Whether you are looking to buy a starter home or your forever home, first-time home buying can be both exciting and overwhelming. There is more to it than just finding a home that matches your dreams. Indeed, there are compromises you will have to make as you seek to balance finances and make the best of what the market offers. In that regard, here are the main home buying tips to follow.
1. Strengthen your financial situation
Your first plan should be to place yourself in a solid financial position that will allow you to get good rates for a mortgage. An excellent financial position also gives you room to reduce the amount you need for lending and have some sums for other expenses that come with house ownership. The first thing is to check your credit score and take measures to get a good one. Pay off all your debt so that beyond house expenses, you have enough to cover your mortgage payments.
Clearing your debt also improves your credit rating and increases the amount you can be given. As part of strengthening your finances, you should save for an emergency fund of three to six months’ expenses. This fund is for any large and sudden expenses that come your way and ensures the cost of maintaining your home does not affect your ability to keep up with your payments.
2. Shop around for a mortgage
You must spend time looking around for an ideal mortgage lender. Do not be bound by loyalty to a brand or adverts that only focus on one mortgage aspect. Shop with at least three lenders. You can use a mortgage broker but only one who is not pushing you towards one decision where they may be getting an extra commission. Consider the lender’s whole terms, including the amount, the interest rates, and monthly payments.
More importantly, consider all the costs associated with the mortgage as these can quickly drive the final cost a couple of thousands over. Beware of lending options that promise single-digit rates or cheaper monthly premiums. Such options make up for the low rates with more extended payment periods and high insurance cover experience. Also, work with an experienced mortgage lender who is willing to walk you through the process and transparent about the loan’s total cost. If navigating the mortgage options is too overwhelming, you can always use a mortgage advisor’s help.
3. A home you can afford
Next, you need to know which house can you afford. The mistake most first-time buyers make is focusing only on the monthly mortgage payments. However, there are several other monthly costs, including Home Owners Association fees, insurance, taxes, and utilities.
For a comfortable stay in your house to allow you to meet other needs without extra strain, your homeownership costs should not exceed 25% of your monthly take-home pay. Therefore, take your monthly income, multiply it by 25%, and you will get how much you can afford to pay for home costs every month. If you want to afford a higher-cost house, you will either increase your income or save for a bigger portion of the deposit, bringing us to our next point.
4. Save for down payment and closing costs.
You want to have enough money set aside to pay for the house’s down payment and closing costs. If you are going to need a mortgage to purchase your first house, then at least save for the down payment, ideally 20% or more of the total house cost. Saving for a down payment ensures you do not pay Private Mortgage Insurance every year, which can add to your monthly expenses.
There are first-time homebuyer programs that may promise single-digit interest rates with no need for a down payment. The problem with them is they are either carry plenty of fees, charge higher interest fees, and can adjust the interest rates to shift the risk to you.
The best deal you should look for is a conventional 15-year mortgage with a fixed rate and a 20% down payment. It allows you to be debt-free in a shorter period, protects you from rising rates, and keeps your loan costs down.
5. Real estate agent
For a first-time buyer, the service of an excellent real estate agent will prove invaluable. It saves you much of the legwork and provides someone on your corner who will look after your interests. They help you with the negotiation process, understanding the various fees, filling in the paperwork, and a wealth of connections to help you get the best deals in the market. They are knowledgeable of the neighborhood and will help you set a realistic budget.
When you are out to buy your first dream home, the focus is usually on the house that you can easily forget the finances you will need before and after you have made the purchase. These five steps will help you be in a solid position to find the house you want without ending up in unsustainable debt or financial strain.