10 Things You Must Know If You’re A First-Time Homebuyer
1. You don’t need to use your bank to get pre-approved
This is a big one. Many buyers think that its “easier” going to their current bank to get pre-approved for a mortgage, but that could not be further from the truth. Weather you use your bank or a different lender the process should be just as easy and comparable. All banks and lenders are not created equal. You should definitely shop around for which banks and lenders have the best terms, rates and programs that can fit many first time homebuyer’s situations. Your real estate agent can also give you recommendations for lenders as well.
2. You don’t have to put 20% down to avoid PMI
The good ole 20% down to avoid PMI that we all hear so much about. Sure, putting down as much money as possible on your home is better for you and your less “risky” to your lender, which could mean a lower interest rate and more equity in your home but believe it or not there are programs available that enable buyers to put down less than 20% on their home purchase and pay no mortgage insurance! Music to your ears I’m sure. Just to be clear, PMI, or private mortgage insurance is an additional fee tacked on to the loan that helps protect the lender if the borrower defaults on the loan if they put down less than 20%. Saving 20% down payment for any home is no easy feat especially for first time home buyers, so know that you have options. More good news, if you did have PMI on your loan, after you have built 22% equity, lenders will automatically drop PMI and at 20% equity in your home you can request the mortgage insurance to come off of your monthly payments.
3. A real estate agent costs you nothing
When you buy a home, the agent gets paid by the seller...95% of the time. When sellers put their homes on the market and sign a listing agreement, the commission the buyer’s agent gets paid is already included in the listing agreement when that home goes on the market. You, the buyer don’t have to worry about paying an agent for their services.
4. Your Interest Rate is everything
You know how you keep hearing people say “Hurry up and buy a home because interest rates are low, “…well, their right! Average interest rate is around 8-9%, and the rate you pay in interest can dramatically affect your monthly mortgage payments. Think of it in this way, if you’re paying $1,800/month for a home that you saw and want to purchase at 4% interest rate and the rate increases to 5%, your payment will increase by at least $100/month for the same property. Make sure you lock in your interest rate once you get pre-approved if you think there is a chance it will continue to increase.
5. Know your credit score
This is probably an obvious one, since you will be applying for a loan, but one of the most important aspects of obtaining financing for a home. As a general rule of thumb, the higher your credit score the better chance you have of getting a more attractive interest rate. You can get a FHA loan (which requires PMI), with a minimum FICO score of 580. For a conventional loan you will generally need a higher FICO score but that varies by lender. If you don’t have the credit score you want, that can easily be fixed with a little bit planning and budgeting your finances, and some patience.
6. Make sure you are comfortable with your mortgage payments
It’s pretty exciting when you finally get your pre-approval letter from the lender and your one step closer to owning your own home. Keep in mind though, the bank and lenders can sometimes approve you for more than you feel comfortable spending. Buyer beware, you are ultimately the one who has to pay your mortgage payments each month so you should ultimately decide how much you’re comfortable with spending every month. Besides PITI (Principal, Interest, Taxes, and Insurance) & HOA fees if you buy a condo/townhouse, think about your other expenses…groceries, utilities, car payments, student loans, etc. Try not to stretch yourself too thin on your mortgage payments, you still want to be able to go out and take a trip sometime.
7. You can fix the home but you can’t move the location
After watching many episodes of House Hunters, I’m sure you have realized that you may sacrifice some wants in your new home. Keep in mind, that the location of the home determines the value, not the renovated kitchen with stainless steel appliances. My professional advice is, it’s always a better bet to buy in the location you desire and make it the home you love. You can renovate a home but you cannot move it to a different part of town. Research your preferred neighborhoods, check crime stats, school ratings, and make sure you would be comfortable living there.
8. Property Taxes Increase
Your property taxes will inevitably increase and are assessed based on your home value. Sometimes you can get them escrowed by your lender as part of your monthly mortgage payments or plan to pay them yourself biannually.
9. Have a money cushion and some reserves
Save, Save, Save! You will thank yourself for saving as much as you can when you purchase your new home and all the other expenses you might have after your purchase. Have a nest egg for home maintenance, if something was to break as soon as you move-in and your moving expenses.
Also, some lenders require that you have reserves of a couple of mortgage payments saved in your bank account to ensure you are not spending your last dime on your home purchase. You will have to show proof of funds before closing on the home.
10. Save for Closing Costs
When you’re saving for your down payment also make sure that you save extra money for the closing costs to close on your home. These costs can be a little tricky because there are so many different factors that can affect the fees you pay at settlement that you won’t fully know until you’re under contract and/or close to closing. For example, the seller can pay something toward your closing costs as part of the terms of your offer or you may be responsible for all of your closing costs which can equal up to 4% of the purchase price.