Investing in a home buying is a huge financial move in life. Property has been considered an asset for decades and will continue to be one. Whether you are buying a home for the first time to get out of your parent’s house, to start a new family, with future retirement plans, or for reselling purposes, you need to stay well-informed for not to fall into any false trap.
Here we will talk about certain factors that you must know before taking any bait.
5 Factors a First-time Home Buyer Should Consider—
In our previous blogs, we have shared what you should look for in a property before buying it. Like it’s structural conditions, position, locality, and such more. This time we will focus on the financial aspects.
- Know Your Loan Options. The type of home loan you choose will determine the amount of down payment you need to make. So, you must must decide wisely.
- Conventional Loan: This is a widely offered loan that’s not backed by the government. It typically requires a good credit score (usually above 620) and a down payment of at least 3% to 20%. Conventional loans come in fixed-rate and adjustable-rate options.
Government-backed Loan: These loans are insured by government agencies, making it easier for you to qualify with a lower down payment (often as low as 3.5%). There are three main types:
FHA Loan— Insured by the Federal Housing Administration, this is a good option for first-time homebuyers with a moderate credit score.
VA Loan— Backed by the Department of Veterans Affairs, this benefit is available to veterans and active service members with no down payment required in most cases.
USDA Loan— Guaranteed by the U.S. Department of Agriculture, this loan is for properties in eligible rural and suburban areas. It often has relaxed credit score requirements and allows for no down payment.
Jumbo Loan: This loan is for homes exceeding the conforming loan limit set by Fannie Mae and Freddie Mac (government-sponsored enterprises). Jumbo loans typically require excellent credit scores and higher down payments (around 10% to 20%).
Fixed-rate Mortgage: With this type of loan, your interest rate stays the same throughout the entire loan term, providing predictable monthly payments.
Adjustable-Rate Mortgage (ARM): ARMs offer an initial lower interest rate that adjusts after a set period (often 1, 3, 5, or 7 years). This can be risky if interest rates rise significantly, but can be a good option if you plan to sell the home before the rate adjusts.
Knowing these offers, and your capability to invest in will also help you understand what type of home you can afford/look for.
2. Ensure Your Commitment to a Loan
Most mortgage loan terms are of 15-30 years. So, before making any purchase of a premature home or buying a ready-to-move-in one, do consider if you are going to stay in that home or in the city for at least 6 years.
You must have an emergency funding option to cover 3 month’s expenses and a registered professional license.
3. Secure a Preapproval
It’s okay to have a home of your own. Even if you are in immediate need, do not jump into home listings. Achieving a preapproval of the mortgage before starting the hunt will ease your end process.
A prequalification letter and a preapproval letter from your lender will help you ideate on how much loan money you can expect to get, based on your income and asset evaluation.
4. Save for Closing Costs
A down payment is just the first phase of the whole first-time home buying investment. In simple term, closing costs is a commission you pay to your lender for various financial arrangements.
For most government-backed loans the cost is auto assisted. But in case you didn’t qualify for a government loan, negotiate with the seller on the percentage. The closing cost may range between 2% -5% of the total loan amount.
Attorney fees, Pest inspection fees, Appraisal fees, Escrow fees, and a few more are the costs covered under Closing Costs.
5. Maintain a Good Credit Score
Never use up the maximum credit score. Meaning, do not make too many purchases using your credit card or stay behind time in paying bills before and after applying for a home loan.
Team up With a Real Estate Agent
In your best interest, work with a real estate agent or consult a realtor from the beginning of your home-buying planning. Their knowledge of local properties and updated mortgage loans for real estates can be beneficial for your savings.
