6 Dos for First-Time Homebuyers
Advanced preparation can make all the difference in the home buying process. Here’s what to do to ensure your finances are in order and find the right professionals to represent your best interests.
1. Know Your Credit Score
Lenders look at your credit score to determine whether you’re financially prepared to buy a home. Before you look at houses, check your credit history to know where you stand. Lenders set their own credit score requirements to qualify for home loans, and they’re less likely to approve you if you have a low credit score.
To give you an idea, most mortgage lenders look for a credit score of at least 640. FHA loans allow you to purchase a house with a credit score as low as 500. However, the FHA program requires a down payment of at least 10 percent if your score is below 580.
A higher credit score can qualify you for better mortgage programs and lower interest rates, reducing the overall cost of homeownership. To improve your score, focus on:
Making payments on time
Paying down debt balances
Not applying for new lines of credit
Disputing negative marks on your credit report
If you have an existing credit card, asking for a higher credit limit could improve your debt utilization ratio and increase your credit score.
2. Use a Home Loan Calculator
After you get your credit score in order, your next step is to determine how much house you can afford. A home loan calculator can show you how much your mortgage payments might be and estimate your home loan’s total cost.
It’s best to find a mortgage calculator that will factor property taxes and insurance costs into your monthly payment. Many real estate listings include a history of property tax amounts for prior years. For home insurance, get multiple home insurance quotes to find the best policy for your new home.
Before you purchase a house, it’s essential to determine the amount of money to save for a down payment. A home loan calculator can help you see the impact a larger down payment can have on your house payment.
When you put more money down, lenders can offer a low interest rate. A down payment of at least 20 percent can also eliminate the need for private mortgage insurance (PMI). Using a home loan calculator, you can explore different financial scenarios to determine which options are best for you.
3. Find Programs for First-Time Buyers
Buying a first home can feel overwhelming. First-time homebuyer programs can help you overcome significant hurdles that stand between you and homeownership. Local and national programs exist and can offer down payment assistance, a reduced interest rate on your mortgage, and even tax credits to lower your tax bill.
The options can vary from one location to the next. The U.S. Department of Housing and Urban Development (HUD) lists local assistance programs by state to make it easy for buyers to find help. You may discover closing cost assistance and homebuyer education programs. On a national level, several loan and assistance programs are available.
Here are some of the most useful local and national options to consider when searching for a first home:
FHA loan: Helpful if you have a low credit score or need a low down payment
VA loan: Service members and veterans can buy a home with no money down
USDA loan: Offers no down payment and 100 percent financing on qualifying rural properties
Home renovation loan: Purchase a fixer-upper and remodel it using money from the loan
Good Neighbor Next Door program: Discounts on homes for law enforcement, teachers, firefighters, and emergency medical technicians
Programs are available to help even after you purchase a home. Because of the coronavirus pandemic, the Federal Housing Administration has COVID-19 mortgage help available. If you buy a home and cannot pay your mortgage loan, contact your lender to discuss your options.
4. Look Into a First-Time Homebuyer Credit
Unfortunately, the federal First-time Homebuyer Tax Credit (FHTC) no longer exists. The program was a response to the 2008 housing burst but ended in September 2010. However, some states offer tax credits that you may qualify for.
For instance, Texas has two programs that provide first-time homebuyer grants. Its Homes for Texas Heroes Home Loan Program helps teachers, firefighters, police, correctional officers, veterans, and EMS personnel. At the same time, the Homes Sweet Texas Home Loan Program has assistance for buyers with low and moderate incomes.
Florida also has down payment and closing cost assistance. The state’s Mortgage Credit Certificate (MCC) Program can provide an income tax credit of up to 50 percent of the loan amount.
5. Find a Real Estate Agent
A real estate agent isn’t a requirement when shopping for a home. However, a real estate agent can guide you through the process. Real estate agents are familiar with the local housing market and can show you what to look for when purchasing a home.
The right agent can make all the difference. They can help you make an offer and negotiate the purchase price. But the best part? Real estate agents don’t cost you anything out of pocket. The agent’s commission is taken from the listing price, so the seller pays the fee.
6. Read Your Mortgage Disclosures
When you finally make it to closing, your hard work isn’t over. One important thing to watch for as a first-time buyer is your mortgage disclosure.
For instance, your Closing Disclosure lists all the details about your loan. Review the document to double-check that the spelling of your name, terms and conditions, interest rate, loan amount, and estimated monthly payment match what you expect.