurting your debt to income ratio (total monthly debt divided by total monthly income). The debt to income ratio is one of the key factors lenders consider when evaluating a mortgage loan application. This helps them determine a borrower's ability to repay the proposed loan.
7. Do Enlist a Real Estate Agent
It's a common misconception that enlisting the help of a real estate agent is a waste of money. From shopping for homes and neighborhoods, understanding housing costs, and negotiating a buy/sell agreement to navigating the home loan approval and closing process, a real estate agent will save you time, money, and energy.
8. Don't Assume an Inspection Covers Everything
Inspections are part of the mortgage process. An inspection, however, doesn't always cover everything. Be sure to attend your inspection and pay close attention. Be sure your inspector can access all areas of the house (crawl spaces and attics). Ask questions about what's included and don't be afraid to ask your inspector to take a closer look at something if you notice anything that seems amiss.
9. Research First Time Home Buyer Loan Options
Look into the different loan options and packages available to you as a first time home buyer. In addition to federal programs like FHA, USDA, and VA home loans, be sure to research your state and local home ownership assistance programs. Be sure to check with your local lender, they may have a first time home buyer program that fits your needs. You might find that you qualify for assistance with your down payment or other benefits.
10. Don't Wait to Fill Out a Mortgage Application
If you wait to start the mortgage application process until you find the house that fits your dreams and your budget, you might miss out. Apply for pre-approval on a home loan amount within your budget. With pre-approval, you will be able to negotiate a buy sell agreement as soon as you find a house you love and have an offer accepted — without waiting for credit approval.
11. Do Consider Your Future Housing Needs
As a first time home buyer, you have to think about what your future housing needs might be. Do you want a house that will accommodate a big family or is close to a good school district? If you consider your future needs now, you will find a house that will be able to grow with you.
12. Don't Neglect Negotiations
We live in a society in which prices on most items are set in stone. Real estate prices, however, work differently. While you probably won't get a low-ball offer accepted, you do have some wiggle room with negotiations. Work with your real estate agent to discuss potential ways to work the seller's price down. You might be able to get them to cover some of your closing costs or even agree to handle certain repairs (cost and execution) prior to closing.
As a first time home buyer, the mortgage process can be overwhelming. Carolina Trust’s Mortgage Team is here to help guide you through each step of the process. If you have any questions relating to your unique financial situation, please contact us today.
For more first time home buyer tips, review our "10 Steps to Buying a House in the Carolinas [Complete Checklist]."