First Time Mortgage Buyer: Preparation and Tips on Home Purchasing

Who is a First Time Mortgage Buyer? A first-time mortgage buyer refers to someone who is purchasing a home and obtaining a mortgage for the first time. It means that they have not previously owned a property or taken out a mortgage in the past.

Thinking about buying your first home can be both exciting and a little difficult. When you feel ready to take this step, you may find yourself unsure of where to start.

Don’t worry! These tips for first-time home buyers will guide you through the entire process, from beginning to end. They will provide you with valuable insights and help you navigate each step with confidence.

Preparing to buy tips

1. As First Time Mortgage Buyer Start Saving Early

When calculating how much money you need to buy a house, consider one-time expenses as well as new, recurring bills. Here are the main upfront costs to consider when saving for a home:

Down payment

The amount of down payment you need will vary based on the type of mortgage and the lender you choose. Certain conventional loans, specifically designed for first-time home buyers with good credit, may only require a down payment as low as 3%. However, even a small down payment can be difficult to save. For instance, a 3% down payment on a $300,000 home would be $9,000.

To help you plan, you can use a down payment calculator to set a target amount. Then, consider setting up automatic transfers from your checking account to your savings account to begin saving towards your down payment goal.

Closing costs

Closing costs are the fees and expenses that you need to pay when finalizing your mortgage. These costs usually range from 2% to 6% of the loan amount. For example, on a $300,000 loan, your closing costs could be between $6,000 and $18,000. It’s important to note that these costs are in addition to your down payment.

However, in a buyer’s market, you may have the opportunity to negotiate with the seller and ask them to contribute towards your closing costs. Additionally, shopping around can help you find better deals on certain expenses, such as home inspections, allowing you to save money on your overall closing costs.

Move-in expenses

When planning your finances for a home purchase, it’s essential to consider the budget for moving costs. Typically, local moves can amount to around $2,500, although long-distance moves can be more expensive.

It’s important to have some cash available after the home purchase. Allocate funds for immediate home repairs, upgrades, and furnishings. These expenses should be factored into your overall budget to ensure you have the necessary funds to settle into your new home comfortably.

2. Decide how Much Home you can Afford as a First Time Mortgage Buyer

Before you begin shopping for a house, it’s important to determine a safe and suitable budget. NerdWallet’s home affordability calculator can assist you in setting a price range based on various factors such as your income, debt, down payment, credit score, and desired location.

Simply by inputting this information into the calculator, you can gain a better understanding of how much you can afford to spend on a house comfortably. This will help you narrow down your search and ensure that you’re looking at homes within your financial means.

3. Check and Polish Your Credit as a First Time Mortgage Buyer

Your credit score will determine whether you qualify for a mortgage and affect the interest rate lenders will offer. Having a higher score will generally get you a lower interest rate, so take these steps to polish your credit score to buy a house:

  • Get free copies of your credit reports from each of the three credit bureaus — Experian, Equifax and TransUnion — and dispute any errors that could hurt your score.
  • Pay all your bills on time, and keep credit card balances as low as possible.
  • Keep current credit cards open. Closing a card will increase the portion of available credit you use, which can lower your score.
  • Avoid opening new credit accounts while you’re applying for mortgages. Opening new accounts could put a hard inquiry on your credit report and lower the overall average age of your credit accounts, which could hurt your score. 
  • Track your credit score. NerdWallet offers a free credit score that updates weekly.

Mortgage selection tips

4. Explore Mortgage Options as First Time Mortgage Buyer

A variety of mortgages are available with varying down payment and eligibility requirements. Here are the main categories:

  • The most common type of home loan is a conventional mortgage, which is not backed by the government. Certain conventional loans aimed at first-time buyers may only require a down payment as low as 3%.
  • FHA loans are insured by the Federal Housing Administration and allow down payments as low as 3.5%.
  • USDA loans are guaranteed by the U.S. Department of Agriculture. They are for suburban and rural home buyers and usually require no down payment.
  • VA loans are guaranteed by the Department of Veterans Affairs. They are for current military service members and veterans and usually require no down payment.

