What First Time Buyers Need to Know

What First Time Buyers Need to Know

Buying a home for the first time is the largest investment many people have ever made, though many go on to buy more expensive properties in the future. When done well, home ownership is an excellent way to build wealth. Of course, when buying your first home there is much to learn, and the professionals at Coastal Home Team have compiled this list to help.

The Mortgage

One of the first steps is preparing to apply for a mortgage. Most first time homebuyers don’t have the funds to purchase a home outright, but many can make the transition from renter to homeowners with a mortgage. Preparing to borrow the funds needed through a mortgage begins with an understanding of what you can afford. The mortgage payment that is affordable for you depends on a number of factors including your income, your debt, your assets, and even your lifestyle.

Checking your credit score is a great place to begin. A lower credit score means a higher interest rate which will increase the total cost in purchasing a home. With a good credit score, 720 or above, you are ready to talk with a lender about pre-qualification. Based on your details the lender will deliver an estimate of the mortgage you for which you may qualify. Keep in mind that rates and fees vary so it is worth shopping around for potential mortgages, as even a small decrease in the interest rate can save you money over the life of your mortgage loan.

Qualify to Buy Versus Affordability

Your lender will tell you the amount you qualify to borrow, often up to 43 percent of your gross income. It is important to remember going that high may mean that after taxes, utilities, and food costs, there may be little left for the activities you enjoy. Keeping your housing costs more affordable, 30 percent or less of your gross income, will lower the pressure on your overall budget and leave you with some disposable income to enjoy life as a homeowner. There are exceptions, for example, if you have large savings available, you might go higher than 30 percent and remain comfortable.

The Down Payment

In the past, the standard for a down payment was 20 percent or more of the home’s price. Today, many first-time home buyers are able to purchase a home with little to no down payment. Keep in mind, the cost of owning a home is more than the mortgage, taxes, and insurance combined, but also includes maintenances and upkeep of the home you purchase. Ask and answer honestly, if you have no down payment are you truly ready for home ownership? Discuss your situation with a trusted financial planner or lender to determine the best route for you, but remember if you make a down payment of less than 20 percent, you may need to pay PMI (private mortgage interest).

In most cases, if you plan to be a homeowner one day, the best plan is to start saving early for your down payment. The more expensive the home, the higher the down payment needed. In some cases, depending on your debt to income ratio, you may need a larger down payment to qualify for a mortgage. In some cases, your lender may require you pay off or reduce other debts to qualify, so when preparing to purchase a home it is important you don’t make other major purchases. If family members are helping with the down payment, you’ll want to get the money in your account quickly as many lenders require it is visible in your account for two months or more.

Is a 30-Year Mortgage the Right Choice?

For most first time homebuyers, a 30-year mortgage is the right option, simply because short terms tend to be cost prohibitive. It is important to note, a shorter term means you could pay off your mortgage more quickly and save money on interest. You can also shorten the length of your 30-year mortgage by paying it as if it were a shorter term, thus leaving you options should a job loss or other financial emergency come your way.