The 5 Essential Tips for Buying Your First Home
Even after the recent financial crisis and mortgage market crash, many Americans still see homeownership as an essential financial and personal milestone. But purchasing a home is a big step that can not only be thrilling, but also nerve-wracking if you don’t know what to expect. If you decide that the timing is right, there are some tips for buying your first home that can help make the process flow smoothly.
1. Improve Your Credit
Chances are that you’ll need to borrow in order to buy a home. Lenders will want to check your credit score to verify that you are likely to repay a debt obligation. Since the recent financial crisis, your credit score is even more important than ever when applying for a mortgage. You can keep your credit score high or improve it by paying your obligations on time, keeping your other debt low, and avoiding additional credit inquiries during the six months leading up to your house hunt. The higher your credit score, the lower your mortgage rate — and the more money you’ll save.
2. Know Your Financial Limits
What can you afford to pay for a home? It’s always smart to start with the “30 percent rule.” This rule states that your housing costs should amount to no more than 30 percent of your take-home pay. So if you make $3,500 per month, you should pay no more than $1,050 per month for housing. This includes your mortgage principal and interest, and should also include your homeowner’s insurance and property taxes where applicable. Use an online calculator to estimate your price range, then only look at homes that fall within those parameters.
3. Be Realistic About the Costs of Homeownership
Of course you know that you need to afford your monthly mortgage payments, but there are so many other expenses to consider. Some overlooked costs of homeownership include utilities, maintenance and repair expenses, property taxes, liability risk, furnishing, and any money spent on keeping up the home or property. Consider all possible additional costs when calculating your monthly expenses.
4. Get a Mortgage Preapproval
One of the best things you can do as you prepare to buy your first home is to get a mortgage preapproval. Contact between three and five lenders to find out what your best interest rate is likely to be, then, after deciding on a lender, ask for preapproval. You will need a number of documents, such as tax returns, pay stubs, and your credit report, before you can be preapproved. Preapproval is crucial because it allows you to lock in a good interest rate, and it provides documentation you can show sellers and agents when you make an offer.
5. Don’t Buy a Home to “Grow Into”
One of the best tips for buying your first home is to avoid purchasing a house that’s bigger than what you need. According to the National Association of Realtors, millennials expect to stay in their first home for 10 years, but actual tenure is less than that. Chances are that you’ll move after buying your first home, so buying something to grow into may not be the best option.
Buying your first home is a big step and a fantastic investment. The more you educate yourself on the process beforehand, the less stressful becoming a homeowner will be. Keep these tips in mind as you begin to plan out where you are laying down your roots.
Miranda is a financial journalist and money expert. She covers business and finance topics for a number of outlets, including for U.S. News & World Report, Forbes, Huffington Post, Business Insider, and AllBusiness.com. Miranda also does corporate work for companies like H&R Block and Equifax. She lives in Pennsylvania with her husband and son, where she enjoys reading, travel, and the outdoors.