Once you’re handed the keys to a home you just purchased, you’re going to finally untense your shoulders for what feels like the first time in years. Real estate is exciting and full of passionate people; your first foray into this space is going to be both unforgettable and likely very stressful.
Though there are going to be a lot of unknowns going into your first home purchase, you can prepare for your real estate investment early on. By saving, evaluating your financial health, and communicating with experienced players in the industry, you can vastly increase the likelihood of securing that perfect home the first time. Continue reading to gain insight into 10 essential tips to avoid wandering into first-time homebuyers’ real estate pitfalls.
1. Start Saving for the Long Term
When you first purchase a home, you’re going to quickly realize that you’re taking spending to a whole new level. Though much of this spending is financed through a mortgage, you can start saving early on for the lesser-known costs of purchasing a home.
Years before you plan on buying a home, you should invest in a savings account specifically for the occasion. By putting away some funds around each pay period, you’re breaking the huge cost of a down payment, closing fees, and home improvement projects into much smaller increments. Think of it as investing in your future self; setting aside a few dollars here and there will have a big impact after years of doing so.
2. Don’t Assume You Only Need to Save a Certain Percentage Just for Your Down Payment
In the same vein as saving early for the future, don’t think you need to cover just the down payment when you buy a home. There are several additional costs that go into first-time homebuying, including the following:
- The down payment: The goal for many first-time buyers is to save 20% of the home’s value for a down payment, but you’ll probably end up saving somewhere between a minimum of 5% and 15%.
- The closing costs: This covers all costs associated with setting up and implementing your mortgage: taxes, titling fees, etc. Expect to pay between $5,000 and $15,000 at the time of closing, though this amount may be more depending on your individual circumstance.
- The property taxes: Property taxes are typically included in your mortgage payment, separate from the loan principal and interest. It usually comes out of your established escrow.
- The homeowner’s insurance: Insurance may be required through your mortgage lender, but even if it isn’t you should get it. This is also typically paid out of your established escrow.
- The private mortgage insurance: Also called PMI, private mortgage insurance is required if your home mortgage is dispersed at over 80% of the home’s total value. It’s designed to protect lenders in the event borrowers can’t make payments, and it can be removed once your home’s reappraised value indicates that your mortgage is less than 80% of the home’s total value.
- The additional costs: As you grow accustomed to your new space, you’ll notice repairs or projects that’ll make the space better align with your vision.
3. Evaluate Your Credit Score and DTI Ratio Early On
Once you’re closer to obtaining mortgage preapproval and prequalification, you need to take a good look at everyone’s debt-to-income (DTI) ratios and credit scores. You can check your score for free at sites like Credit Karma and Experian. Also, you can calculate your DTI ratio by plugging in either your monthly or annual financial information into this simple equation:
Bills / Income * 100 = DTI ratio
Lenders often look at both DTI ratios and credit scores to determine whether you qualify for financing. In general, aim for your DTI ratio to be 50% or lower and for your credit score to be 600 or higher. Lenders want low DTI ratios and high credit scores. If your DTI ratio or credit score doesn’t hit the above metrics, consider waiting to apply for financing. Use the time to improve your score, take care of some debt, and save up some more.
4. Make Sure to Get Both Mortgage Preapproval and Prequalification
There are two major terms you’ll encounter when applying for a mortgage: preapproval and prequalification. One of these words definitely carries more weight than the other, but both are vital for financing your first home.
To prequalify for a loan, a lender collects some basic financial information from you and determines how much house you can afford. The process relies on self-reported information, so lenders don’t do a thorough check on your finances and credit history. A prequalification doesn’t carry as much weight as a preapproval from a loan officer, but it’s useful for you to understand your own situation before you seek preapproval.
The more official step to securing financial assurances is through preapproval. During the preapproval process, loan officers will gather financial records (like bank statements, credit scores, and tax returns) to calculate how much financing you qualify for. After that, all you need to do is find a home and determine the price you’ll be paying for that home. Preapproval requires more time and effort, but it’s more official than prequalification. So, sellers and realtors will focus more on your status of preapproval than prequalification. In fact, in more competitive markets, sellers won’t even consider you if you haven’t already been preapproved for financing.
As a first-time homebuyer, you’ll want to get both preapproved and prequalified for financing before you start looking at specific homes. Prequalification will give you a good idea of how much you can afford, and preapproval ensures you’re remaining competitive in the market. Again, buyers are likely to not even consider first-time homebuyers who haven’t obtained preapproval, so getting preapproved immediately increases the likelihood you’ll get into a home.
