First-time home buying can be challenging due to steep down payments, tougher mortgage requirements, and higher home prices.
The NY Times says, “It’s never been easy for first-time buyers to get into the real estate market, but that’s been especially true in recent years. In 2010 (or July 2009 to June 2010, to be precise), they bought half the homes sold nationally. In 2016 (or July 2015 to June 2016), only 35 percent went to first-timers. In only three of the last 35 years have they had a smaller share.”
But, if you are a first-time homebuyer, don’t worry. There are many financing options and strategies available for you to consider.
Preparations for Your New Home Purchase
When preparing for your new home purchase, make sure that you:
- Save for your down payment.
- Improve your credit score.
- Determine how much home you can afford by consulting our Home Affordability Calculator.
- Research your potential mortgage costs with our Mortgage Calculator.
- Shop around for the best mortgage package you can find.
Saving for Your Down Payment
When planning for your down payment, aim to save at least 20%. If you’re purchasing a more expensive home or relying on additional financing, you might need to save closer to 30%.
Some lenders sympathize with first-time home buyers and allow as little as 3% down. However, it’s important to remember that a smaller down payment could mean higher overall costs and the need for mortgage insurance. (For instance, a 5% down payment on a $200,000 home is $10,000.)
To reach your down payment goals faster, consider setting aside tax refunds and bonuses, setting up automatic savings, and using smartphone apps to track your progress.
Improving Your Credit Score
Before applying for a home loan, check your credit report and address any errors that might be negatively affecting your score.
You can raise your credit score by paying down outstanding debts and ensuring all payments are made on time. Late or missed payments can severely hurt your credit.
While you’re in the mortgage application process, avoid opening new credit accounts (e.g., car loans or credit cards). Wait until after your home loan has closed, as new credit inquiries can lower your score.
Determining How Much Home You Can Afford
Most mortgage lenders allow for a maximum debt-to-income ratio of 45%. This means that your total debts, including your new mortgage, should not exceed 45% of your gross monthly income.
Even if a lender approves you for a certain loan amount, be sure to consider other monthly expenses that could impact your budget. Avoid becoming “house poor.”
Remember, staying in your new home for at least three years will maximize your return on investment.
Researching Mortgage Costs
Many first-time homebuyers are surprised by the additional costs that come with a mortgage. These can include property taxes, mortgage insurance, title search fees, and more. Ask your lender for a detailed breakdown of the costs in your mortgage package.
Mortgage closing costs typically range from 2% to 5% of the loan amount, covering property taxes, mortgage insurance, title search fees, and other expenses.
Shopping for the Best Mortgage Package
You have several loan options when purchasing a home. Here are a few popular choices:
- Conventional Mortgages: Backed by government-sponsored entities like Fannie Mae and Freddie Mac, these loans may require as little as 3% down.
- FHA Loans: Insured by the Federal Housing Administration, these loans allow down payments as low as 3.5%.
- VA Loans: Guaranteed by the Department of Veterans Affairs, these loans sometimes require no down payment at all.
While low-down-payment options may seem attractive, remember that a smaller down payment means higher monthly mortgage payments. Opting for a 30-year fixed mortgage will keep your payments lower, but shorter-term loans can offer lower interest rates.