Would you like to learn some of the best mortgage tips for first-time homebuyers?
Understanding the steps to buying a house is crucial.
Buying a home involves many lingoes the average consumer may not know or understand.
Considering that most people will finance a home’s purchase for a relatively significant amount, it makes sense to get familiar with the real estate terminology that the real estate agent and the mortgage lender will likely use.
Much of what first-time home buyers need to know about the process centers around getting a mortgage.
Any good list for providing advice should include avoiding mistakes. Since you’ve never purchased a home before, it is easy to make them.
By working with a team of professionals like a mortgage broker and Realtor, you can likely not worry about such things. However, making foolish decisions can cost you time, effort, and money.
As a mortgage professional who has been in the industry for many years, it is essential for first-timers to soak in as much knowledge as possible. Those who are well educated on home financing often make fewer mistakes and get the best deal.
I love to see it when it happens. I have worked with numerous happy buyers over the years. Part of that satisfaction is by educating them and referring them to other professionals with an exceptional reputation.
I will share my top mortgage tips for first-time home buyers so you come out on top.
Tips For First-Time Home Buyers
#1: Understand Your Numbers
Most people who approve of buying a home will be able to finance more than they perceive.
For example, if your current rent amount is $985 per month, you might be surprised to learn that you could be approved for a monthly mortgage payment of $1,300 or more.
But that does not mean you should look for a home within your ability to pay.
You will likely have living expenses that don’t show up on a credit report. You will have a list of bills to pay when owning a house. Items like an annual vacation, the purchase of a better vehicle in two or three years, and your hobbies all add up over time. Maximum Real Estate Exposure also succinctly summarizes seven additional expenses you may not have thought much about.
Don’t forget about paying for mowing the lawn and plowing the driveway, as well as the monthly purchases you may make for your home.
Focus on everything you spend a month to feel comfortable with a new house payment.
Above all else, avoid these home-buying mistakes that can cost you!
#2: A Down Payment Isn’t The Only Out of Pocket Expense for Purchasing a Home
You may qualify for a no down payment or low down payment mortgage, such as the VA or FHA loans. If so, this can save you thousands of dollars at the time of purchase. However, the down payment is only one piece of the home-buying puzzle.
Before you make the down payment, you are asked to pay earnest money, which usually amounts to 5% of the purchase price. This amount is expected when you sign a contract to place an offer on the home.
If the seller accepts the offer and your loan is approved, the earnest money is usually applied to closing costs. But you are still asked to pay it upfront as a sign of good faith. Remember, earnest money is not the same as your down payment.
There is also the matter of closing costs. Some service providers are called upon each time a mortgage transaction is completed. The lender, the real estate agent, the home appraiser, the local county courthouse, a homeowner insurance agent, and the closing attorney are just some of the representatives involved in the purchase. Each will charge a fee.
All of the fees are paid when the loan is closed.
There also may be other items to consider. Hiring a moving company, transferring utilities, eating fast food while moving, and setting up the new place are also everyday expenses.
#3: Get Your Credit Score as High as Possible
One of my favorite first-time buyer mortgage tips is improving your credit scoring.
This point cannot be emphasized enough. People with the highest credit scores usually get approved for the lowest-interest mortgages and small down payment loans.
It behooves any buyer to work on increasing their credit score before applying for a mortgage to buy a home!
Look at the following chart for a simple example:
| Scenario 1 | Scenario 2 | |
| Loan Amount | $225,000 | $225,000 |
| Interest Rate | 6.00% | 5.00% |
| Term (in Months) | 360 | 360 |
| Monthly Payment Amount | $1,349 | $1,208 |
| The difference over 30 years | $50,760 savings! |
As you can see, the difference from a 1% change in interest rate is only $141 per month. However, over 30 years, that can mean a savings of $50,760 in interest.
You’ll want to improve your scores to get the best mortgage rate.
Follow these simple rules to get your credit score as high as possible.
- Pay everyone on time every month, without fail.
- Pay down all credit cards as much as possible.
- Do not close out any credit cards, especially older ones.
- Do not take on any new debt.
#4 Use Companies Like Credit Karma and Credit Sesame to Improve Your Finances
Numerous Realtors mention Credit Karma and Credit Sesame to their clients to help improve their finances.
The benefits of using Credit Karma and similar services for home buyers, particularly first-timers, can be pretty substantial. They include understanding and improving one’s credit health, which is crucial for securing a mortgage.
Credit Karma offers various tools and resources to monitor and improve credit scores. The service utilizes the VantageScore model, which, while different from the FICO scoring model used by many lenders, still provides valuable insights into your credit health.
Users can monitor their scores over time, see how they compare, and use tools to dispute errors on their credit reports. This is particularly beneficial for prospective home buyers looking to get their finances in order before applying for a mortgage.
Credit Karma provides educational content on how mortgages work, including the importance of down payment and how it affects monthly payments and mortgage insurance (PMI). They also educate potential buyers on the factors lenders consider when evaluating mortgage applications (such as credit, capacity, and collateral).
This helpful resource shows a complete comparison of Credit Karma and Credit Sesame.
Bill Gassett, owner of Maximum Real Estate Exposure, shared this with me.
