Owning a home is one of the biggest purchases a person will make in their lifetime. For first time home buyers, t’s not a simple purchase. It is your future. If you are planning on financing your first home, it will require a commitment. That commitment will pay off as you pay down your mortgage over time. Once the mortgage is paid off, you own the home outright. Whatever the value is, it’s all yours. Since real estate tends to grow in value over time, your home purchase can also be seen as an investment.
There are plenty of good reasons to own a home, but if your new to the game, you may be wondering where to start. The CGS Team is sharing 5 tips for first time home buyers. If you are considering buying your first home in the near future, you don’t want to miss this read.
First time home buyers should…
Start Saving for a Down Payment Early
To avoid paying an extra monthly insurance payment, known as PMI, you will need to have at least 20% of the property’s value to pay up front. PMI, also known as Private Mortgage Insurance, is a special type of insurance that protects the lender in the case of borrower default. The only way to get out of paying PMI is to have 20% of the property’s value ready at time of purchase, or to request a removal of PMI once your loan to property value ratio is 80%.
PMI typically runs .25% to 2.0% of your loan balance per year. Factors that affect the PMI total include the size of the down payment and mortgage, the loan term and your credit score. Depending on your loan, that percentage can be a hefty chunk of change. Saving for your down payment early so that you can have 20% to put down will save you money in the long run.
If you can’t seem to save 20% before you make the purchase, try saving as much as you can. There are additional costs that come with purchasing your first home – closing costs, appraisal fees, title and policy expenses, and more. Some of these costs may be covered by your lender, while others will fall upon you. If you don’t have any money to put towards these costs, they may be rolled into your loan. This brings up your monthly mortgage payment and costs you more in interest over time.
Research Loan Assistance Programs
There are plenty of federal, state and local assistance programs available to home buyers. First time home buyers could go with an FHA loan, which offers a low down payment of 3.5%, pending approval. Other first time home buyer low down payment offers include Fannie Mae and Freddie Mac loans which both will accept 3% down, pending approval.
Certain states offer loan assistance programs for different reasons. If you’re a woman home buyer, something may be available to you. If you are a single parent, you may be eligible for assistance. Each state and county may have something different, so check with your state and local government’s website.
Be Knowledgeable about Mortgage Options
There are quite a few different mortgage loan options. For example, you could qualify for a fixed-rate mortgage, which means your interest rate will stay the same throughout the life of the loan. Another option is an ARM loan. ARM stands for “adjustable rate mortgage”, which means your interest rate can go up or down throughout the life of the loan.
Another common loan option is an interest-only loan. In an interest-only loan, you only pay towards the interest on the mortgage through monthly payments for a term that is fixed. The term is usually between 5 and 7 years. After the term is over, you begin paying off the principal of the loan. However, when paying the principal, payments significantly increase. This could be a good option if you plan on selling your property before principal payments kick in. Otherwise, you could be hurt by the larger monthly payments.
Be Smart About Credit
Your credit plays a huge factor on being approved for a loan to purchase your home. If you have any late payments or collection accounts, work to fix them before you go through the home buying process. Anything that is bringing down your score can hurt your chance of approval, or raise the interest rate that you are actually approved for.
In fact, DTI is one of the main deciders of loan approval. DTI, also known as debt-to-income, is a ratio that is used to determine what your debt is compared to your income – on a monthly scale. For example, if you bring in $2500 a month, but your debts (credit cards, student loans, and car loan) total $1800 each month, you have a debt-to-income ratio of 72% ($1250 divided by $2500). Most lenders want to see a debt-to-income ratio of 30% or less.
Lastly, when you are ready to begin the mortgage approval process, you will want to put a hold on any new credit activity. When someone applies for credit, it results in a hard inquiry on their credit report. Hard inquiries can bring your score down temporarily. You will want the highest score possible when applying for your home loan.
Have Money Saved for Move In
Owning a home is not like renting. No more calling the landlord to fix something that’s broken! Now, anytime something breaks down, it’s up to the home owner to fix it. There are also plenty of costs that seem to sneak up on first time home buyers. New furniture, appliances, painting, and updated fixtures are just a few of the costs that can come up after moving.
To help ease the transition of the move, you will want to have some money saved specifically for move in costs. This means that you will need to think about your down payment savings and having some additional money saved to get you through your first few months in the home. You don’t want to feel like you can’t decorate your house to your liking, so having money reserved just for that will make life much easier.
Related: The Home-Buyer’s Checklist.
First time home buyers definitely need to think about more than just being approved for a mortgage and moving in. There are a lot of additional things to think about when buying your first home. Be as financially prepared as you can possibly be, so you can enjoy your new home without worry! Are you thinking of buying your first home? Have you already purchased your first home? Post a comment below to share some of your tips and experiences with the home-buying process.