When choosing a mortgage, you have choices regarding the loan term. Many home buyers prefer a 30-year fixed-rate mortgage, which allows for repayment over 30 years and maintains a consistent interest rate.

Alternatively, a 15-year loan usually has a lower interest rate compared to a 30-year mortgage, but it requires larger monthly payments. Ultimately, the decision between the two options depends on your financial circumstances and preferences.

If you anticipate living in the home for a short duration, it may be worth considering an adjustable-rate mortgage (ARM). ARMs typically begin with a lower fixed-interest introductory rate, which allows you to afford a more expensive home with the same monthly payment.

However, it’s important to note that the interest rate on ARMs can fluctuate over time, potentially increasing or decreasing.

5. Research Programs Assistance for First-Time Mortgage buyer

Numerous states, cities, and counties provide programs specifically for first-time home buyers. These programs often include low-interest-rate loans, as well as assistance with down payments and closing costs.

If you meet the income criteria for low to moderate-income households, you may even qualify for grants or forgivable loans that do not require repayment.

Additionally, certain first-time home buyer programs offer tax credits in the form of mortgage credit certificates. These credits can provide additional financial benefits to help make homeownership more affordable.

6. Compare Mortgage Rates and Fees

When searching for a mortgage, it’s important to shop around and compare quotes from three to five different lenders. This comparison can potentially save you thousands of dollars in interest over the loan’s lifetime.

The Consumer Financial Protection Bureau suggests requesting loan estimates from multiple lenders, ensuring they provide estimates for the same type of mortgage. This allows you to compare costs, including interest rates and origination fees.

Lenders may also provide the option to purchase discount points, which are upfront fees that lower the interest rate. Buying points can be beneficial if you have the funds available and plan to stay in the home for an extended period. To make an informed decision, consider using a discount points calculator.

In a buyer’s market, motivated sellers may offer to pay some or all of the buyer’s points to facilitate the closing of the deal. This can provide additional cost savings for the buyer.

7. As First Time Mortgage Buyer Gather Your Loan Paperwork

Before you’re approved for a mortgage, your lender will ask you for financial records to verify your income, assets and debt, including:

  • Proof of income and employment, such as tax returns, W-2s and 1099s.
  • Statements for bank, retirement and brokerage accounts.
  • Records of debt payments, such as student loans, auto loans or any real estate debt.
  • Documentation of other events that impact your finances, such as divorce, bankruptcy or foreclosure.

Pull these documents ahead of time to stay organized throughout the process — you’ll need them for a mortgage preapproval as well as when you apply for the loan.

8. Get a Preapproval Letter as a First Time Mortgage Buyer

A mortgage preapproval is a formal offer from a lender to lend you a specific amount of money under certain terms. It serves as proof to home sellers and real estate agents that you are a serious buyer, giving you an advantage over those who haven’t obtained preapproval.

When you’re ready to start shopping for a home, it’s time to apply for preapproval. The lender will assess your creditworthiness by pulling your credit report and reviewing the documents you have prepared.

Applying for preapproval from multiple lenders within a limited time frame, such as 30 days, to compare rates should not negatively impact your credit score.

Home shopping tips

9. Choose a real estate agent carefully

A reliable real estate agent will search the market for homes that match your requirements and provide guidance throughout the negotiation and closing procedures. To find a good agent, seek referrals from other recent home buyers. Interview several agents and ask for references.

10. Narrow down your ideal type of house and neighborhood

Weigh the pros and cons of different types of homes, given your lifestyle and budget.

