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Buying a house is, of course, the first-time homebuyer's dream. But before you buy your first home, you need to prepare yourself for what lies ahead.
And when you’re ready to buy your first home, there are a few things that you should consider doing before you actually go out and look for a property.
In this post, we’ll show you 6 of the best tips for first-time homebuyers in 2022.
Focus On Your Budget
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A home purchase is a major financial decision. So, before you move forward, it's important to have both your finances and your budget in order.
First, take a look at your monthly expenses. Do you spend more than you make each month? If so, you'll need to cut back on any unnecessary purchases to free up more cash for savings. Next, calculate how much money you have left each month after paying off the monthly expenses you can't reduce.
Housing prices in the Charleston area grew significantly in 2021 due to low housing inventory, high demand and lack of new construction. The higher values of homes are predicted to remain through most of 2022 although not near the increase we saw last year.
Because of those higher home prices you'll need to plan accordingly. If you want to avoid PMI (Private Mortgage Insurance), you'll need to bring a 20% downpayment to the table for a conventional loan. If you don't have much saved, you'll need to work on building your cash reserves by saving and cutting costs as mentioned before. There are mortgages without PMI and lower down payments, but you can expect a higher interest rate which means paying even more for your home over the long term.
But, how can you save up for a 20 percent down payment if you don't know how much home you can afford in the first place? Well, keep reading for more tips on how to get the absolute most for your money.
Get Your Credit In Order
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Most first-time buyers aren't going to be able to make an all-cash offer on their first home. So, you're most likely going to need a mortgage. And one of the things mortgage lenders will look at is your credit report. Your overall credit score plays a big part in what loans and mortgage rates are available to you when applying for a mortgage. So, it's important to figure out what your credit score is and then work on improving it if need be.
Some banks offer free credit score checks, or you can also try a trusted website like Credit Karma to get your credit scores from the two major reporting agencies.
Once you know your credit score, what's next? Well, various loan programs require certain credit scores. First, let's look at what the credit scoring system looks like:
Graphic: Experian
While it is a myth that you need great credit to buy a home, the lower your score, the fewer options you'll have. Credit scores for most loan programs start around 620, but the FHA loan program will even grant a loan with a score of 580.
Let's take a look at the minimum credit scores for some of the major loan types:
Conventional loan: 620+
FHA loan: 580+
VA loan: 620+
USDA loan: 640+
If your current credit score doesn't fall into the limits of your desired program, what can you do to improve it? Lenders will want to see that you're making loan payments on time, have no major credit issues recently, and that you haven't filed bankruptcy or foreclosures. Spending some time making sure you pay your bills on time, reducing any credit card debt by paying down those balances, and having a good mix of credit types in good standing like revolving credit, installment credit, and retail credit will help you work toward higher credit scores over time.
Speak With a Lender
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We always recommend that you speak with a lender before beginning your home search. Speaking with a lender is important as far as figuring out what type of mortgage loan would work best for you and what you’re pre-approved for so you know your budget.
In the current real estate market, it's essential that you have a mortgage preapproval letter before you begin looking for a home. A pre-approval letter is a document that states how much home a bank is willing to loan you for the purchase of a home. This not only gives you a certain amount of "Buying Power", but it also lets a home seller know you're serious about purchasing a home.
And when seeking a pre-approval letter, lenders will typically look at proof of income, credit history, and what your DTI or Debt-to-income ratio is to decide how much money they feel comfortable loaning you. This is why we recommend addressing the first two tips before anything else.
Find a Real Estate Agent
You can certainly speak to a lender before beginning to work with a real estate agent, but a good real estate agent usually has a large network of services you'll need to access in the process of buying a home including a mortgage company. For that reason, they'll be able to recommend the best lender for your particular situation.
In addition, your local real estate agent should be up-to-date on all the current regulations, market conditions and have intimate knowledge of the areas you're most interested in buying in. They'll go over the entire home buying process, frequently communicate with you to keep you in the loop and best prepare you for the process so there are no surprises.
When it comes time to make an offer on a home, your agent will advise you on the best course of action, submit offers and negotiate on your behalf.
Narrow Down Your Wish List
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By the time you've chosen a real estate agent to work with, you may have a wide-ranging list of things you want for your dream home, and that's great! However, it's important that you narrow down your wish list and focus on what’s important to have in a home such as location, community, features, etc. Doing so helps your real estate agent suggest available homes and also helps you to stay within a realistic budget and make the best decision.
For example, if you're planning on raising a family, you'll probably want to live near schools and parks. If you plan on commuting to work, you'll want to be close to public transportation.
Is it important your home has a garage or a large fenced-in backyard? Two bedrooms or three? Creating a list of "Must-Haves" and "Good-to-Haves" Allows your agent to narrow down which areas to consider that will fit within your budget and wish list.
Finally, Don't Be Afraid to Ask For Help
If you've read this far and still feel like you can't afford to buy a house, don't worry - there are plenty of resources available to help you out.
The government offers programs like the Federal Housing Administration (FHA), which helps low-income borrowers purchase homes and other first-time homebuyer programs. In addition, private lenders often offer loans to qualified applicants who meet certain requirements.
At Charleston's Best Home Team, we're always available to answer questions and we happen to have a lot of answers! Get in touch today so we can help you on your way to homeownership!
For additional reading about the home buying process, check out our other posts about Why You Shouldn't Wait To Buy Your New Home, 6 Things to Avoid After Applying for a Mortgage and How To Avoid A Bidding War When Buying a Home.