You have scrimped and saved, and now you think you are ready to take the leap into home ownership. Buying a home is a huge step, and it can be overwhelming if you are a first-time homebuyer. After all, it is one of the biggest financial decisions you will make in your life. While there are many sources for tips to home buying, including friends and family, we have narrowed down the three most important tips you need to know as a first-time homebuyer.
Pre-qualify for your home loan
You think you are ready to become a first-time homebuyer, so you start looking through the realty websites for your dream home. Tempting as it might be to look at new homes, daydreaming about your ideal home, this is not the first step any new homebuyer should take.
Instead, meet with a lender to get pre-qualified for a home loan to make sure you have the credit you need and the necessary financing before you fall in love with your perfect home. To get pre-qualified, a lender will run your credit and look at your financial situation. This can give you necessary information about your credit health before you jump into the realty market, potentially giving you time to address any outstanding items.
Plus, getting pre-qualified will give you a better idea of how much house you can afford. This allows you and your real estate agent to focus on houses that can be your dream home without breaking the bank.
Keep your monthly budget in line
Just because you qualify for a $300,000 loan does not mean that you can afford it. One mistake you do not want to make as a first-time homebuyer is overstretching your monthly budget by buying a house at the top of your range.
A general rule to follow is the 28/36 rule, which states your home costs should not be more than 28% of your income and your total debt should not exceed 38%. Even though this is a general rule for financial health, it is not uncommon to be approved for above this amount.
It is important to keep focused on your monthly budget, especially if you anticipate other expenses. Home buying can come with many expenses, such as new furniture needs, and you will want to keep in mind other expenses that might come down the road like growing your family. Stretching your monthly budget on mortgage costs alone may cause you to be too strapped when it comes to other life expenses.
Remember cash is king for a first-time homebuyer
Home ownership comes with increased costs across the board. Not only are there mortgage and insurance costs, but maintenance and repairs can become a costly weight on your budget if you are not prepared. In order to set yourself up for successful home ownership, make sure you have three to six months of savings in your account after you’ve paid your down payment and closing costs.
One of the largest misconceptions held by first-time homebuyers is that you are required to have 20% down for a new home. While this is true for some conventional loans, most non-conventional loans do not require 20%.
In fact, FHA loans can require only 3.5%, and there are some conventional loans that will go as low as 3%. Although these loans will require private mortgage insurance (PMI) payments, reducing your down payment as much as possible can give you more leverage once you own your home.
After all, keeping that cash in your bank account will only set you up for success as a first-time homebuyer. A healthy savings account will ensure you can maintain your new dream home without breaking the bank. Also, it’s a good idea to save one to three percent of your home’s value annually to cover any unexpected costs.
Finding your dream home
First-time homebuying does not have to be a terrifying experience. Focusing on three financial tips like lining up financing before shopping, keeping your budget in line and retaining as much cash as you can will help ensure your experience as a first-time homebuyer will be a successful one.
Also, making sure you have a lender who understands your goals and financial situation can help you follow all three of these financial tips. First Centennial Mortgage is a mortgage company specializing in serving as financial mentors for first-time homebuyers. Call us today to see how we can help make your dream home a reality.