  • Typically, purchasing an existing home is more affordable than buying a new construction home. However, in cases where local housing inventory is limited and you have the financial means, a brand-new home presents appealing opportunities for customization.
  • Condominiums or townhomes often come at a more affordable price compared to single-family homes. However, it’s important to consider that these types of properties typically have shared walls with neighbors, which may result in less privacy. Additionally, when shopping for condos, townhomes, or homes in planned or gated communities, remember to factor in homeowners association fees into your budget.
  • A manufactured home, including the type commonly called a mobile home, can be an affordable option if you have a tight budget. Many manufactured homes are financed through chattel loans, which have higher interest rates than mortgages.
  • Fixer-uppers, which are single-family homes requiring updates or repairs, typically have a lower price per square foot compared to move-in-ready homes. However, it’s important to consider that you may need to allocate additional funds for repairs and remodeling. Fortunately, renovation mortgages offer a solution by financing both the purchase price of the home and the costs of improvements in a single loan

When considering a home purchase, it’s essential to think about your long-term needs and determine whether a starter home or forever home would be the best fit. If you have plans to start or expand your family, it may be wise to purchase a home with extra space to accommodate your growing needs.

Thoroughly research potential neighborhoods before making a decision. This includes assessing property values, property taxes, and safety considerations. Choose a neighborhood that offers amenities that are important to you, such as good schools and nearby entertainment options.

11. Stick to your budget

To prevent financial strain in the future, it’s important to establish a price range based on your budget and adhere to it. Sometimes, lenders may offer a loan amount higher than what you can comfortably afford, or you might feel pressured to exceed your comfort zone to outbid other buyers in a competitive market.

In highly competitive markets, it’s advisable to consider properties below your price limit. This allows room for maneuvering during bidding wars. However, in a buyers market where there is less competition, you may have the opportunity to explore homes slightly above your limit. Your real estate agent can provide guidance and suggest an appropriate range.

12. Make the most of walk-throughs and open houses

With advancements in technology, online 3D home tours have gained popularity. While they may not provide the complete experience of an in-person visit, such as the smell of carpets, they can help you narrow down your list of properties to visit.

Although it is possible to purchase a house without seeing it in person, it is generally recommended to visit the property yourself.

During your visit, engage all your senses. Listen for any noise, take note of any odors, and carefully observe the overall condition of the home, both inside and outside. Inquire about the electrical and plumbing systems’ type and age, as well as the condition of the roof.

Home purchasing tips

13. Don’t skip the home inspections

A home inspection is a thorough assessment of the structure and mechanical systems. Professional inspectors look for potential problems, so you can make an informed decision about buying the property. Here are some things to keep in mind:

  • Standard inspections don’t test for things like radon, mold or pests. Understand what’s included in the inspection and ask your agent what other inspections you might need.
  • Make sure the inspectors can get to every part of the house, such as the roof and any crawl spaces.
  • While it’s not mandatory for the buyer to attend the inspection, being present can be beneficial. It allows you to observe and learn about any issues or potential maintenance needs firsthand. However, if you are unable to attend the inspection, it is important to review the inspection reports thoroughly.

14. Negotiate with the seller

When purchasing a home, there may be opportunities to save money through negotiations with the seller. You can request the seller to either cover the cost of repairs upfront or reduce the price of the home to account for future repairs you’ll need to make.

Additionally, you may negotiate for the seller to contribute towards some of the closing costs. However, it’s important to note that there may be limitations set by lenders on the portion of closing costs the seller can pay.

The extent of your negotiating power will depend on the local market conditions. In a seller’s market where there is high demand and limited inventory, it may be more challenging to negotiate favorable terms. Working closely with your real estate agent is important in understanding the local market dynamics and developing an effective negotiation strategy.

15. Buy adequate home insurance

Prior to finalizing the home purchase, your lender will require you to obtain homeowners insurance. Home insurance is designed to protect your home and belongings by covering the costs associated with repairing or replacing them in the event of covered incidents. It also provides liability coverage if you are found responsible for an injury or accident.

When purchasing home insurance, it is essential to ensure that you have sufficient coverage to rebuild your home in case of complete destruction. This coverage should account for the cost of rebuilding, rather than the market value of the property.

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