Buying your first home is one of the biggest investments you will ever make in a lifetime. It can also be a very emotional experience. It takes time and dedication to prepare your finances for this big step.
Millennials currently make up 38% of first home buyers entering the market, according to the National Association of REALTORS® Home Buyers and Sellers Generational Trends Report. Student loans and growing credit card debt can be a hindrance to this generation, making it hard to qualify for a mortgage. In a Forbes interview, KB Home Chief Operating Officer, Mike Mandino, shared tips on how millennials (and all first-time homebuyers) can prepare for buying a new home.
Buying a home for the first time can be overwhelming because there is so much information that you need to learn. It helps to have a knowledgeable real estate agent to assist you as a first home buyer. Let’s take a look at the top ten things that first home buyers need to know.
1. Start saving for your down payment early.
A common misconception is that you need 20% down, but now some lenders will consider much less. There are first-time homebuyer programs that will allow as little as 3% down. Consider that putting down less than 20% could mean you may have to pay mortgage insurance and other higher costs. Use a down payment calculator to determine what your savings goal will be.
2. Research your mortgage options and compare the rates.
The mortgage option you qualify for will also determine the down payment you are required to pay. Do your research for first-time homebuyer educational programs for your state. These programs may help you qualify for a down payment and closing cost assistance. Each type of mortgage option has requirements, pros, and cons.
Conventional mortgages conform to the standards set by government-sponsored entities Fannie Mae and Freddie Mac. They may require as little as 3% down.
FHA loans are loans insured by the Federal Housing Administration. They may permit as little as 3.5% down.
VA loans are loans guaranteed by the Department of Veteran Affairs. Sometimes no down payment is required at all.
Once you decide on your best option, talk to lenders, and get pre-approved for your mortgage. Get a pre-approval letter, which is simply an estimate of how much a lender is willing to lend based on your income and debts. Having this letter will make you look more serious to sellers and give you the upper hand on those who did not take this step.
3. Determine how much home you can afford.
If you can afford larger monthly mortgage payments, a 15 year fixed loan will offer the most savings on interest payments. If you need your monthly mortgage payment to be lower, you can opt for a 30 year fixed loan. Use a 15-year vs. 30-year mortgage calculator to get an idea of what kind of payments you can expect.
4. Fix your credit and pause any new credit activity.
When applying for a mortgage loan, your credit score will be a crucial factor for approval. An excellent credit score also means you will get the best interest rate. Check your credit score and dispute any errors. Keep paying your bills on time to avoid blemishes on your credit report. Avoid opening any new credit inquiries or loans, such as car loans or new credit card accounts.
5. Find the right real estate agent.
Your real estate agent will be your guide through the process and a valuable resource. Choose a real estate agent or company that has integrity and experience in this industry. Your agent can help you determine the best type of house to buy with your budget in mind, such as buying new or buying an older home. Tell your agent your list of “must-haves” and the areas you are looking to move to, and they will work their magic to find a selection of homes that meet your needs.
6 . Go house shopping and make your offer.
Consider the type of home you want and the neighborhoods where you want to live. You will likely be living there for a long time, so it’s important to consider the future, not just your current situation. If you want to start a family, make sure your house will accommodate a growing family. Check out the local schools and parks in the area. Look into the crime rates for the district to make sure you are moving to a safe neighborhood. Your real estate agent can help you with this as well. Once your real estate agent gathers a list of houses that may suit you, it’s time to go on house tours and visit open-houses. Your real estate agent will guide you through the process of making an offer once you find the home of your dreams.
7. Know the process of a home inspection.
After your offer is accepted, you will need to pay for a home inspection. Your real estate agent can help you with this process as well. Make sure the person you hire can inspect the condition of the home inside and out. Be present at the time of inspection and pay close attention. Don’t be afraid to ask questions or ask the inspector to take a closer look at any areas of concern. Make sure they have full access to the roof, attic, crawl spaces, and basements. The inspector may also check for things such as radon and mold or pests, so make sure you know what the inspection includes. You may want to do a home appraisal to assist you in negotiating your offer.
8. Negotiate your offer.
Depending on the home inspection results and appraisal, you may want to negotiate on your offer. Are there any repairs that you want the seller to handle or consider a lower proposal to allow for you to cover the cost of repairs? Will the seller pay for your closing costs? If the seller is in a hurry to sell quickly, you may find they will be willing to negotiate these items and save you a significant amount of money.
9. Buy adequate homeowners insurance.
Before you close on your house, your lender will require you to buy homeowners insurance. An excellent place to start is your current auto or renters insurance agent. You may be able to bundle your auto insurance and homeowners insurance for even more significant savings. Shop around and compare rates. Make sure your homeowners’ insurance covers everything you will need. A less expensive policy could mean less coverage and leave you with unexpected expenses if you need to use it.
10. Finalize your closing plan.
You are at the finish line of your home buying journey; however, there are still additional items to do to close on your new home and take ownership. Check out this checklist to ensure you have taken all of these necessary steps and have the proper documents in place for the final closing.
Having a plan in place and knowing what to expect will give you an advantage and much less stress in the home-buying process. It is not an overnight process, so take the time to do your research and get your finances in order. Be sure you are happy with the home you have chosen and don’t settle on the first house that comes along if it’s not the best fit for you. Happy house-hunting!