10 Essential First-Time Homebuyer Tips

Are you buying a house for the first time? Before you start house hunting, check out these first-time homebuyer tips to help you navigate the process. A little extra knowledge and strategy can help you save money and avoid costly mistakes that could derail your home buying plans. Read on to find these 10 tips for first-time homebuyers.

1. Check your credit early

 When: 2-3 months before you apply for a mortgage

Your credit score has a huge impact on the mortgage interest rate lenders will offer you. Check yours before you apply for a mortgage to see if there’s anything you can do to boost it to 780 or higher — if so, you’ll get the lowest mortgage rates and easiest path to approval. If you can’t boost your score to that level, try to get it as high as possible.

Three quick strategies that may help:

• Pay your bills on time. Late payments pull your scores down quickly.
• Pay off your card balances. Keep in mind that it may take 60 to 90 days to update your credit report after you’ve made a payment, so plan to pay off or reduce your credit card debt ahead of house hunting.
• Don’t open new credit accounts. New credit cards, retail store cards and car loans may ding your score, so avoid any new credit applications during the homebuying process.

2. Pay off debt

 When: Before you apply for a mortgage

Along with your credit score, your debt-to-income (DTI) ratio is a factor that can make or break your loan approval odds. Lenders calculate your DTI ratio by dividing your total debt, including your new house payment, by your before-tax income. The preferred standard is 43% or lower.

A high DTI ratio also limits how much home you can afford. But there are ways you can reduce your current debt. For example, if you’re down to a few payments on a car loan, pay it off. Pay off as much credit card debt as you can, or remove yourself as an authorized user on credit cards you don’t use. These small steps could make a big difference.

3. Make as large a down payment as you can

 When: At closing

First-time homebuyers often believe you need to put 20% down to buy a house, but there are a number of programs that require only a 0% to 3% down payment. However, putting down a larger down payment gives you several advantages:

• A lower mortgage payment
• A better interest rate
• More buying power (allows you to buy a more expensive home)

If you’ve already put all of your spare savings toward your down payment, you can still boost it with these strategies:

4. Research first-time homebuyer down payment assistance

 When: Before you choose a lender

You may be eligible for down payment assistance (DPA) depending on your income and the location of the home you’re buying. Some state and local government housing programs cover both your down payment and closing costs. Most of these programs set strict income limits that vary based on where you live.

Not all loans work with all DPA programs, though. If you’ve identified a DPA program that will work for your needs, make sure you ask prospective lenders whether they’ll take it before you commit. You may need to shop with a few extra lenders if you’re applying for a specific DPA program in your area.

5. Give yourself time to build your down payment savings

 When: Consider four to 10 years ahead of purchasing

In today’s market, a median down payment for a first-time homebuyer is 9% — on a median-priced home, that means a $37,836 down payment. Amassing these necessary savings can be a big hurdle for first-time homebuyers. It takes patience and consistency while you’re in the saving phase.

It’s also important to keep your down payment funds in the bank (not under your mattress or in a safe at home, and likely not in an investment account, which can be too risky for short-term savings goals). The minimum amount of time you can have money in a bank account and still use it for a down payment is typically 60 days.

6. Make sure you have a financial cushion

 When: Before you begin shopping in earnest

Most first-time homebuyers understand the hefty financial investment it takes to own a home — but sometimes they forget to plan for the unexpected. Ask yourself these questions:

• Do you have a buffer for home maintenance expenses? Experts recommend setting aside 1% of your home’s value to cover unexpected repairs and ongoing maintenance. That rainy-day roof leak or summertime air conditioning breakdown is your responsibility as a homeowner.
• Have you set a maximum housing expense budget? Set a mortgage payment limit ahead of time that leaves some wiggle room in your budget.
• Do you have mortgage reserves? Some loan programs require mortgage reserves, which is “rainy-day” cash set aside to cover your mortgage payments for a set number of months. Lenders may require reserves if your credit score is low or you have a lot of debt compared to your income.

Mortgage preapproval isn’t optional

Once you’ve done the legwork to get your finances ready for homeownership, it’s time to start the mortgage preapproval process. Most sellers won’t even accept an offer without a preapproval letter, so don’t skip these steps.

Just remember: If you don’t tell the lender ahead of time what your payment budget is, the preapproval letter will reflect the maximum you qualify for based on your loan application. Ask the lender to adjust the amount down if the max doesn’t fit with your spending plans.

7. Shop for a mortgage lender

 When: Once you’re ready to buy

Borrowers who shop for a mortgage could save more than $76,000 on average over the life of their loans, according to LendingTree data. Contact mortgage brokers, banks and even your local credit union to see what they offer.

Make sure to gather quotes on the same day. Rates change daily, so if you complete all of your loan applications on the same day, you’ll be able to make an “apples-to-apples” comparison when reviewing your loan estimates.

8. Lock in your interest rate

 When: Once you’ve been approved for the home loan

When you’ve found a specific home to buy and you’ve applied for a mortgage, you should lock in your rate — this is especially important if mortgage rates are on the rise. Make sure you understand the terms of the rate lock, including:

• How many days your rate will be locked
• What your lock expiration date is
• What the cost of locking in the loan is

9. Get a home inspection

 When: Before finalizing the contract for home purchase

Even if you’re buying a fixer-upper or have agreed to purchase the home “as-is” — meaning the seller isn’t required to make any repairs or improvements to the home before closing — you should always get a home inspection. You need to know the condition of a home before committing to buying it.

Fixer-upper home loan options

If the home is in need of major renovations, you may want to consider a Fannie Mae HomeStyle® Renovation or FHA 203(k) loan. These fixer-upper loan programs allow you to roll the cost of repairs and renovations into the same loan you borrow to buy the home. Plus, the loan amount is calculated based on the value of your home after renovations, which gives you extra borrowing power.

10. Don’t be afraid to negotiate home price

 When: Before closing/after home inspection

There are a number of ways to negotiate a home price with a seller, and it’s a common strategy. 63% of homebuyers have haggled over price, according to a LendingTree survey.

Talk to your real estate agent about any of these negotiation strategies:

• Ask for the seller to make repairs. If there are crucial repairs needed on the home, you can ask the seller to cover them.
• Ask for closing cost credits. Depending on the type of loan you take out, you may be able to get the seller to pay up to 6% of your sales price toward closing costs.
• Negotiate for a lower price. If the seller won’t pay closing costs, you can request a reduction in the sales price.
• Be prepared to walk away. An unreasonable seller may not be worth the headache. If the seller won’t budge on closing costs or repairs, it may be time to restart your home search.