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First time home buyer tips

Buying a home is one of the biggest financial decisions you will make in your life. Learn the basics before you start the process.

Buying your first home is an exciting milestone. However, when you're making this important financial decision, you'll want to feel confident you have a plan in place. A solid strategy can go a long way in helping you find the home of your dreams.

Should I rent or buy?

While home ownership is appealing, it’s important to understand the commitment that comes with it. Another option is to rent, which presents a different set of benefits and challenges. Carefully evaluate your situation and the benefits and drawbacks of renting versus buying to decide which option is best for you in this particular season of life.

Home ownership brings with it a sense of pride and also a valuable asset. However, owning a home is a tremendous responsibility that requires the investment of both financial resources and time. Maintenance is critical to preserving the value and comfort of your home. If the HVAC breaks or a water pipe bursts, it will be your responsibility to fix it. This can be costly.

Renting a home involves paying regular monthly payments without having to worry about additional investments in system upgrades or repairs. Rental agreements also specify a particular timeframe – typically a year or two – allowing you to move at the end of your lease term, whether you land a job in another city, decide you’d like to live in a better school district, or simply want to live somewhere new.

Consider this list of benefits of renting versus buying as you evaluate what's best for you.

Benefits of renting

  • Flexible - Renting offers greater flexibility than home ownership because, at the end of the lease, you are free to move to a different area at no cost. Home ownership involves the sale or rental of your home, which can be expensive.
  • Predictable - When you rent a home, you typically need to make a security deposit up front and an application fee, but after that, you have a fixed monthly payment through the end of the lease. When you own a home, you may have fixed monthly mortgage payments, but may also incur unexpected expenses for repairs and maintenance, making the costs less predictable. 
  • Hassle free - HVAC break? No sweat! All you need to do it contact your landlord. Renting is hassle-free in that you are not responsible for making repairs should something break. 

Benefits of buying

  • Equity - When you purchase a home, you are purchasing an asset. That means that over time your monthly mortgage payments contribute to you owning more and more of the house, which can be sold later. In this way, you build value over time.
  • Tax deductions - Your interest payments in your home are tax deductible, meaning that you receive tax benefits when you own a home. Rental payments are not tax deductible. 
  • Stability - Owning a home provides a sense of pride and stability for many. You can make your home your own, upgrading, making changes and decorating however you'd like. 

Steps to buying a home

If you decide that home ownership is right for you, here are some simple steps to follow as you go through the home searching and buying process.

1. Determine your budget

You've decided you want to buy a new home — that's great! Before you get to the fun part, however, you'll want to make sure your finances are in order.

Here are a few things to consider as you get started:

  • Start with your budget — You'll only want as much house as you can realistically afford. Budget for estimated costs beyond a mortgage, including, property taxes, utilities and homeowners insurance.
  • Consider your down payment — Many lenders require a 20% down payment, while some lenders and government programs offer special deals for first-time homebuyers — a VA Loan is one example. If you put down less than 20% you might have to pay private mortgage insurance (PMI), which is a fee on top of your mortgage.
  • Remember upfront costs — Depending on the negotiations with the seller, you might have to pay for closing costs, which are due at signing. There's also earnest money, which is money included with your offer to show the buyer you're serious. If the deal goes through, it can go toward your down payment.

If you are a first-time homeowner, you may qualify for a first homeowners assistance program. These programs are available in many cities and counties and can offer assistance in the form of grants, zero-interest loans or assistance with closing costs.

2. Prepare your finances

Once you have a handle on your budget, you can move to the next phase of the home buying process: getting your finances in order.

  • Check your credit — A great credit score means you'll have more opportunities for attractive mortgage rates, which can save you thousands of dollars over the long run.
  • Pay down debts — Something else to know is your debt-to-income ratio, which is the amount of your income that goes toward your monthly debt. You can improve this number by paying down as many debts as you can before you buy.
  • Avoid big purchases — Something else that can derail your mortgage application is a big purchase. If you're planning on buying something — a car, for instance — wait until after you've got your mortgage set.

3. Look for a mortgage lender

The next thing you want to think about is your mortgage.

Pre-qualification is a great way to get a ballpark idea of what you might be approved for and how that ties into your budget. A lot of real estate deals require a letter of pre-qualification during the process, so it's a good step to go through at the start.

From there, you can move into the pre-approval process. This is a much more detailed and in-depth look at your finances and credit report by a lender to determine a specific loan amount.

Today, there are plenty of options when it comes to finding lenders. You can look to your local bank or credit union, deal with mortgage brokers directly or look at online lenders.

You’ll also want to find a qualified real estate agent to help you identify homes in your range, arrange visits and help you navigate the process.

