Getting ready to buy your first house? Money Girl helps you make one of the biggest purchases of your life with 7 tips to get prepared, save money, and become a happy homeowner, no matter your age.
Tip #2: Focus on Building Credit
For the vast majority of home buyers, you’ll need to qualify for a home mortgage to purchase property. Building credit is always important, but it’s critical before buying a home. Whether you’re a first-timer or a seasoned homeowner, your credit is a primary factor that mortgage lenders consider when evaluating you.
Not only does repairing and building credit help you get approved for a mortgage in the first place, it’s the key to locking in a low interest rate that saves huge amounts of money over the life of your loan.
For example, if you get a $200,000 fixed-rate mortgage with excellent credit, you’ll pay about $145,000 in interest with a 30-year loan. But if you have average credit, you’ll pay close to $190,000 in interest for the same loan.
Having less-than-stellar credit costs you $45,000 just in interest. Even if you sell your home before paying off the mortgage, having excellent credit translates into a monthly payment that’s $125 less than if you have average credit.
If you invested $125 per month for retirement, instead of paying it to a mortgage lender, it could easily grow into a nest egg worth over $200,000 within 30 years. Small financial habits, like how you handle credit, really add up. Read 6 Steps to Build or Repair Your Credit Before Buying a Home for key strategies to follow ahead of your home loan application.
Building credit takes time, and Millennial home buyers may have a short credit history or more student loan debt, compared to Gen X and Baby Boomers. That means Millennials should review their credit reports and make financial adjustments earlier in the home-buying process than older buyers.
Tip #3: Check Out First-Time Homebuyer Programs
There are many great programs for first-time homebuyers that may include mortgage interest subsidies or down payment assistance. But did you know that even if you owned a home in the past, you may still be eligible?
Many first-time homebuyer programs define a first-timer as someone who has not owned real estate in the past three years.
Many first-time homebuyer programs define a first-timer as someone who has not owned real estate in the past three years. So be sure to investigate and ask your mortgage lender how these programs could save you money, no matter your age or even if you owned a home in the past.
The U.S. Department of Housing and Urban Development (HUD) and one of its agencies, called the Federal Housing Administration (FHA), have helped more than 30 million people become homeowners since 1934.
These agencies don’t make loans, but they insure loans. That means lenders that give them will get paid even if the borrowers don’t make loan payments. This encourages lenders to give mortgages to hopeful homebuyers who might not qualify otherwise.
With an FHA loan, you don’t need excellent credit or a high down payment to qualify. The loan limits for a single-family home vary throughout the country but typically range from the low $100,000s to just over $200,000.
Ask your lender for details about FHA programs for first-time buyers. Or contact a HUD housing counselor for free or low-cost advice about your options.
Tip #4: Estimate How Much Down Payment Money You’ll Need
Before you can qualify for a mortgage, you’ll need to prove to a potential lender that you have enough in savings to fund a down payment. It’s a one-time cash payment you pay at the home's closing.
You must make a down payment because home lenders generally won’t finance 100% of the purchase price. The bigger the down payment you can make, the less risky the loan is for the lender.
When you make a purchase offer on a home you can request that the seller pay some or all of your closing costs.
Plus, there are closing costs in addition to a home’s purchase price. These costs vary depending on where you buy a home. But remember that in real estate, everything is negotiable.
When you make an offer on a home, you can request that the seller pay some or all of your closing costs. You can also haggle with your mortgage lender not to charge certain upfront fees.
If you do negotiate with a lender to avoid fees, just make sure that it doesn’t cost you more in the long run. They can make up for fees by charging you a higher interest rate or including fees in the total amount of the loan, which means you’d end up paying interest on your closing costs.
The money for a down payment can come from your savings or gifts from family. If you’re already a homeowner, your down payment can come from the money you make when you sell your current home.
If you can make a 20% down payment on a home, you’ll avoid paying private mortgage insurance or PMI. PMI is s a special kind of insurance that lenders typically require you to pay when you borrow more than 80% of the value of a property, even if you have excellent credit.
So, exactly how much down payment you’ll need is difficult to pin down. It depends on the price of the home, the type of mortgage you get, and customary closing costs in the market. In general, you need enough cash to cover these main costs:
- Earnest money is the good faith deposit you make on a home when you submit an offer. The customary amount varies by market but might range from 1% to 3% of the offer price. If your offer is accepted, the funds are applied toward your closing costs. If not, your earnest money is returned to you.
- A down payment is the percentage of the home price that you must pay at closing. The more you put down, the lower your mortgage payments will be. Some loans require you pay 10% to 20% of the purchase price. Other loans designed for first-time home buyers, such as an FHA loan, may only require 3% down.
- Closing costs are fees you must pay at the settlement or closing. They typically include the loan origination fee, appraisal, survey, inspections, attorney fees, taxes, title insurance, and any other processing expenses. You should receive an estimate of your total closing costs from your lender, so you aren’t caught by surprise.