Buying a house can be stressful, complicated and a maze to get through, especially if you are a first-time home buyer. However, when you know what to expect, the process can be seamless and smooth.
This guide will help you determine how much you can afford and how to finance it.
1. How do I start?
To get started, keep these tips in mind:
- Contact at least three lenders to make sure you get the lowest rate.
- Educate yourself about the different types of loans. About 90 percent of buyers will use one of the four major loan programs: Conventional, FHA, USDA or VA.
- Understand your price range and corresponding monthly payment. Calculate your anticipated mortgage payment, including interest, principal, taxes, and insurance.
2. What is a mortgage?
A mortgage is a home loan. It’s different from other types of loans due to:
- Low interest rates — Currently under three percent.
- Extended repayment periods — Most people extend their mortgage over 30 years.
- Rates and payments are usually fixed — Most people have a fixed mortgage interest rate so the monthly payment stays the same over the entirety of the loan period.
- The loan is “secured” — Mortgages are secured by your home’s value. If you don’t make the scheduled payments, the lender can foreclose on your house.
Sometimes, you can use a mortgage to cover the entire purchase price of a home, but most people put at least some money down.
The amount you pay out of pocket is called the down payment; the mortgage will cover what’s left over.
3. How much of a down payment do I need?
Many first time home buyers think they have to put 20 percent down but this isn’t true. The average down payment is just about six percent.
You can put down even less with FHA, VA, USDA and conventional 97 loans.
The payment you put down will depend on your monthly income, your current savings, the cost of the home, and your overall home buying goals.
- Bigger down payment — Lower interest rate, lower monthly payment
- Smaller down payment — Purchase a home and begin building equity sooner, and preserve more of your savings for emergencies
4. Must I pay the down payment out of pocket?
Most mortgage lenders require a down payment, which comes out of your own pocket. But there are ways to make a down payment without draining your savings. You could find a down payment assistance program run by your local government, which offers grants or low-interest loans to assist first-time home buyers. Or, you could use gift funds for the down payment.
5. What first-time home buyer loans are available?
Home buyers can choose from many loan types. But most buyers (including first-time home buyers) will select one of four popular loan programs.
- Conventional home loan: You need good credit scores and a down payment of at least 10 percent.
- Federal Housing Administration (FHA) home loan: Best for smaller down payments and/or credit issues.
- Department of Veterans Affairs (VA) home loan: Friendly terms and low interest rates but you have to be associated with the military.
- U.S. Department of Agriculture (USDA) home loan: This is available in rural areas and low-density suburbs, and is a no-money-down mortgage with cheaper insurance.
6. What about first time home buyer grants?
First time home buyer grants may available at the state or local level, known as down payment assistance (DPA) programs. These cover all or part of your closing costs and down payment.
- A first time home buyer GRANT — You don’t have to pay this money back.
- A low-interest LOAN — Money is borrowed to cover the down payment or closing cost but you have to pay it back with minimal interest
7. How do I know how much house I can afford?
Begin by figuring out your budget for your monthly mortgage payment. Let’s say your goal is to get a mortgage payment of $1,500 a month.
First, calculate your monthly mortgage payment, which is comprised of four parts: Principal, Interest, Taxes and Insurance (PITI).
- Principal and Interest — These comprise your basic mortgage payment, including payments toward the loan balance and interest to the lender
- Taxes — You have to pay annual property taxes, which range from one to two percent of your home’s value each year
- Insurance — This insurance usually costs 0.25 to 0.50 percent of your home’s value each year
If you are looking at a home price of $250,000 and put 10 percent down, you will have to set aside $400 for insurance and taxes each month, leaving you with $1,100 for principal and interest.
Next, find your mortgage rate and price range. Take the time to observe mortgage rates and see how they are trending. Adjust your target price range depending on the current mortgage rates you are seeing.
8. What credit score do I need?
Your credit score will make a huge difference when buying a house, affecting your loan options, rate, mortgage and budget.
Here’s how credit scores are classified:
- 720+ = Excellent
- 680 to 719 = Good
- 620 to 679 = Fair
- < 620 = Poor
If you have a credit score in the “excellent” range, you will get access to the lowest rates and most favorable loans.
If you have fair to good credit, here’s what you have access to:
- Conventional loan — 620+
- FHA loan — 580+
- VA loan — 620+
- USDA loan — 640+
It’s tough to find mortgage financing if you are below 620.
9. How do I choose a mortgage lender?
The key is to shop around for a mortgage. That’s because rates can vary as much as 0.5% from one lender to another. You may think 0.5% is negligible, but in the first three years of your $250,000 loan, for instance, that difference saves you nearly $4,000.
10. What qualifies me as a first-time buyer?
You are automatically considered a first-time home buyer if this is the first home you have ever bought. This will earn you access to low-down-payment home loans as well help with paying the closing costs and down payment.
11. What is the max income to qualify?
Many first-time home buyer programs don’t have an income limit, but there are some that do impose max income caps.
12. How can I get a first-time home buyer grant?
Look for programs in your area, as these grants are offered by state and local governments as well as nonprofits.
13. How will I know I’m ready to buy a house?
Ask yourself these questions. Do you:
- Have a steady job and reliable income?
- Have enough money for the down payment AND closing costs?
- Have a strong credit history?
- Plan to stay in a home for at least five years?
14. Can I buy a house with no money down?
There are two loan programs that allow you to buy a house with no money down: VA loan and USDA loan.
To qualify for the VA mortgage, you must be a veteran or service member. For a USDA loan, you must buy a house in a “rural” area, and meet specified income caps.
15. What is Private Mortgage Insurance (PMI)?
This is an insurance policy that makes homeownership possible for buyers who don’t wish to make a 20% down payment. You will then have to pay PMI premiums in order to protect your mortgage lender from foreclosure and default. When your balance drops to 78% of the sales price, you no longer have to pay PMI.
16. What are points?
A point equals one percent of the loan amount, and allows you to get a lower interest rate. If you are planning to sell or refinance within the next few years, you may not want to pay discount points.
17. Do I need a home inspection?
Some loan types (i.e., FHA and VA) require a home inspection to ensure the home meets safety and affordability requirements. However, in the event your lender doesn’t require an inspection, you should still get one, as it could reveal structural or systemic problems you will want to know about before purchasing a home.
We hope this first-time home buyers guide has been helpful as you navigate your way through your mortgage lender options!