Buying a home is a complex but ultimately rewarding process. For first time homebuyers, it is common to feel overwhelmed with all the different steps and intricacies. Instead of looking at the entire process, break it down into smaller steps.
If you are working with a real estate agent, make sure to ask questions. Do not be afraid to slow down and ask questions when needed. Listed below are common tips and pitfalls to avoid when shopping for your first home.
Setting a Budget
Before you even look at listings, you should set a budget. Your budget is not only for the listing price, but also setting aside money to get your house set up. In addition to buying new furniture and redecorating, you may also need to make small repairs or replace older utilities.
Your current finances are also important because it determines your eligibility for a loan. If you are having trouble getting a loan, you may also have trouble finding a reasonable down payment. While it is not ideal, sometimes you must wait and improve your finances and pay off existing debt before you purchase a home. Doing this may ultimately save you thousands of dollars in the long run. Finally, it is helpful for real estate agents to know exactly how much you are willing to reasonably spend, since you avoid looking at houses that are outside your budget.
Choosing a Mortgage
Your mortgage is the loan you use to purchase your home. There are five primary types of mortgages:
- Conventional
- Jumbo
- Government insured
- Fixed rate
- Adjustable rate
Each type of mortgage has a different repayment plan and eligibility requirements. Certain mortgages may also only be eligible on select homes.
Your down payment also changes based on the mortgage. For example, a jumbo loan typically provides the largest loan, but it has steeper credit requirements and your down payment is usually between 10 to 20 percent. Fixed rate mortgages have the same interests and monthly payments for the entirety of the loan, making it easier to budget around, but at the cost of higher interest rates. Not all lenders offer each type of loan, which is another consideration.
Mortgage Preapproval
While it is not a required step, it is a good idea to get preapproved for your mortgage. A mortgage preapproval guarantees how much you can get when you apply for a loan. It is based on your current financial information, including blank statements, tax returns and your credit score.
Getting preapproved lets you know exactly how much you can borrow. It also acts as security for a seller, since it is proof you can afford the home. It also shows you are interested in the purchase, which helps when negotiating with the seller.
Grants for First Time Buyers
There are several grants and programs only available to first time homebuyers. One of the newest options is the Downpayment Toward Equity Act, introduced in 2021 to address the rising cost of homes during the pandemic. The act provides up to $25,000 as of this writing to eligible individuals who want to go from renting to owning their own home.
In addition to state and federal grants, nonprofit groups may also assist lower-income buyers. One of the largest non-profit groups is the National Homebuyers Fund, which provides up to five percent of the home’s purchase price.