Luke, I often mention these company to my clients that need the financial help boosting their credit. The best part is they are free to use. I highly recommend them to anyone who wants to improve their financial standing before buying.
#5: Include More than the New Home Payment in Your Budget
Buying a home means you are responsible for all maintenance and repairs. New carpet, paint, plumbing problems, electrical issues, or a fix to the air conditioning/heating unit are all on you. It also means that when the roof needs to be replaced, or the exterior walls need repainting, you will even need to pay for that too.
It is a good idea to set aside a certain amount of money each month to handle the repairs and eventual replacements that will occur over time. Expect to save 10% to 15% of the monthly mortgage payment as part of a rainy-day fund.
It also means paying for all utilities. The electricity, water, trash collection, natural gas, internet, and cable/TV/satellite bills are up to your discretion.
If you currently live in a place where one or more of those items are covered by the monthly rent, it may be surprising to find out how much each costs.
If possible, inquire with the real estate agent about the current monthly utility bills. This information will help you work out the budget numbers.
#6: Get Preapproved for a Mortgage
Talk to a local mortgage lender and get a pre-approval for a mortgage loan before you start looking for a home. Getting preapproved will do two things for you.
- It will define the price range for your home purchase.
- It will show real estate agents that you are serious about buying and make it easier to negotiate with sellers.
- Most Realtors will not show properties to buyers who are not preapproved.
To get pre-approved for a home, you must document your income with the lender and be subject to a credit check. An experienced mortgage lender can review your credit and income documents, determine the best type of loan for your situation, and explain which mortgage programs will approve you for the home purchase.
I contacted Michele Brown of The Home Shop NV for her take on showing homes to buyers who are not preapproved.
“It’s the first thing I ask. Are you buying with cash or financing the home? If the answer is financing, my next question is if they are pre-approved. If my buyers have no idea how much house they can afford, it benefits no one.
If the buyer can’t afford the home, they only get frustrated and disappointed. It wastes their time, the agents, and the seller who had to leave the house and prepare for a showing for a buyer who may not even be able to afford the house.
If you’re serious about looking at homes, don’t make a move without sitting down with a lender and figuring out exactly how much you can afford. If you have a pre-approval letter, and you find the perfect house, you don’t have to hesitate to make an offer on the spot. As your agent is working hard to help you buy the home, this part is solely up to you, the buyer, to complete. “
#7 Understand Your Mortgage Options
While there are numerous mortgage programs for first-time buyers, conventional, FHA, and VA loans are the most widely used. Let’s examine each one closely.
Conventional Mortgages
Conventional mortgages are the most common type of home loan. The government does not guarantee them, so private lenders, like banks and credit unions, typically offer these loans.
Some conventional loans may require only a 3% down payment for first-time home buyers. Traditional loans’ appeal is their flexibility and the variety of options they offer regarding loan terms and rates.
However, they generally require a more robust credit score and substantial down payments than government-insured loans.
FHA Loans
The Federal Housing Administration insures FHA loans. They are designed to lower the barriers to homeownership for those with less-than-perfect credit scores or who can afford only a small down payment.
For these loans, down payments can be as low as 3.5%. FHA loans are prevalent among first-time home buyers because they require lower credit scores to buy a house.
However, borrowers must pay mortgage insurance premiums, which protect the lender if a borrower defaults on the loan. PMI can be expensive, so I recommend my mortgage clients compare loan programs.
Also, remember that an FHA 203k loan is an excellent option when buying a house that needs work.
VA Loans
One of my favorite loan programs is a VA mortgage.
The Department of Veterans Affairs guarantees VA loans. They are available to current military service members, veterans, and sometimes their spouses.
These loans offer the advantage of requiring no down payment and do not require mortgage insurance. Not having PMI can significantly lower monthly payments.
Eligibility for a VA loan is based on service requirements, and there is typically a funding fee that can be rolled into the loan amount. VA loans are known for their flexible credit and no down payment requirements, making them an excellent option for eligible veterans and service members.
Analyze Which Financing Option Is Best
Your mortgage representative should outline the pros and cons of each loan program you’re considering.
Each of these loan types serves different buyer needs and financial situations. Conventional loans offer flexibility but come with stricter credit requirements. FHA loans allow those with lower credit scores or smaller down payments to purchase a home but with additional insurance costs.
VA loans offer significant benefits for veterans and service members, including no down payment and no mortgage insurance, but are limited to those with military affiliations.
#8 Understand Your Closing Costs
Another essential first-time buyer mortgage tip is to know your costs for closing a property inside and out.
Understanding your closing costs when buying a house is crucial for several reasons. Closing costs are a collection of fees paid at a mortgage transaction’s closing.
These costs are in addition to the property’s purchase price and are not part of your down payment. Common examples include the following:
- Origination fees
- Underwriting fees
- Real Estate agent commissions
- Home Appraisal
- Home inspection
- Title searches
- Closing attorney fees
- Homeowners Insurance
- Credit report checks
- Real Estate property taxes
Closing costs typically run between 3 – 6 percent of your approved loan amount.
