Must-Dos For First-Time Homebuyers
As with any big project, buying a house without losing your mind is all about getting the details right, start to finish. This article covers the “start” part. Do these things before you start looking.
Start saving early
Ugh, I know. But you do not want to find the house of your dreams only to be unprepared to take action. That’s a heartbreaker. Here are the main costs to consider when saving for a home:
DOWN PAYMENT
The amount of your down payment depends on the kind of mortgage you get. Some first-time buyer loans allow for as little as 3% down if you have excellent credit. But it can be challenging to save up even for a small down payment. I mean, a 3% down payment on a $300k home is $9k. Pro tip: Use a down payment calculator to decide on your goal, then set up automatic transfers from your checking to your savings to get started.
CLOSING COSTS
These are the fees you pay to finalize your mortgage, and they range from 2% to 5% of the loan amount. You can ask the seller to pay a portion of your closing costs, and the more the better. In our example of a $300k house with a $9k down payment, that leaves a loan amount of $291k. If closing costs were 3.5% of that loan amount, that’s another $10k.
MOVE-IN-EXPENSES
You’ll need some cash after the home purchase, so set aside some money for immediate home repairs, upgrades and furnishings. For the sake of this exercise, let’s say $5k. So to sum it up, on our imaginary $300k house, we need a $9k down payment, $10k for closing costs and $5k for move-in expenses. This amounts to $24k in cash. So yeah, start saving right now.
Deploy these small saving hacks that'll add up over time
Know what you can afford
Figure out how much you can *really* pay for a house before you start looking. Here’s a cool home affordability calculator to help you set your price range based on your income, debt, down payment, credit score and more.
Fix your credit
Your credit score will determine whether you qualify for a mortgage and how good your interest rate will be. For most loan types, the minimum credit score you’ll need is 620. But higher is better, and borrowers with scores of 740 or more will get the lowest interest rates. So get your credit right, right now. Here’s what you do:
Get free copies of your credit reports from each of the three credit bureaus—Experian, Equifax and TransUnion. Review them carefully and dispute any errors that could hurt your score.
Pay all your bills on time. Duh.
Keep your credit card balances *very* low. Like below 20% of your available credit low.
Keep your credit cards open. Your total available credit is the amount of credit you have if you add up the limits of all your available credit. So, closing any one of your cards will decrease the amount of total available credit you have. Another way to look at it is that closing any one card increases the amount of your total available credit that you’re using. Either way, bad idea. It lowers your credit score.
Track your credit score. Credit Karma offers a free credit monitoring service that updates each week. There are few better feelings than watching your credit score climb steadily because of your smart choices.
Know your mortgage options
Here are the main ones:
CONVENTIONAL LOANS
These are the normal kind of loans issued by banks. Close to 70% of all home loans are conventional. They typically cost less than FHA loans but can be harder to get, although some conventional loans for first-time buyers require as little as 3% down.
FHA LOANS
FHA loans allow for lower credit scores and down payments as low as 3.5%, but the interest rate is often not as good as with conventional loans. And also, in Hillsborough County, the maximum amount of an FHA loan is $331,760. For borrowers with good credit and a 10%-15% down payment, FHA loans usually cost more than conventional loans, so don’t do it. But for borrowers with lower credit scores and/or smaller down payments, FHA loans are often the cheapest option.
VA LOANS
VA loans are guaranteed by the Department of Veterans Affairs. They are for current and veteran military service members and usually require no down payment. With the number of military families in our community, this loan option comes up a lot in Tampa.
You also have options when it comes to the mortgage term. Most buyers go for a 30-year fixed-rate mortgage, which is paid off in 30 years and has an interest rate that stays the same the whole time. A 15-year loan has a lower interest rate than a 30-year mortgage but the monthly payments are higher.
Check out Florida's first-time home buyer programs
Compare rates and fees
The way you do this is by requesting estimates for the same type of mortgage from multiple lenders so you can compare the costs, including interest rates and origination fees.
Have you ever heard people talk about “buying points”? That’s when a lender lets you buy discount points, which are the fees you pay upfront to lower your interest rate. Hey, if you have the upfront money on hand and plan on staying in the house for a while, then yeah.
Use this handy discount points calculator to decide
Get a preapproval letter
Having a preapproval letter shows home sellers and real estate agents that you mean business, and can give you an edge over all those poor saps who haven’t already taken this step (see introduction).
Apply for preapproval when you’re ready to start looking for real. This is when a lender will pull your credit and review various documents to verify your income, assets and debt.
If you’re shopping around for the best rates, applying for preapproval from more than one lender shouldn’t ding your credit situation as long as you apply for all your preapprovals within a 30-day time frame.
Christy Rosen Clement is a Pricing Strategy Advisor®, Seller Representative Specialist®, Military Relocation Professional® and REALTOR® at Palermo Real Estate Professionals in South Tampa
