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Do's and Don’ts First-Time Home Buyer

Tips for Buying Your First Home

As a first-time home buyer, learning all the do's and don'ts of buying a house can be overwhelming. However, it doesn't have to be complicated. Here's what you should and shouldn't do when buying your first home.

What should a first-time home buyer know?

If you're a first-time home buyer, you should know how much house you can afford. This will involve figuring out your budget for both a down payment and a monthly payment as well as knowing what kind of mortgage rates you might qualify for.

Know what you can you afford: A good way to determine what you can afford is to get pre-approved for a home loan before you start shopping for a house. You should contact your mortgage lender first to complete an application. Your lender will most likely request income documentation and other necessary documents that are related to your finances. Once the application has been completed, your lender will use that information along with your credit report to determine the loan programs, rates and loan amounts you qualify for.

Know your monthly payment and down payment: If you want to avoid the mistake of looking for homes that are above your price range, use our affordability calculator to get a better idea of what you can afford based on your monthly budget. You'll also need to have a sense of how much you want to spend on the down payment. While 20% down is standard and can help you secure lower interest rates and avoid mortgage insurance, there are little to no money down options available as well as down payment assistant programs. Be sure to talk with your lender to find the best options for you.

Know your credit score: Finally, you should know your credit score and be prepared to work on strengthening it if necessary. In the eyes of your lender, the higher your credit score, the lower the probability you may default on the loan. With a higher credit score, you are also more likely to receive a lower interest rate. If you have a less-than-perfect credit score, you may want to improve your credit before you start the home buying process so you can qualify for a lower rate.

What should you not do when buying your first house?

Don't look outside of your price range: As a first-time home buyer, it can be hard to determine what you can afford. You should have plenty of wiggle room in your monthly budget after your mortgage payments, and your down payment should never drain your savings completely. If you're moving from an apartment to a home, odds are that you are going to need some furniture or a little bit of money to decorate your new home. You should also keep a rainy-day fund to cover any emergencies or unexpected repairs. Fortunately, as a first-time home buyer, you might qualify for a down payment assistance program that doesn't require 20% down.

What are the do's and don'ts when buying a house?

Once you've decided you're ready to start house hunting, there are a few do's and don'ts you should be aware of as you go through the process as a first-time home buyer.

DO get pre-approved for a mortgage loan

Home buying doesn't always begin with home searching. Ideally, it begins with a pre-approval from a trusted mortgage lender. Remember that buying a home should be a financial decision, not an emotional one. By going to a lender and getting pre-approved first, you will know how much home you can afford so you can search for homes in that price range.

DO save up for a down payment and have the money ready

One of the most important steps in buying a home is saving for a down payment. Typically, a 20% down payment is recommended, so you can avoid having to pay for Private Mortgage Insurance (PMI). PMI protects the mortgage company in case you’re not able to pay your mortgage and usually costs 1% of the total loan value. It is included in your monthly payments. A higher down payment can also mean lower monthly mortgage payments.

You don't want to stretch your budget by putting too much down though. There are several loan options available that offer a lower down payment for borrowers who qualify. For example, a conventional loan featuring a down payment as low as 3% is available for a first-time home buyer. An FHA loan also has lower down payment options.

If you plan to pay cash for your down payment, make sure it's not in a safe or in an overseas account. The money must be in a U.S. bank account, so try to take care of this before the time of payment. If your down payment is a gift, have the donor give you the money as soon as they can. Don't forget to follow all the necessary steps and documentation for the gift.

DO check to see if you qualify for down payment assistance programs

Depending on where you live, you may be able to receive down payment assistance through the state or local government, non-profits, foundations, and other entities. These programs can help with down payment assistance, closing costs assistance, and discounted interest rates.

In many cases, these programs offer a zero-interest forgivable loan or grant designed to help first-time home buyers. It’s important to investigate your available options fully as some programs may have limits on the sales price of the home or on income of the buyer.

Some examples of down payment assistance programs are:

  • Community heroes: For law enforcement personnel, first responders, EMTs, medical professionals, educators, and veterans.
  • Recent college grads: Popular in states that have a large college graduate population and also a great enticement for graduates to stay local.
  • Minority programs: Encourages homeownership for all.
  • Historic areas: Historic districts often have a lot of charm but might need a lot of TLC. There are often grants and improvement loans available for restoring historical homes.
  • Leverage your lending partners: New American Funding has access to information on thousands of programs across the country and can do a quick search of programs available in your area.

DO gather your important documents and keep them in one place

Make sure you keep all important documentation such as pay stubs, W-2s, tax returns, and bank statements that will be needed to buy your new home. It doesn't hurt to make copies of these important documents and keep them safely filed away. Try to avoid making large deposits in your bank account before buying a home. If you have to, make sure you document where the money came from so that you can explain to your loan officer when they start asking about your income, debt, and assets.

DON'T change jobs or employers

If you are thinking about changing jobs, make sure you do so before you apply for a loan, or wait until your loan has been funded. Your loan can’t fund unless you are working for the company that your lender has verified. Changing your career mid-process can hurt the chances of your loan going through so it's best to just wait it out.

DON'T apply for credit or run up a balance

You want to go into mortgage applications with the best credit possible. Don't apply for new credit or give your personal info to anyone else who might run your credit while the loan is still in process. In fact, if you can, you should avoid applying for new credit for at least one year before applying for a home loan. This is because credit inquiries can drag your credit score down for up to one year, and they stay on your credit report for two. You should also try to avoid making large purchases, such as a car or boat, on your existing credit cards as this new debt may cause your credit score to take a dip as well.

DON'T forget about closing costs

Along with your down payment, you may or may not need to pay your closing costs. It really depends on the program and terms of the loan you have selected.  Being a first-time home buyer, you may be wondering how much it’s going to cost to close on a home. When you are preparing to close on your home, your lender will give you an exact number, so you will know exactly how much you will need. Some of these closing costs may include the appraisal, home inspection, homeowner’s insurance and more.

Get clear on your budget as a first-time home buyer with our mortgage calculator, and make sure you're ready to hit the ground running with our first-time home buyer guide and resource center.

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