Let's take a look at some first-tiem homebuyer tips and common pitfalls you'll want to avoid so you'll be well informed before your purchase.
Key Takeaways
- Start prepping your finances well in advance of applying for a home mortgage.
- Compare multiple offers from lenders to find the best deal.
- Take advantage of first-time homebuyer programs for low rates and down payment assistance.
- A real estate agent can be an invaluable ally who can walk you through the many steps of the homebuying process.
1. Prepare Your Finances
One of the most important tips for buying a home is that you must prepare your finances. Your new home is an investment, but a home lone is also an investment for your bank. It's looking for low-risk customers for loans, so you'll have to show financial stability.
There are a few things you can do to prep your finances before acquiring a mortgage, according to John Cabell, director of banking and payments intelligence at J.D. Power and Associates. Pay down debt, make your payments on time, and avoid opening new loans or credit cards.
New accounts don't show up instantly on your credit report. They'll usually take at least a few weeks to appear.
You'll also want to start saving for a down payment at this point, although the amount you'll need may be determined by the mortgage for which you're applying.
2. Determine Your Budget Early
Your budget will depend on several factors, including the size of your down payment and what mortgage programs you'll be using.
Banks will generally want you to maintain a debt-to-income ratio lower than 36% to ensure that you'll be able to pay back your loan.1 Mortgage calculators can help you determine your monthly payment. Figuring out how much house you can afford based on your income is also important.
Note
You'll likely be responsible for private mortgage insurance (PMI) if you're putting down less than 20%. This can drive up your monthly costs.
Don't forget to calculate the "invisible" costs of homeownership when you're determining your budget. These includemaintenance expenses and property taxes.
Be wary of going over budget. This creeping trend has increased over the years. About 28% of buyers spent more on their homes in 2021 than their initial budget allowed.
3. Don't Buy Solely Based on the Market
The housing market is always fluctuating. There will sometimes be more houses for sale than there are interested buyers. This results in a buyer's market. Properties will be snapped up quickly, and multiple-offer situations may become more common at other times.
Timing the market is the act of trying to predict the best time to buy and waiting until then. This could mean you'll save some money or face less competition, but attempting to time the market is something you should avoid. There can be more than one downside to waiting for the market to change, including spending more money on rent or risking the continued rise of home prices.2:37
4. Explore Your Mortgage Options
There are many types of mortgage loans out there, including specialized loans for first-time homebuyers. These often come with lower interest rates or reduced down payment requirements. Be sure you've thoroughly investigated all your options before you dive in with any one type of mortgage.
5. Look Into First-Time Homebuyer Assistance
Look into first-time homebuyer programs. These programs can provide down payment assistance or vouchers toward the purchase of a home. These can save you tens of thousands of dollars.
Note
Many programs consider those who haven't lived in or owned their own home within the last three years to be first-time homebuyers.
6. Compare Several Loan Offers
Each bank charges its own set of fees, and this can lead to some fairly significant differences in costs. You'll also find varying annual percentage rates (APRs) at different banks, so getting more than one offer is critical to finding the lender that suits you.
Don't neglect to get a preapproval letter from your bank once you're ready to start home shopping. Many sellers require that you have one before they'll accept an offer on a house.
Note
Your credit report will be checked often as you're going through the mortgage application process. But multiple inquiries within a 45-day window are recorded as a single inquiry on your credit reports.
The number one mistake that first-time homebuyers make is failing to prepare before going home shopping.
7. Make a 'Must Have' Home Feature List
It can be easy to start adding things to your list of needs and wants when you begin touring homes. But you'll want to make sure that the list is true to what you really desire. Is location important to you? How about schools? Does the home need to be turnkey, or are you up for a renovation project?
Remember that there are many things you can change within a home, including the kitchen, backyard, bathrooms, and bedrooms. What you can't change is the location or the lot size. Keep this in mind when you're determining your "must-haves."
8. Hire an Agent
A real estate agent is an expert at their job, which is to find the house that best suits your needs. They'll be able to tell you if a home is properly priced, whether the neighborhood is good, and how quickly properties are selling. They'll also be able to negotiate on your behalf and prepare the required paperwork for you.
It's possible to do this all yourself, but an agent is almost always a better option for a first-time homebuyer.
9. Don't Skip the Inspection
A home inspection is meant to uncover problems with the home's structure, plumbing, roof, and other parts that could be very expensive to repair. You may have a keen eye, but a professional is going to be better equipped to examine the property. You'll have to pay for it, but the inspector will send you a thorough report detailing the condition of the property when the inspection is completed.6
Note
Waiving the inspection is the equivalent of walking in blind. An inspector can inform you before you purchase the home of any costly repairs that will have to be made.
10. Plan Your Offer Carefully
The offer you make will depend greatly on how the market is doing. You'll have more leeway to negotiate if there's less competition, but you may have to prepare for other offers if it's a seller’s market.
Listening to your agent's recommendations is key when preparing an offer. There are tons of moving parts within real estate, and an agent's guidance can make the difference between failure and success.
This is especially true in hot markets, which commonly occur when interest rates are low.
11. Negotiate Thoroughly
Understanding how to negotiate is key, and this is another situation in which a real estate agent can be invaluable. You may have to negotiate if the seller doesn't accept your initial offer. You may also have to do so if the home inspection turns up issues. It's often possible to work with the seller to have these repaired before you purchase the property. You can also ask for a credit against the sale price so you can have the problems fixed yourself.
Be ready and willing to negotiate with the seller in order to get the best deal, and don't be afraid to walk away if you can't come to an agreement. There's always another home.