Why They Are Good to Know
Understanding these costs is necessary for a few reasons:
- Prevention of Surprises: Many homebuyers underestimate the amount of money they’ll need to cover these costs. This can lead to an unwelcome surprise at the closing table.
- Financial Planning: Knowing these costs in advance helps you better plan and budget your purchase.
- Negotiation Leverage: Understanding who usually pays for what in closing costs can provide negotiation leverage. While most of these costs are the buyer’s responsibility, some can be negotiated with the seller to pay. For example, seller concessions allow the buyer to have some of the closing costs covered by the seller.
#9 Choose The Location of Your Home Wisely
There are many things to consider when purchasing a home. Morning commutes to school or work are a significant part of daily life.
If the new location adds 20 or 30 minutes to your daily commute, you are giving up almost an hour every day for the opportunity to live in that home.
There are also things like proximity to family, friends, shopping, and entertainment.
For example, if you habitually eat with your sibling or parents once a week at their home, will the new home location put a damper on those plans? Or, if you like to socialize with friends regularly at a particular hot spot, how far will that hot spot be from your new home?
Consider the usual routine that you currently enjoy and determine how that habit will be affected by purchasing a home.
#10: Consider the Ability to Sell the Home in the Future
While you may be buying a house now with long-term plans, that does not mean things won’t change.
Nobody can predict the future, and something may happen that causes you to sell the home. Keep these things in mind when purchasing a home:
- Never buy the most expensive home in the neighborhood—historically speaking, the most costly house will be the toughest one to sell.
- Never buy the smallest or biggest home in the neighborhood – similar to the item above, the smallest and most significant homes in a particular neighborhood will be more difficult to sell
Also, remember the target audience that would likely be interested in purchasing your home. As long as many people could consider living at your place, you should be in good shape to sell if your life circumstances should change.
#11: Review the Homeowner’s Association Agreement Thoroughly
If you are moving to a neighborhood with a Homeowner’s Association Agreement, you owe it to yourself to read the contract before buying the property. Some Associations are very laid back and have very few rules.
Other groups have guidelines about a wide range of items, including the exterior walls’ colors, the type of roofing material, what can or cannot be left in the driveway, and other details. Ensure you agree to these rules and have no problem abiding by them.
#12: Read the Purchase Contract Thoroughly Before Signing
Signing a contract to buy a home makes you liable to carry out the purchase. For this reason alone, it is wise to read the entire contract. Some sellers may have restrictions, and you need to be aware of the limitations.
For example, the sellers may require that they remain in the home for a week or 30 days after the loan closes while their new home is being built.
The sellers may expressly state that they will make no improvements or repairs to the home before the sale. These things may not prevent you from buying the home, but they could impact your plans for moving and establishing residency.
It is also essential to find out if there are any purchase contingencies. Some sellers will place a contingency on the contract. They will only sell their home if their agreement is accepted on a different house. If the contract on the other home is rejected, they cannot sell it.
#13: Investigate the Demographics of the Area
Most people wish to be surrounded by others like themselves. If you are a young married couple with a small child, you may feel more comfortable in a neighborhood with other young children.
On the other hand, being surrounded by many families and young kids may not be your thing if you are single and have no plans to marry.
Along those lines, if you are buying your home, you likely don’t want to buy a home in a neighborhood with multiple rental properties. Rental homes normally do not rise in value as quickly as homes owned by their occupants.
#14: Push Emotions Aside During Negotiations
When we want something awful, it’s easy to get caught up in emotions and ignore facts. However, this is precisely the opposite of what should happen.
When dealing with real estate agents and sellers, make sure to get a fair deal. If things need to be repaired, point that out before signing the contract.
Perhaps the price can be lowered to cover the repair costs, or the sellers can pay for it out of pocket. If the home is overpriced for the area, determine why and see if the sellers will come down on the price.
It would be best if you got a good home. However, you must protect yourself from signing a contract that could harm your interests.
#15: Determine What is Necessary Versus What is a Want
Most of us want to have the absolute best that we can afford. However, when buying a home, it is easy to claim something is necessary when it is just a want.
Make a list of things that you feel are absolute must-haves. If you have two small kids, you will likely want a bedroom for each. Having an extra bedroom for a “man cave” is probably a want, not a need.
If you have a large dog that needs daily exercise, having a large yard or a convenient park is necessary. Having 20 acres is a want.
If you suffer from achy joints or a weak back, getting a tri-level home with narrow steps may be a bad idea for the long term.
These are just examples to get you thinking. Consider what you dislike about your current place and what you enjoy. This can be the right starting point for you and help you develop a list of items and features you will need at the new place.
Conclusion
This list is not all-inclusive. However, it does cover the significant mortgage tips for first-time home buyers that must be considered before purchasing a home. Getting yourself ready for the home search, contract negotiations, and eventual purchase will make the whole process much smoother.
About the author: Luke Skar of Inlanta Mortgage—Madison wrote this article on the best mortgage advice for first-time home buyers. Inlanta Mortgage—Madison serves Wisconsin, Illinois, Minnesota, and Florida. Since 1993, Inlanta Mortgage has provided award-winning customer service to clients who need to purchase a home or refinance an existing mortgage.
