The decision to buy a home is one of the most important one can make in a lifetime. Aligning desired neighborhoods and amenities with an affordable budget can be a difficult compromise, but there are many factors a first-time homebuyer should consider before beginning the search. A little financial check now can save valuable time and money later.
First, have you considered how much you want to borrow? Can you really afford to borrow that amount at that rate for that time period? A home purchase is a long-term investment, you must consider whether foreseen or unforeseen changes in income will support your projected mortgage payments. Will you barely breakeven on a monthly basis once your mortgage is factored into your current budget? No one buys a home wanting to be “house poor.” But if your net pay is just enough to cover your expenses, you may want to seek a lower loan amount. Consider how much you want to borrow with how much you need to borrow and how much you can borrow.
Have you checked your credit with all three major reporting services? If not, it’s best that you know where you stand before applying for your mortgage and being surprised by the content of your reports. This is also a good time to clear up any discrepancies and pay any valid past-due bills affecting your score. Your credit score can make a huge impact on the amount that you can borrow and your monthly payment. The higher your score, the better terms and interest rate you will receive. Dealing with a lower than average score? Take time to pay down your debt, which will definitely improve your score. Begin the process when your creditworthiness is sure to get you the best rate for your home purchase.
What about your down payment? The more cash that you have on hand, the better your home loan terms will be. A 20% downpayment will not only eliminate the need for Purchase Money Insurance once you’ve obtained your mortgage, but can also increase your purchase-ability. For example, you’re under contract for the perfect home in the perfect location and the sellers have agreed to a purchase price of $250,000. The only problem is, your bank has pre-approved you for $200,000. With 20% of the purchase price, or $50,000, you get the keys to your dream home. Regardless, FHA loans require a minimum of 3.5% of the purchase price at closing. Some lenders do offer loans that include your down payment, but it is best to enter your home with equity.
Do you know what type of loans are available? Fixed rate home loans are standard 15, 20 or 30 year mortgages where the interest rate and monthly payments remain the same for the entire term. Adjustable rate mortgages (ARMs) are mortgages whose rates adjust after pre-determined periods. Interest rates adjust higher than prior rates, greatly increasing monthly payments.
Have you checked with your locality for any special assistance for first-timers? Beyond tax breaks, there are numerous programs available to assist buyers with completing their purchase, helping with financing and providing guidance throughout the process. If you find yourself stuck throughout the process, the U.S. Department of Housing and Urban Development can provide resources to help you realize your dream.
Congratulations on your first home!