Buying a home can be challenging but rewarding, especially if you’re doing it for the first time. It’s a significant life achievement, and you’ll want to do your due diligence and get it right. There are many steps to the process, so it can be intimidating. Here are eight things you need to know before becoming a first-time homeowner.
Buying a house is an expensive adventure. There are a lot of costs associated with purchasing a home. The highest upfront financial cost will likely be the down payment, which is your first toward the house. It will be a significant factor in your attractiveness to the seller and how much interest you’ll pay throughout your mortgage.
Down payments can require a hefty sum of cash, depending on how much the house costs. The average down payment for Americans in 2021 was between 7% and 17% of the price of the house. For example, if the home you want costs $300,000, you’ll pay between $21,000 and $51,000 in a down payment. Just be careful with your cash and don’t drain your life savings.
The down payment will be one of the most considerable burdens of the process, and it won’t be the only fee you’ll pay. You also have to consider other expenses like closing costs. You’ll have to pay these fees to finalize your mortgage, which usually cost between 2% and 5% of your loan.
Use the $300,000 house mentioned above for this example also. Imagine you made a down payment of 10% or $30,000. That leaves $270,000, so your closing costs will likely range between $5,400 and $13,500. The market now favors sellers, but if it turns into a buyer’s market, you may be able to get the seller to cover part of the closing costs.
After closing costs, there are still some other expenses to consider. In the short term, you’ll need to consider moving expenses, especially if you live far away from your potential house. You should also examine how much you expect to pay in maintenance, which can be expensive but necessary for maintaining your home and its value. The average American household spends about $3,018 annually on upkeep, depending on the house’s condition and location.
Before looking for houses, it’s wise to check if you have any outstanding debts because they can significantly affect your ability to purchase a home. Lenders will check to see how much of your income goes toward paying off debts. They want to ensure you can fit a mortgage payment into your monthly budget.
Americans have different debts that can restrict their ability to buy a home. Student loan debt is one of the most significant burdens for American homeowners. If you pay off your student loans, you’re showing a lender that you’ve taken steps to better your debt-to-income ratio. Paying off what you owe can improve your credit score and put you on the fast track to buying a new house.
Your credit score is another important factor when lenders determine the details of your mortgage. If you have a high credit score, the lender will give you a lower interest rate because they’re more confident that you’ll be on time with your mortgage payments. A lower credit score often leads to higher interest rates because the lender doesn’t know if they can trust you.
Depending on your loan type, you typically need a credit score of 620 or higher to buy a house. If you can reach 650, 700 or higher, you’ll set yourself up nicely with lower interest rates. Increase your score by making your credit card payments on time and keeping your credit card utilization low. Building your credit score will go a long way in determining what mortgage you qualify for.
Securing a mortgage is one of the most critical steps when you’re ready to buy a house. There are numerous options available for first-time homebuyers. You could get a mortgage with the Federal Housing Administration (FHA). The federal government backs these loans, and your down payment could be as low as 3.5%. This option is practical for first-time homebuyers because the required credit score is relatively low. There’s no maximum on the home price, and you may have more flexibility with the loan terms.
After examining your credit and debt situations, the next step you’ll want to take is getting preapproved for a mortgage. This part is valuable in the search for a home because a mortgage preapproval will give you a price range when house hunting. It’ll save you time from looking at places you can’t afford, and you’ll become a more attractive buyer. A seller will be much more likely to sell if a lender has already deemed you ready to buy a house.
The house-hunting process can be intimidating because there are a lot of homes on the market and many steps to take. You may need help, so you should look for a real estate agent. Read reviews and testimonials to see who is an expert on housing in the city you’re searching in. They’ll help you judge if a seller has overpriced a home or is selling it too low for the area.
Real estate agents also have access to a valuable tool called multiple listing service (MLS). Agents use MLS to search houses for sale across different listings and find all the information you need, such as new offerings, open house days and more. You likely won’t have access to MLS software unless you’re with a real estate agent, so let them handle the work for you.
Once you’ve secured a mortgage preapproval, you can start the home search. Unfortunately, it takes longer than a 30-minute episode of “House Hunters.” One way to narrow things down is by creating a priority list with your wants and needs.
The neighborhood, school district, property tax rate and walkability are some external factors to consider. You should determine how many bedrooms and bathrooms you need. Do you want to live in a single-family home, a townhouse, a duplex or a condo? You can help yourself and your real estate agent by creating a preferences list.
House hunting can seem like a daunting process. There are many fees and costs to pay before you make your first mortgage payment. Use these tips to make the process easier, and before you know it, you’ll be moving into your dream home.
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