Mortgage types

Not all mortgages are the same. It’s important to understand a little bit about the different types so that you can determine which type might work best for you.

  • Adjustable-rate Mortgage (ARM) - An ARM means that your interest rate will adjust or change over time. When this happens, your monthly house payment will also change. Be sure to discuss with your lender just when these adjustments will be made (one year, five years, etc.), and if there is a cap to how high the rate can climb. An ARM loan typically begins with a lower rate than a fixed loan, but you'll have to feel comfortable with knowing that it will adjust.
  • Fixed-rate Mortgage - Unlike an ARM, a fixed-rate loan maintains the same interest rate for the entire life of your loan. That means that you won't have to worry about overextending your budget if interest rates climb because your payment will not be affected as a result.
  • Balloon Mortgage - This type of loan typically provides you with relatively low monthly payment for a fixed period of time. Depending on your contract, that could be anywhere from 5, 10, 15 or more years. Upon completion of this initial period, you'll be obligated to make a large “balloon” payment on your loan. If you select this option, be sure that you plan accordingly so that you're not caught in a financial bind when your payment comes due.
  • Bridge or swing loan - This is a short-term loan that essentially buys you the necessary time to sell one house so that you can move forward with the purchase of your new home. These types of loans can be risky because there is no guarantee of when your old home will sell.
  • Federal Housing Administration Mortgage (FHA) - These loans can be a good choice for first-time buyers because they typically offer a low down payment, low closing costs, and you don't need a superior credit rating to qualify. In 2022, the FHA minimum down payment is 3.5% of the purchase price of your home if your credit score is at least 580.1
  • Veteran's Administration Loan (VA)If you or your new spouse are veterans, a VA loan allows you to borrow 100% of your new home purchase. That means no down payment. For more information on VA loans, visit the Veteran Loan Center
  • USDA Loans - Offered by the U.S. Department of Agriculture, this loan program can be a good choice for rural residents who meet specific eligibility requirements. For more information, visit the USDA website

Shop for a home

Now you can get to the fun part. When you start shopping for a home there are some key things you want to take into consideration:

  • How long you're going to stay — Think about your future plans and how the home you're looking at fits into it. As best you can, you want these to line up.
  • Home inspection — It's a good idea to hire an inspector to take a look at the home you're interested in before you buy. They can alert you to any potential problems both now and down the road.
  • DIY projects — Pretty much every home will have something the new homeowners will want to change. Take a look at projects that are easier for you to do versus needing to hire a professional for additional money.
  • Resale value — Also think about the long term. Are there improvements you can make to this home that will increase the resale value for when you sell?

The cost of owning a home

You’ve found the perfect home and that’s great, but don’t forget about upkeep. You should save money to repair and upgrade the house to maintain the value so you can earn more when you sell and also keep the house from degrading. It’s also important to remember that homeowners insurance is required for any mortgage. This can ensure that if the house is damaged due to an unexpected event like a storm or fire, that you won't be responsible for covered repairs.

As you contemplate home ownership, it may also be a good time to consider purchase life insurance. This could help ensure that your spouse or loved ones could pay off the house and remain in your home in the event of your death.

Some FAQs

Here are some common definitions and concepts that first time homeowners should be aware of.

Q: What is an escrow account?

A: An escrow account is an account that your lender establishes. Each month a portion of your loan payment is deposited into this account to pay for homeowners expenses like real estate taxes and insurance premiums.  This helps ensure that funds are available when these expenses come due. 

Q: What is mortgage insurance?

A: Mortgage insurance is designed to protect the lender in case you are unable to make payments on your homeowners loan. Typically, if you make a down payment of less than 20% on your home, mortgage insurance is required. Mortgage insurance helps you obtain the loan you need to afford the house of your dreams, but increases the cost of your loan.

Q: What is earnest money?

A: Earnest money is typically a deposit that the buyer makes when they agree on an initial offer with the seller. Earnest money goes toward the purchase of the house unless the buyer decides to forfeit the offer for some unforeseen reason, in which case the seller receives the deposit. The intent of this deposit is to demonstrate true commitment on the part of the buyer.

Q: What are closing costs?

A: Closing costs include fees and expenses associated with the administration and transaction of closing on a home and securing the homeowners loan. Closing costs may include anything from legal fees to application fee, credit loan reporting fee and dozens more.

Buying a home doesn't have to be a daunting experience. Keeps these tips for home buyers in mind as you get started. If you're organized going into it, you'll have a much better chance of finding a home that fits your needs and your budget.

1. FHA Loan Requirements: Downpayment, Credit Limit and More


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