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14 First-Time Homebuyer Tips for 2022

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Before you take on the challenge of buying your first home, it’s helpful to have some first-time homebuyer tips handy to help you navigate the process. If it’s been a while since you bought your last home, these tips will bring you up to speed on what it will take to become a homeowner again.

Tips for getting your finances in order

Homeownership means you’ll be on the hook for repairs and maintenance on your home. And if you need a mortgage to buy a house, make sure your financial house is in order before you start shopping for a mortgage.

1. Make sure your finances are ready for homeownership

  • Add a homeownership expense buffer to your emergency fund. Experts recommend you set aside 1% of your home’s value yearly to cover unexpected repairs and ongoing maintenance. The extra cash will help you avoid using credit cards to cover that rainy-day roof leak, summertime air conditioning crash or broken down dishwasher.
  • Don’t change jobs or how you earn your income. Lenders prefer a stable track record of earnings for at least two years. It’s easier to qualify with salaried or full-time hourly income than unpredictable income from self-employment or a commission-only gig.

2. Make sure your down payment and closing cost funds are easily accessible

If you’re getting a financial gift from a relative or borrowing from a 401(k) for your down payment funds, make sure you have your gift letter ready to go when you apply for a mortgage. And if you’re depositing any cash stashes, make sure it’s sitting in your bank account at least 60 days before you apply for a mortgage.

3. Take steps to boost your credit scores

Besides your income, your credit scores can also make or break your homebuying plans. Keeping your credit balances low, paying bills on time and having a good mix of revolving, installment and retail credit can help you work toward a credit score of 740 or higher — if you want the lowest interest rates and easiest path to loan approval.

Although loans backed by the Federal Housing Administration (FHA) allow for scores as low as 500 (with a 10% down payment), a higher credit score helps you qualify for mortgage programs with 3% down payment minimums.

4. Figure out your down payment and closing cost budget

Once you know which home loan is the best for your finances, check your budget to make sure you have the funds for both the down payment and closing costs. You’ll typically spend between 2% and 6% on closing costs, in addition to whatever your down payment is.

5. Don’t forget about moving expenses

Unless friends and family volunteer to help with your move, you’ll need money for moving. Expenses can include a truck, boxes, packing supplies and possibly movers to set your furniture and belongings where you want them in your new home. You’ll spend an average of $2,300 for a local move and $4,300 for a long distance move, according to the American Moving and Storage Association.

6. Avoid maxing out your mortgage payment

Lenders divide your total debt, including your mortgage payment, by your gross income to determine your maximum debt-to-income (DTI) ratio. Although lenders may approve you for a DTI ratio as high as 50%, the Consumer Financial Protection Bureau (CFPB) recommends capping it at 43%, to leave room in your budget for unplanned expenses or reductions in income.

Tips for choosing a mortgage program

If you need a mortgage for your home purchase, you’ll find lenient qualifying standards with loans backed by the FHA, the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Only eligible military borrowers are eligible for VA loans, and USDA loans are designed to help low- to moderate-income borrowers buy homes in designated rural areas.

Conventional mortgages are a good match for borrowers with higher credit scores who need a loan amount higher than FHA loan limits permit.

7. Learn about the different mortgage programs

The table below provides a side by side snapshot of the minimum requirements for each mortgage loan program.

Loan featureConventionalFHAVAUSDA
Minimum down payment3%3.5% (with 580 credit score)0%0%
Minimum credit score620580 with 3.5% down payment; 500 with 10% down payment620 with most lenders640 with most lenders
Maximum DTI ratio45% with exceptions possible43% with exceptions possible41% with exceptions possible41% with exceptions possible
Loan limits$647,200 in most areas$420,680 in most areasNo limitSame as conventional

8. Know your total monthly housing expense

Your monthly mortgage payment is made up of four basic components: principal, interest, taxes and insurance, or PITI for short. However, if you make less than a 20% down payment, you’ll likely pay monthly mortgage insurance to protect your lender against losses if you can’t make your payments and they foreclose on your home.

