We've gathered a few solid tips to help first-time home buyers get started on the process.
Today is Your Someday
Millions of people buy homes each year, and you want to join them. Follow these steps to make sure you begin your career as a homeowner the right way.
- Figure out what you can afford. Lenders like to know that you can afford the house you’re buying, so they look closely at your debt-to-income ratio. As a rule of thumb, your total mortgage payments, including principal, interest, taxes and mortgage insurance, shouldn’t be more than 28% of your monthly gross income. Your total debt payments, including mortgage, credit card minimums and student loans shouldn’t add up to more than 30% to 40% of your pretax earnings.
- Clean up your credit score. This all-important number often determines whether you can get approved for a mortgage and the interest rate you’ll pay for it. Take a look at your credit report for free once a year from each of the three major scoring bureaus: Equifax, TransUnion and Experian. It’s also relatively inexpensive to pay to view your credit score. While you’re at it, correct any errors on your credit history that may hurt your rating.
- Accumulate a down payment. A 20% down payment makes lenders happy, but some may accept less. If you’re bringing a small down payment to the table, you may have to pay private mortgage insurance, or PMI, which can raise your monthly payments. There may be ways around PMI, however. For example, Dominion Energy Credit Union’s 5/5 ARM allows as little as 10% down with no PMI payments.
- Research financing options. Government-backed loans can offer a lot of advantages. These loans are still issued by your financial institution of choice, but the financing comes from the government. Federal Housing Administration, or FHA, loans allow a lower down payment, but putting down less than 20% means you’ll pay a mortgage insurance premium.
- Calculate transaction costs. Transfer taxes, inspections, escrow services and legal costs—all of these raise what you pay when buying a home. Representatives at financial institutions like Dominion Energy Credit Union can answer questions about how much you can expect to spend on closing a mortgage loan.
- Look for assistance. If your income is low relative to where you live, there may be programs to help you buy a home. The Department of Housing and Urban Development, or HUD, lists state-by-state programs on its website, and your lender may also be able to point you toward possible sources of assistance.
- Comparison shop. Browsing online property listings will give you an idea of the housing inventory in your area, and the approximate cost. If you can’t afford the house you want, decide whether you’d rather buy something more modest and trade up later, or wait until you have the money for a longer-term home. Don’t forget, transaction costs make it expensive to buy and sell, so buying a temporary home may not be the best strategy.
- Prequalify for a mortgage. If you’ve done your due diligence and decided you’re ready to buy, go ahead and start the application process with a lender. Prequalification reveals how much you’ll be able to borrow. The next step, preapproval, tells sellers you mean business when you make an offer.
Becoming a homeowner takes a big investment, but careful preparation can make the process smoother. And remember, help is available if you need it.
Virginia C. McGuire, NerdWallet