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Just because a bank says it will lend you $300,000 doesn’t mean that you should actually borrow that much. Here’s what every first-time home buyerneeds to know to dive into house hunting with confidence—and with as few curveballs as possible. Whether it’s getting a mortgage, choosing a real estate agent, shopping for a home, or making a down payment, we lay out the must-knows of buying for the first time below. Home buyers should request Loan Estimates for the same type of mortgage loan from multiple lenders.
You also don’t want to bid too high and pay more than you need to. Shopping for a home can be the most fun part of the homebuying process. But it’s still important to gather good information from your real estate agent during this phase. A real estate agent can advise you on everything from how much down payment you might need or whether a neighborhood has a homeowner's association, to finding a lender you can work with. NerdWallet strives to keep its information accurate and up to date.
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That means a couple could withdraw a maximum of $20,000 ($10,000 from each account) to use toward a first-home purchase. Just know that if you don’t use the funds to pay for the home within 120 days—and if you’re under age 59½—then it becomes subject to the 10% penalty. Generally, to qualify for a home loan, you’ll need good credit, a history of paying your bills on time, and a maximum debt-to-income ratio of 43%. You need to know exactly how much you’re spending every month—and where it’s going. This calculation will tell you how much you can allocate to a mortgage payment. Than a traditional mortgage, but there are still certain prerequisites borrowers must meet like getting private mortgage insurance and having a minimum credit score of 500.
You should also be prepared to bring funds to cover your closing costs, which typically range between 3-5% of the sale price. It can be disappointing, but try not to feel discouraged if you don’t get the first home you put an offer on. In fact, 59% of buyers who submitted an offer ultimately made multiple offers before successfully closing on a home, according to the Zillow Group Report. Buying a home can be stressful during the best of times, and it might feel positively overwhelming in a highly competitive market. Qualifying for a loan isn’t a guarantee that your loan eventually will be funded—underwriting guidelines can shift, lender risk analysis can change, and investor markets can alter.
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The alternative models will look at areas like payment of cell phone and utility bills, and rent. As a result, more credit-worthy Americans are expected to have access to mortgages. As you prepare to buy your first home, managing your credit wisely is essential. Your credit score tells lenders how much of a risk you are for a mortgage loan. The lower your interest rate, the more home you can comfortably afford.
Most home buyers opt for a 30-year fixed-rate mortgage, which is paid off in 30 years and has an interest rate that stays the same. A 15-year loan typically has a lower interest rate than a 30-year mortgage, but the monthly payments are larger. Before submitting your offer, take another look at your budget. If you’re on a budget, look for homes whose full potential has yet to be realized. Even if you can’t afford to replace the hideous wallpaper in the bathroom now, you may be willing to live with it for a while in exchange for getting into a place that you can afford.
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You’ll need to have proof of a homeowners insurance policy before closing, so if you already own a home, ask your existing agent to help you open a new policy. If you don’t own a home, shop around for a policy that works best for you. Your lender may be able to help you coordinate a policy that can be paid through your monthly escrow account.
Your real estate agent can help you understand the severity of any problems the home inspection turns up. They should be able to "read the room" to guess how the seller might respond to a request for repairs. Your agent can help you identify issues that might be a deal-breaker, and help you understand what to do if a seller refuses to make requested repairs. Knowing any problems will help you determine whether you really want to move forward with an offer and how to address any potential problems in the offer.
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Earnest money is the amount you deliver with the offer to show you’re serious about buying the home. With a nationwide network of real estate agents to choose from, Credible makes it easy to find a real estate agent who knows the market in the area where you want to buy. That being said, don’t hire the first real estate agent you talk to. It’s a good idea to speak with a few to determine who’s the best fit for you. A real estate agent can be a great source of information when you’re buying your first home.
Paying down some of your debt or looking for ways to generate extra income before applying for a mortgage could help to improve your debt-to-income ratio. If you have one to three years to realize your goal, then a certificate of deposit may be a good choice. It’s not going to make you rich, but you aren’t going to lose money, either .
This helps you compare costs and interest rates so you know which lender is really offering the best deal. One option when your savings are tight is to get gift funds from a parent or relative. Knowing how much homes have sold for gives you a realistic idea of what you might need to pay if you were to live in a certain neighborhood. You can use this information and compare it to your housing budget (or how much you’ve been pre-approved for) to see whether you can afford to live in a certain area. If an area doesn’t fit your budget, your real estate agent can suggest similar neighborhoods that might be a better fit. You can even drive around neighborhoods you’re interested in living in to see if there are any homes for sale and see which agent is on the sign.
But it might not be the right choice if you only plan to keep the loan for a few years. According to the Consumer Financial Protection Bureau , getting quotes from more than one mortgage lender can save you thousands of dollars over the life of your home loan. And with the ability to quickly get estimates online from many lenders, this is an easy way to save yourself some serious cash. While some buyers may choose to purchase a home without a real estate agent or Realtor, it’s not advisable — especially for your first home purchase. Down payment assistance programs can not only shorten your path to homeownership, but they can also free up existing savings for moving and other home-buying expenses. So don’t postpone your home buying plans thinking you need to save 20% or invest your entire savings in a down payment.
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