Life Events

Mortgage Tips For First-Time Homebuyers

We’ve put together a short checklist to work through before delving into home ownership.

Jun 17, 2014

Buying a home is always a major life event, but for first-time buyers it is often a difficult, stressful affair. The most important thing that first-time homebuyers can do to make this experience more manageable is to invest proper time and money into getting prepared before they start the process of choosing a home.

In order to help our customers who are new to the homebuying process succeed, we’ve put together a short checklist to work through before delving into home ownership.

1. Improve Your Credit Score

If you don’t know your credit score yet, home ownership may be further away than you think. The first thing buyers should do is to head over to the website of one of the three major credit tracking organizations and request their annual free credit score. Websites like CreditKarma.com and AnnualCreditReport.com are also valid options.

There are a few things that determine your credit score, but perhaps the most important are your credit utilization ratio and the frequency with which you pay bills on time. Your credit utilization ratio adds up all of your outstanding debt and divides by the total amount of credit available to you. If you have a maximum of $20,000, for example, but you owe $15,000, your credit utilization ratio is 75 percent – enough to sink your credit score over time.

A damaged credit score takes time and sometimes money to repair. Buyers should begin the process of checking and building their credit scores at least six months to a year before attempting to buy a home.

2. Plan for Closing Costs

One cost of purchasing a home that often puts a snag in first-time buyers’ plans is closing costs. Many buyers save up enough for a down payment, but neglect to factor in closing costs to their budgets. Because first-time buyers may be stretching their budgets to afford a home, these costs can defer would-be owners’ plans.

Closing costs vary by state and mortgage provider, but a good rule of thumb is to have at least 4 percent of the home’s value available to pay for closing costs. Homebuyers planning ahead will have savings in excess of this to pay for unexpected expenses associated with moving and owning a new home.

3. Come Up with a Down Payment

The single biggest barrier to first-time home buyers is the down payment. Many banks demand a 20 percent down payment, which may take potential buyers a long time to save up. There are options available to some buyers that include smaller down payments, like VA loans, which can be obtained with no down payment for qualified borrowers. With no down payment, however, you will be paying considerably more in interest over the repayment period of the loan.

The first-time buyers who are most likely to be successful in buying a home are those that are able to cut costs and save up a considerable sum of money.

4. Get Pre-Approved

There are a number of reasons why it makes sense to get pre-approved for a loan. In the past, potential buyers would get prequalified for a loan in order to get a sense of the size of the loan that a lender would give them. A pre-approval, on the other hand, is an assurance to you and to sellers of precisely the loan that you can take out.

These days, pre-approval is a virtual necessity, especially for first-time buyers. Sellers in this market often get multiple offers, and may simply disregard offers that come without a letter of pre-approval.

Buying your first home is a big life step. Take the time now to ensure that you are properly prepared, and the purchasing process will be significantly simpler down the line.

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