5. Don’t Go with the First Option that Comes Your Way
Purchasing a home is one of the major milestones for many. As such, it’s important that you make your decision after lengthy consideration. Evaluate your choices along the way and don’t just settle for the first option you find, especially early on. Weigh out the pros and cons of your decisions and make sure to put some real thought into the steps you’re taking toward closing on a home. Be choosy with the following:
- Which realtor you pick
- Which lender you pick for financing
- Which home you pick (though in competitive markets you can’t be as choosy)
- Who you choose to use for appraisal and inspections
In competitive housing markets, you’ll have to make a quick decision on whether to purchase a specific home. Since multiple people and families are vying for the same space, you may have to settle for a starter home now and allow that home to appreciate before reselling. It’s extremely difficult for first-time homebuyers to find homes as of writing this blog, so being choosy with your real estate team ensures your realtor will find you a home you’d like to live in. The home-buying process picks up speed toward the end, so in the beginning be particular with your realtor and lender to assemble the ideal team for you.
If a representative or organization is pressuring you to decide quickly, keep in mind you can always proceed with another option. If you’d like to explore different options for financing, realtors, and more, check out our first-time homebuyer’s checklist. It has tons of links that’ll get you to where you need to go for researching your options.
6. Take Advantage of First-Time Homebuyer’s Assistance Programs
Don’t sell yourself short when it comes to first-time homebuyer assistance programs. Instigated on both federal and state level, homebuyer’s assistance is offered to scores of first-time buyers on a daily basis. These assistance programs can pay dividends both when you initiate the purchase of your home and down the line. Here are a few of the perks made available by first-time homebuyer assistance programs:
- Secured, low-interest-rate mortgages
- Down payment assistance
- Closing cost assistance
Now, because the real estate market can be incredibly competitive for first-time buyers, keep in mind that first-time homebuyer assistance programs are going to have limited availability. They are worth investigating thoroughly, though you may not meet certain qualifications, or the program may be at full capacity.
7. Make Sure You’re Buying a Home You Can Afford
After preapproval, prequalification, and thoroughly investing first-time buyer programs, you’ll have a pretty good idea of the kind of home you can afford. Being honest with yourself on the financing is key to ensuring that you can continually pay off your mortgage for the term you plan to set.
If you are looking for a home beyond the financing options available to you now, you can always wait and improve your credit score/DTI ratio or save up more money. Alternatively, if buying a home in the near future is of utmost importance, you can buy a “starter home” with plans to sell a few years down the line. Though keep in mind there is risk to this, as the real estate market is constantly in a state of ebb and flow.
8. Don’t Pass on an Inspection and Appraisal
During the process of negotiating, you’ll hear a lot about inspections and appraisals on the homes you’re looking at. Some lenders do require you get the home inspected and appraised before they release funds, but it’s always good to get your home evaluated regardless of if its required or not.
Home inspections can reveal problems or damage not obviously apparent during an initial walkthrough. And home appraisals assure that the home’s sale price aligns with its determined value. Keep in mind that both processes may uncover existing problems that will be costly to you, but buyers may still sell without making any fixes to the issues due to the state of the market. You’re going to have to make a timely decision regardless but knowing the ins and outs of your new home will prepare you better for your upcoming journey. Essentially, getting your home inspected and appraised ensures your investment is sound and that you have a pretty good idea of what situation you’re getting yourself into.
9. Don’t Make Large Financial Changes Before You Buy Your Home
This one may seem obvious, but a lot of first-time buyers tend to forget they’re purchasing a home in a few weeks when they open a new credit card or take out an auto loan.
As a rule of thumb, don’t make any financial decisions during the time you’re planning to buy a house. You want your credit score and DTI ratio to align with the findings your lender reported on your mortgage preapproval. If big changes occur, it could jeopardize your qualification for your mortgage or first-time homebuyer program.
10. Try to Keep the Emotions Out of the Decision
Finally, arguably the best way first-time homebuyers avoid real estate pitfalls is by keeping emotions out of the equation. Buying a home is stressful. You’re going to be meeting a lot of new people, seeing a lot of homes, and at the end you’re going to be moving. No part of this should be familiar to you as a first-time homebuyer, but that doesn’t mean your decision should be influenced by your experience.
When you put in an offer on a home, you should do so after weighing your options carefully. Try not to get too excited too early, and don’t get discouraged if a buyer doesn’t accept your offer. Like we stated, real estate is in a constant state of flux. The homes you’re seeing one morning may be gone by the next. It’s important to remind yourself that this is a huge business decision, and it’s going to affect your life for the foreseeable future.
Though this will be nothing short of exhilarating, keep your emotions at bay until you’re holding the keys to your new home. Then, it’s time to open the champagne!
Oh, Yeah. You Have to Move, Too.
Not only are you going to spend hours negotiating, touring, and running your hands along bare walls, but you’re also going to be moving at the end of your home purchase. No matter where you’re going, moving with a reliable, trusted moving company will make all the difference.
If you want more information on pricing, timelines, and availability, consider reaching out to Bailey’s Moving & Storage. We service moves around the globe, offer long-term storage solutions, and boast a trained crew who’ll get you wherever you need to go with ease.