Below is a breakdown of how each piece of your payment works:

Principal. This is the portion for payment that goes toward paying off your loan balance over time.

Interest. The interest portion of your monthly payment is the fee you pay each month to the lender based on your interest rate.

Taxes. Property taxes are charged based on your city’s or county’s tax rate and your home’s features. They’re typically paid annually, but divided by 12 and included in your monthly mortgage payment.

Insurance. Lenders require you to buy homeowners insurance to cover losses due to fire, theft or other hazards so your home is restored to its original condition. You can shop for the most competitive homeowners insurance by using a comparison tool.

Mortgage insurance. Mortgage insurance is required on most loan types with less than a 20% down payment, but how much and how you’ll pay varies depending on the mortgage program:

Loan program/mortgage insurance typeHow much it costsHow it’s paid
Conventional Private mortgage insurance (PMI)PMI 0.53% to 1.73% depending on credit score and down paymentTypically monthly
FHA Upfront mortgage insurance premium (UFMIP) UFMIP lump sum 1.75% upfront UFMIP is added to loan amount
FHA Annual mortgage insurance premium (MIP)MIP 0.45% to 1.05% annually depending on down paymentYearly premium divided by 12 and added to monthly payment
VA Funding fee (no mortgage insurance required)Funding fee 0.5% to 3.6%, depending on down payment and previous benefits useTypically added to loan amount
USDA Upfront guarantee fee Lump sum upfront guarantee fee of 1% UFMIP added to loan amount
USDA Annual guarantee feeAnnual guarantee fee of 0.35%Annual fee divided by 12 and added to monthly payment

HOA. Lenders don’t add homeowners association (HOA) fees to your monthly payment, but you need to add them to your monthly housing budget if your home is a townhome, in a planned community or part of a condominium association.

9. Shop for the best mortgage rate and get pre approved

  • Rate-shopping tips. Studies consistently show that comparing mortgage rates with at least three to five different lenders may help you snag not only the lowest rate and monthly payment, but thousands of dollars in interest charges over the life of your loan. Compare the lender fees, interest rate and annual percentage rate (APR) on the loan estimates you receive. Interest rates change daily, so make sure you collect all your estimates on the same day.
  • Don’t start house hunting without a preapproval. A mortgage preapproval tells a seller you’re a serious buyer and have the financial resources to back up any offer you make. In competitive housing markets, your offer won’t even be considered unless a preapproval letter is attached.

House hunting tips

10. Pick your house and neighborhood ahead of time.

Create your homebuying wish list ahead of time and map out what part of town you want to live in, the school districts and whether you want an old or new home. Having a solid list of “must-haves” for your real estate agent will help you avoid wasting time on homes that don’t fit your needs.

11. Find the right real estate agent

An experienced real estate agent may make the difference between buying your dream home or settling for second best. Top agents have the market expertise, personal touch and communication skills to keep you in the know on houses as soon as they become available, and the haggling skills to get your offer accepted.

Homebuying tips

12. Be prepared to move fast on offers

There were an average of 3.8 offers on homes that sold during August of 2021, according to recent data from the National Association of Realtors (NAR). That means to compete you’ll need to make your offer quickly and, in most cases, at least for the amount the seller is asking for.

13. Get a home inspection

A home inspection puts a magnifying glass to your potential home to make sure all the components — from the foundation to the rooftop — are in good working order. In most cases, you can cancel a purchase offer within a set time period if the home inspection reveals problems that you or the seller aren’t willing to fix before closing.

14. Be ready for your closing day

You’ll need to gather up your funds and review a closing disclosure to finalize all the figures at least three business days before your closing date. Avoid changing jobs, charging new credit or making large cash deposits before your closing — your loan could be denied before you ever get to the closing table for doing so.

 

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