Buying a home is a turning point in one’s life. It signifies independence, maturity, and new beginnings. It’s also a lot of responsibility. As a first-time home buyer, do your research ahead of time so that you are prepared and ready for this new chapter ahead of you.
Here’s what you need to know to get ready to purchase your first home.
Prepare to be a first-time home buyer
So, you’re ready to buy your first home. Congratulations! But before you get caught up in picking out paint colors and a new mailbox for the front lawn, there are a few things you’ll need to consider first:
Sometimes, people rush into buying their first home for the wrong reasons. Even though they may not feel ready, other people pressure them into making the jump into homeownership.
Take your time to think about your future. Is this where you’d like to live for the next couple of years? Family? Do you expect to relocate for work in the near future? Don’t rush into purchasing a home for the first time if it is not a part of your long-term goals.
The type of home you want
If you are truly prepared to purchase your first home, it is time to think about the next step.
What type of home will best suit your needs? Would you be most satisfied in a condo? A townhouse? A traditional single-family home? There are advantages and disadvantages to each. To help you make a decision, research and compare the reasons to move to a condo community and the reasons to buy a custom new home.
Your must-haves and deal-breakers
There are a lot of factors to consider in shopping for your first home. Before beginning house-hunting, determine your must-have features and your deal-breakers.
Consider your ideal neighborhood, house size, and layout. Ask yourself questions, like: do I want a pool, or definitely not? Of course, you will need to remain flexible in your quest for your dream home, but having a list of key features in mind will help you to pick the right place.
Prepare your finances
Here’s the part of the home-buying process that’s not so much fun. It can be overwhelming to prepare your finances for what will most likely be the biggest purchase of your life so far. To see the process a little more clearly, follow these steps to stay on track towards homeownership:
1. Strengthen your credit score
The first step to being financially prepared to buy your first home is to check and strengthen your credit score. Your credit score is one of the most important factors in determining if you qualify for a loan and what the cost of your loan will be. And it’s not enough to simply pay all of your bills on time. You also have to pay attention to your utilization ratio (i.e. how much you spend per month in relation to your credit limit).
Remember, the higher your credit score, the lower your monthly payments will likely be. So, when preparing to buy your first home, cease applications for new credit one year before you apply for financing.
2. Figure out what you can afford
Even if you have an excellent credit score, when shopping for your first home, you need to figure out what you can actually afford.
Assess your current assets and liabilities. What does your monthly cash flow look like? Are you just making all of your payments or do you have extra money to save each month? To help you figure out what kind of mortgage you can afford, consult a mortgage calculator. It is advised that your home expenses not exceed more than 28% of your gross monthly income, or you can risk becoming “house-poor.” (This means that you have to pour most of your monthly income into mortgage payments, with little remaining for other expenses.)
Remember, just because you can qualify for a higher mortgage than you had anticipated, it doesn’t mean that you should accept it. When assessing the price of a prospective new home, look at the big picture. In addition to a monthly mortgage payment, you also need to be prepared for:
- The down payment
- Property taxes
- Homeowner’s insurance
- Any additional expenses for maintaining and/or improving the house
- Any immediate repairs needed before move-in
- Closing costs
3. Save for the down payment
A down payment can be anywhere between 5% and 20% of the home’s price, preferably closer to 20%. Once you have determined what kind of monthly mortgage payment you can afford to make, prepare to save for the down payment.
You will want to build a healthy savings account. You must be prepared for not only the down payment, but also for closing costs and the miscellaneous expenditures of moving. It is a good idea to have 4-6 months worth of mortgage payments saved. This will show lenders that you are not living paycheck to paycheck and will also provide you with a cushion for unexpected home repairs (which inevitably will come) upon move-in. Basically, it goes without saying that you do not want the down payment to wipe out your entire savings account.
4. Get pre-approved for a mortgage loan
Once you have done the preliminary research about what type of home you can afford, it is time to make it official by getting pre-approved for a mortgage loan.
Different lenders may require different documentation, but most will request to see, among others, the following:
- Social security number
- 2 years worth of tax returns
- 2 recent pay stubs
- 2 months worth of bank statements
- List of assets
Click here to see a more extensive financial checklist for first-time home buyers.
It may seem counterintuitive to get pre-approved for a mortgage loan before even beginning house hunting, but this is a crucial step. Many realtors will not even show homes to buyers who are not pre-approved, nor can you place an offer on a house without pre-approval.
5. Buy a home you love
Finally, make sure that the home you decide to purchase is one you actually like. Of course, you will need to be realistic in the search for your dream home, but don’t compromise everywhere. Most likely, as a first-time home buyer, your first home will be one of, if not, the largest purchase you have made. So, make sure your first home is one you will truly love.
Buying your first home can be as daunting as it is exciting. But being prepared for the process will ease your nerves and help you to find your dream home faster.