Buying your first home can seem like a Herculean effort. Simply getting the right documents in order and understanding your down payment options can feel overwhelming, and you haven’t even started looking at houses and comparing floor plans or school zones yet. More than 5 million people buy existing homes every year, though, so the journey is well-trod, and professionals are available to assist you with every step.
Step out of the confusion of first-time home buying and begin your journey to home ownership with these seven tips for success.
1. Understand your home-buying budget
Before you do anything else, take time to understand your personal financial situation and how much home you can afford. Make a list of your monthly income; if your income fluctuates because you’re paid based on overtime numbers, bonuses or commissions, take a conservative estimate of these numbers — i.e., estimate on the lower end of the range you expect to earn each month or don’t include income over your base salary in these calculations.
Next, make a list of your monthly expenses not including rent or other housing costs. Expenses might include utilities, payments on credit card accounts and auto loans, insurance, entertainment, food, fuel, clothing, school and other necessities. Take a less conservative approach when you estimate expenses — i.e., estimate on the higher end of the range you expect to spend each month — and include amounts that you plan to save each month.
Subtract your expense total from your income total to see how much money you have each month to potentially cover a mortgage payment. Remember that cutting it too close — using all of your extra income to make a mortgage payment — puts you in a precarious position. Traditional lenders tend to approve mortgage loans when the monthly payment is 28 percent or less of your gross income for this reason.
2. Get educated about your credit score
Your FICO score helps you qualify for a mortgage loan, determines what payment options are available to you, and impacts your interest rate (and total cost of your home over the length of the loan).
When buying your first home, a higher credit score is obviously better, though a FICO score over 700 won’t necessarily net you a home loan approval if you don’t have the income to cover the payment. A very low score can keep you from home ownership. Loans backed by the Federal Housing Administration require at least a score of 500. And if you have a score below 580, your FHA loan may come with a 10 percent down payment requirement.
Order your full credit report (not just the score) from all three major credit bureaus before you begin the home-buying journey. If your score isn’t optimal, determine what actions you can take, such as reducing debt-to-income ratio, paying off certain balances or handling delinquencies, to raise your score.
3. Understand down payment options when buying your first home
One of the easiest ways to pave your road to home-buying success is to prepare for a down payment of up to 20 percent. That would mean a $40,000 up-front payment on a home that costs $200,000, though, and many first-time home buyers struggle to come up with that type of cash.
Luckily, numerous programs are available to assist with down payment options. Depending on your personal situation and state, assistance might include:
- FHA and other loans that require much smaller or no down payment
- Secondary down payment loans
- Down payment assistance via grant programs or loans that are forgiven as long as you own the house for a certain period of time
4. Don’t make decisions based on things you can easily change
When you start looking at homes, realize that the chance of landing your dream home as a first-time home buyer is fairly slim. But you can buy a house that has dream potential, so don’t count a property out based on things you can easily change.
Things you can’t easily change, and which may be showstoppers for a particular house, include school districts, companies that service the home for internet or utilities, neighborhood culture, square footage and floor plans. Things you can change include wall colors, flooring and even the type of appliances and fuel.
Before you start on the process of buying your first home, make a list of things you don’t want to negotiate on and a list of “nice-to-haves.” Share this list with your real estate agent so they can show you homes that best match your criteria, saving you a lot of time and disappointment. You don’t want to look at a dream house that’s hundreds of thousands of dollars out of your price range or in a school district you won’t settle on. But you might consider a home with slightly less square footage than you wanted if it’s the right price, it’s in the right area and it has the right floor plan.
5. Have a cash savings you can access
Many first-time home buyers get caught up in saving for the down payment or making their credit report shine and forgot to put aside some easy-to-access cash reserves. A small emergency fund can mean the difference between whether a home purchase flounders or not. You may need to come up with unexpected closing costs if negotiations don’t work out as planned, and some home buyers have to shell out for inspections or other services.
Plus, once the ink is set on the deal, you may want to start making your new house a personalized home. Having some money set aside for new furniture, curtains, appliances, or small accessories can make your first home ownership experience more pleasant and successful.
6. Consider a home warranty
Even if you do have some cash put away, you probably don’t want your reserve wiped out by a new appliance needed weeks after you buy a new home. Consider negotiating for a home warranty, which covers most of the major appliances in a home such as the HVAC system, water heater or refrigerator. That coverage provides you peace of mind as you begin life in your new home and recover from the one-time expenses of buying a house.
Some sellers may be willing to cover the cost of one year of home warranty as part of the home price, and you might be able to work with a lender that has a home warranty option.
7. Work with reputable, experienced professionals
Finally, increase your chances of success as a first-time home buyer by working with reputable, experienced professionals. From your real estate agent to your mortgage lender to your home inspector, the people who assist you in this journey have a lot to do with your satisfaction. Ask friends and family for recommendations about real estate agents and other professionals to ensure you’re working with the best teams in your area, and don’t be afraid to interview a lender before you decide to work with them on pre-qualification and home loan approval.