There comes a time in a renter’s life when you’re ready for a place to call your own. But if you’re a young homebuyer, then you probably know what it’s like to be stuck under student loan debt, while struggling to improve your credit. You’re not alone.
Even with these common hurdles, you may be ready and able to own a house — you just might not know it yet. Read on to find out exactly why homeownership is likely to be within your reach.
Buying a home for the first time: 9 tips to make your dream a reality
Here’s what you need to know to get started:
1. Your credit score matters.
If you’re seriously considering buying a home for the first time, and your credit isn’t looking so hot, spend a few months boosting your score. This helps for three reasons:
- A better credit score means a better rate on your mortgage.
- A better score is a sign you know how to adult and pay your bills on time.
- And, a better score increases the likeliness that you’re financially stable enough to pay off a large sum, i.e., your mortgage.
If you’re not sure where your credit stands, request the free copy of your annual report that you’re entitled to at AnnualCreditReport.com.
2. But it doesn’t have to be perfect.
Again, you’re not alone. Having less-than-pristine credit doesn’t automatically disqualify you from buying a home for the first time:
- With an FHA loan, you may get approved with a credit score as low as 580.
- Of course, this doesn’t mean there isn’t room for improvement.
- If you have a low score, it may benefit you more to try to boost your credit; talk with your loan officer about your options.
This gives you a good idea of how much is possible with potentially poor credit — and that it’s more than you think.
3. Speaking of possibilities, there’s plenty of down payment assistance out there.
Fannie Mae and Freddie Mac, hoping to bring in first-time buyers who haven’t been able to save as much for their down payment as previous generations, allow qualified homebuyers to put as low as 3 percent down.
The Federal Housing Administration (FHA), Veteran’s Administration (VA), and the U.S. Department of Housing and Urban Development (HUD) also offer low-down-payment loan programs:
- If you’re a qualifying borrower, you could have a down payment of as little as 3.5 percent with an FHA loan.
- If you’ve served in the U.S. military, you could qualify for a VA loan, which offers no down payment and no mortgage insurance premiums to qualifying borrowers.
- And, if you’re a law enforcement officer, school teacher, emergency medical technician, or firefighter, you could qualify for the HUD Good Neighbor Next Door program. Under this program, borrowers can take advantage of a 50-percent discount on the list price of their home if it’s in a qualifying community revitalization area and the property is their sole residence for 36 months.
Each state also has its own down payment assistance programs, which may have credit and income requirements. Ask your loan officer about what’s available in your area when buying a home for the first time. Or, read here for how to search for these programs online.
4. It’s important to think beyond your rate when you’re shopping for a loan.
That’s because a rate is not the only indicator of your long-term costs with a home loan. There are other things to consider, and they add up:
- These include lender’s fees, title company fees, closing costs, homeowner’s insurance, property insurance, the appraisal fee, the credit report, the home inspection, and how much you put toward your down payment.
- While you do want to keep track of when rates are low (as they currently are), you also want to make sure your total loan cost is affordable for you.
What many buyers don’t know is that a loan officer can actually help you take a look at how all these costs play out in the long run. They can sit down with you and compare scenarios to help you see how you can save most. For example, you may save more when buying a home for the first time if you take a higher rate and pay less in closing costs, depending on how long you plan to be in a home.
5. You don’t need 20-percent down.
It’s not a requirement — it’s just what’s suggested if you have it:
- The more you put down on your home, the less you’ll have to pay over the time you have the loan.
- If you don’t have a 20-percent down payment ready to go, it’s still possible to get a home loan.
- But you may be required to pay PMI, or Private Mortgage Insurance, which can add on to your monthly bill.
PMI can cost anywhere between 0.25 to 2 percent of what you pay each year on your loan. But many homebuyers feel the potential for PMI is worth the savings of buying a house right now while rates hover around historic lows; the median down payment for first-time buyers is just 7 percent.
Fact: You could buy a house with as little as zero down. Get in touch with a Cornerstone loan officer to learn how.
6. Online mortgage calculators are helpful, but a human’s even better.
Anyone brought up in the age of the Internet knows you can find absolutely anything online. But that doesn’t mean there aren’t limitations:
- One of the biggest limitations? There’s no one there to guide you.
- Sure, you can check out an online mortgage calculator (we recommend trying this one) and get a rough idea of what you might be able to afford.
- But keep in mind that there are all sorts of costs (like the PMI we mention above) that you might not know you need to include in your calculations.
Not only that, but there could be financial opportunities like down payment assistance programs, discount points, and builder incentives that can change what your home financing situation looks like. So, if you’re looking for accuracy, seek out a human (a.k.a. a qualified loan officer) and have a chat.
7. Prequalification letters are kind of a big deal.
In fact, you should get one before you browse for a home:
- It may seem like it should be the other way around — shouldn’t you find a home you want first?
- But actually, it’s important to get a prequalification letter before you ever start searching for houses.
Getting a prequalification letter is essential because A) it’ll give you a better idea of how much home you can afford and B) realtors will trust you as someone who’s serious enough to have already started the loan process. (Meaning, your money is more likely to come through, ensuring they’ll make the sale.)
Prequalifying also means you won’t waste time searching for homes out of your price range. When you do find a home you love, you’ll be able to act quickly, making a more desirable offer that will stand out to a seller. Look for a lender that has the technology to offer borrower-generated prequalification letters, allowing you to print your own custom PQ letter and strengthen your power to negotiate.
8. Just because you prequalify for a certain loan amount doesn’t mean you should spend that much on a house.
When buying a home for the first time, it’s easy to get excited about how much you qualify for, especially when it’s higher than you thought it would be:
- But there are other costs involved with the care and keeping of a home.
- Beyond property taxes, homeowner’s insurance, and closing costs, these expenses may include moving costs, making unexpected repairs, purchasing new furniture or other household items, and more.
Save yourself the buyer’s remorse and talk to your loan officer about what’s realistic before you get into your home search. The good news is that by buying now — compared to a year from now when rates and housing prices are predicted to rise further — you, like many buyers, may be able to afford more than you expected.
9. You need to know what you want in a mortgage from the get-go.
Home financing can vary widely depending on many factors, such as:
- How long you plan to stay in a home.
- What kind of home you want (single-family versus condo).
- How much you’re willing to pay each month.
If you know you want to be in your house for only five years, your loan scenario will look very different than it would if you were planning on living in your home for 25-plus years. In other words, a loan scenario that would save you money over 25 years may not save you any money in five.
Or, let’s say your partner is hoping to get a promotion that could mean moving in less than five years. If you had to uproot yourselves, you could get hit with a pre-payment penalty. Your loan officer can provide different scenarios based on where you want to be for the next five, 10, and 25 years to help you make the smartest — and most affordable — pick.
‘Our first home purchase was such a great experience!’
“We don’t have enough good things to say: They always made themselves available to answer any questions we had and were so friendly and professional while doing so! They made sure this process was efficient and stress-free for us — we will recommend them to all our family and friends!!” Click here to find a Cornerstone loan officer near you.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.
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