How to Buy Your First Home: 10 Things You Need to Know

There are many steps involved and the technical aspects of real estate might seem daunting at first. With so much jargon, paperwork and processes, you may be thinking that it is too complicated for you. But fear not.

In this article, we are explaining how to buy your first home, and share with you the 10 things you need to know before buying a home.

1. Determine What You Can Afford

Before hitting the listings for the house of your dreams, you have to take stock of your financial status. Determining how much house you can afford is more complex than it might seem.

Depending on the type of loan you might need, your monthly mortgage payments can't exceed a certain percentage of your monthly income. For example, if you use a Federal Housing Administration (FHA) loan, your monthly mortgage payments can't be more than 31% of your total monthly income. There are certain ways you can go higher, but these require special circumstances.

In addition to that 31% of your monthly income, you will have to add in your taxes, insurance, utility bills, and other monthly costs your family is making. If the difference between that total and what you are paying now for rent is positive, then you can afford that mortgage.

You may find many suitable houses, but the price tag and the other expenses you might have to make will determine what you can afford.

2. Compare Financial Programs for First-Time Buyers

As a first-time buyer, you have several options that will make buying your first home easier. The Department of Housing and Urban Development (HUD) aims to help you buy an affordable home.

As we've seen above, you can get an FHA loan even if your credit is not spotless (more on that later), and you can get a mortgage with less down payment as well. FHA insures mortgages for lenders so they can give you more favorable deals.

Lenders would consider better mortgage deals for you through FHA, but the process is complicated and you might need a trustworthy real estate agent to find the best FHA solution for you.

3. Fix Your Credit Score

Regardless of FHA loans, you can always get a better deal with high credit score. For example, if your score is below 700, you will have to pay a higher down payment to your lender. This is done because lenders need a way to protect themselves against the risk of you defaulting on your monthly mortgage payments.

By requiring you to pay as much as 20% of the total cost up front, your lender will have something tangible left if you stop following through with your monthly payments since a low credit score indicates you might not be reliable.

With a score of 700, you will get more favorable deals. A credit score of 750 or higher will ensure you get the best mortgage rates in the market. So, if you improve your credit score before shopping for a mortgage, you will be able to improve your financial future.

4. Save For the Down Payment

Even if your lender offers you private mortgage insurance, you will still be required to pay some form of down payment. Down payments can range from 3% to 20% of the total house price.

The size of the down payment depends on your credit score, your loan terms, and the total cost of the house you will be buying.

With FHA loans, you can lower your down payment down to 3.5%, but you will be required to pay higher mortgage rates as they will include the private mortgage insurance premiums on behalf of the lender.

Since most home buyers struggle with a 20% down payment, there are ways to reduce it through down payment or homebuyer's assistance. We will examine down payment assistance later in the article.

In addition to the down payment, you will need enough money to cover two other costs: earnest money and closing costs.

Earnest money is the first "good faith" deposit you offer to your lender when you first make an offer. This is a relatively small sum that can be as low as 1% of the price, but you still have to have that in hand. If the lender accepts the offer, the earnest money goes towards your closing costs, otherwise, you get them back.

Closing costs refer to the fees you pay when you settle the deal. These include all processing expenses, attorney fees, real estate agent fees, lender charges, survey charges, appraisal costs, inspection costs, insurance, and taxes.

5. Compare Similar Properties

Before committing to one deal, it is a good idea to compare similar properties for better prices or to gauge if the mortgage you are getting is fair or not.

Even costly mortgages are less expensive than short-term home ownership or renting, so it is important to make the move. Nonetheless, by comparing, you will be able to find houses with all the features you need within your budget.

Do not aim to close the deal quickly. Take your time to examine your options, educate yourself and compare.

6. Shop for Mortgage Rates

Buying your first house is probably the largest investment deal you will be making to date. It involves six figures, lots of paperwork and complex procedures.

The mortgage for your house is going to represent the largest debt you held so far. That is why you have to shop for your mortgage carefully and compare rates as you did with properties. Even a tiny difference in interest rates can have a huge impact on your financials down the road.

7. Examine Different Mortgage Types

When shopping for a mortgage, keep in mind that there are several different types of mortgage you can qualify for.

Mortgages fall into two broad categories: conventional loans and government-backed mortgages.

Most mortgages are conventional loans. These are issued by private lenders such as banks, credit unions, and mortgage firms. Government-backed mortgages are insured by the government and are meant to help first-time buyers, as well as certain groups of people, such as senior homebuyers.

8. Consider Private Mortgage Insurance If You Can't Make the Down Payment

If you can't make the full down payment, you should see into private mortgage insurance. As we've seen above, private mortgage insurance raises your monthly rates in order to offer you lower down payment.

This type of insurance protects your lender from you defaulting on your payments while giving you the flexibility to enter your home faster.

There is also mortgage life insurance that protects the borrower and their family in case of the borrower's injury or death. This insurance pays the remainder of the mortgage if something happens to the borrower.

9. See If You Qualify for Any Homebuying or Payment Assistant Programs

Depending on where you live and your family status, you might qualify for homebuyer's assistance. This ranges from having the lender pay the closing costs to getting a favorable FHA loan with a 3.5% down payment.

If you want to make your home more energy efficient, there are energy-efficient mortgages that incentivize low energy consumption. Similarly, you can get assistance if you manufacture mobile homes

10. Negotiate

Finally, you should not hurry to close the first deal that seems suitable to you. As you browse for more mortgage options, negotiate your loan terms with your lender and ask your real estate agent for guidance.

A bit of research and patience can transform your mortgage and give you a much better deal. If you change your mind and want to switch lenders after the purchase, you will have to transfer your mortgage to another lender. This will incur sizable surcharges and you should avoid it at all costs. So, plan in advance!

Now That You Know How to Buy Your First Home...

Knowing how to buy your first home is the first step to a secure and happy future inside the house of your dreams. There is no better time to start working on buying a home than now.

Here at the Realty Edge, we have helped hundreds of home buyers with all their real estate needs. Browse our listings for a fantastic selection of real estate properties in Minnesota, check our down payment assistance resources, or contact us directly about your real estate plans!