Thanks to low mortgage rates, a housing glut, and generous tax incentives, mortgage applications are surging. Although the housing market is still a ways from a full-scale rebound, it is a great time to buy a home—especially your first. Over the years I’ve written several posts with mortgage information to help first-time home buyers navigate the complicated and stressful home-buying process. Here’s a recap of what you’ll need to know as you prepare to buy your first home.
Understand how mortgage rates work. Before we were in today’s economic mess, you probably remember hearing about how many people were starting to have trouble making payments on adjustable rate mortgages, or ARMs. This post briefly describes the difference between fixed rates and ARMs, as well as what mortgage points are, and whether you should ever pay them on your mortgage. Compare current mortgage rates and get good-faith estimates from a few lenders on what your rate and costs would be.
Be patient, and remember a few important things about buying a home. Buying a home—especially your first home—is a huge decision. Take your time, don’t let brokers pressure you, and make sure you’re ready. It’s better to buy a home when you’re financially prepared to do so, not just because rates and housing prices are low.
Determine how much house you can afford. I do not subscribe to the philosophy that you should treat your home as an investment. Yes, hopefully it will appreciate over time. But you should buy it to be your home. That means you should only spend what you can afford today.
Consider condos carefully. Condos are popular among first-time home buyers, especially among those living in urban areas. But consider the pros and cons of condo living carefully. Condos make some things easier (like not having to worry about yard work or exterior painting), but they come with their fair share of headaches.
Get both buyers’ credit in shape. If you’re buying your first home with a spouse, partner, or friend, you’ll both need great credit to qualify for the mortgage. If one of you is struggling with poor credit, you’ll need to be prepared to buy the home with only one borrower on the loan. To do that, the signing borrower will need to have enough income and assets to qualify alone. So check your credit score and take steps to improve your credit if it needs it.
Start to save cash for a down payment and more. Having a down payment of up to 20% of the home you want to buy is almost a necessity in today’s tighter credit market. And, not only will you need a down payment, many mortgage lenders will want to see that you have at least six month’s worth of mortgage payments “on hand”. So keep stashing money away in a high-yield savings account as fast as you can!
Get mortgage pre-approval before you shop. You’ll want to make sure you can get approved for a fair mortgage rate before you find your dream house. That’s where pre-approval comes in. Shop around with several local banks or mortgage brokers. You can start by getting free, no-obligation mortgage quotes online.
Finally, remember that there’s nothing wrong with renting. Renting has some serious advantages that you’ll give up as soon as you buy a home. It’s just another reason to make sure you’re ready to buy a home—both financially and emotionally.
If you’re on the road to first-time home ownership; good luck! If you have any tips to share with others based on your experiences, please share them!