Buying your first home is a big deal. As a first time buyer, it’s likely the biggest financial decision you’ve ever had to make. And it’s not an easy one. To help guide you through the confusion, here are four things you need to know before buying your first home.
Prep Your Credit
Having a high paying job and a reasonable down payment is a fantastic start, but it’s just that, a start. If your credit reflects a misspent youth, you’re going to need to spend a little bit of time patching it up before applying for a loan. Here’s how you can make amends for those credit card mistakes of your past:
- Check your score. A lot of people simply assume that their credit is squeaky clean. Until they check it. Get yourself a report and find out what your actual score is.
- Always pay your bills. Never, never, ever be late when paying your credit card bills. Period. It’s one of the surefire ways to damage your credit score.
- Pay more than the minimum. Lenders don’t mind people that have debt. They don’t like revolving debts, however. You need to pay more than the minimum on your bills, ideally clearing your entire balance.
- Take your time. Fixing a bad credit score doesn’t happen overnight. It may be annoying to have to put your new home plans in the waiting room, but getting a home loan with bad credit isn’t a good idea.
Home Loan Pre-Approval
Before you start going on those exciting showhome tours, we recommend getting a home loan pre-approval. This is basically the lender saying to you, “Yes, we’re willing to lend you x amount of money to help you buy a home.” There are several steps you need to go through to get pre-approval, but they’re worth the minor hassle.
The main advantage is that it gives you a solid idea of how much you can afford. Not based on a gimmicky calculator, but an actual lender. It allows you to put in an offer on a home confident in the knowledge you can take the deal over the line. It doesn’t cost anything to get pre-approval, so it’s a no-brainer step.
Research Assistance Programs
If you’re wondering whether buying a new home is even possible for you and your family, assistance programs may be that golden ticket you’re looking for. They’re designed to help those that are in slightly less favorable financial positions.
For American citizens, the FHA loan is backed by the Federal Housing Administration. They’re great for first-time buyers, as all you need is a 3.5% down payment and your credit score needs to be above 580 (i.e. not a very high score). You can even borrow if your score is between 500-579, although you’ll need a 10% deposit. Check the requirements and find out if you’re eligible.
Stick to Your Budget
Most home buyers will roll their eyes at this tip, thinking it’s coming straight out of the mouth of Captain Obvious. Yet millions of Americans have made this mistake: buying a home they simply can’t afford. And that trend reflects our spending habits as a whole, with 43% of American households spending more than they earn each year.
Foreclosure statistics make for scary bedtime reading. According to the Mortgage Bankers Association, 1 million American homes enter into foreclosure per year. Sure, there are various reasons why this can happen, but people not sticking to their budgets is right near the top of that list.
Avoid making a decision that will hang a big weight around your neck for the rest of your life. It’s not worth that extra bedroom. It’s not worth that beautiful garden. It really isn’t. Stick to your budget, no matter how enticing that white picket fence is.
Keep Researching
The tips you’ve read here are arguably the most important things you need to know before signing that home loan deal. But it’s not a complete list. Keep researching and do your due diligence. We’ve made this point throughout this article: this is going to be a major financial decision, read the small print, look at the purchase from a financial standpoint, and don’t be afraid to walk away.
