First-Time Homeowners Should Know These Tips
Looking back at my first experience buying a home, there was definitely a lot I didn’t know. It was easy to get wrapped up in the excitement of putting roots down in a new place, so some details were definitely overlooked.
There’s a lot I’ve learned in my years as a homeowner (like how to thaw frozen pipes, which came in handy this past weekend), and I want to share my experience with fellow first-timers to make buying your first home a great experience.
Whether you’re looking for a starter home or are settling into a property with your family, these tips will set you up for a smooth path to homeownership.
Improve your chances at receiving a lower interest rate
Purchasing a house is a major (and rewarding) commitment. Most homebuyers need to take out a mortgage in order to purchase the real estate. The loan application process can sometimes feel overwhelming, but it’s important to understand what lenders are looking for so you can receive the best interest rate and other terms.
Lenders want to know your desired loan amount, property value, down payment and maybe most importantly, your credit score, to make their decision.
Your credit score ultimately shows lenders how reliable you are at paying back your debts. While banks set their own qualification standards, it never hurts to improve your credit score before applying for a loan.
My Fico.com breaks down that, for the most part, credit scores are determined by your payment history, amounts owed, length of credit history and credit mix. Your score essentially boils down the information in your credit report - such as what you've taken on in the past, and how timely you've been with your payments - into a three-digit number that quickly tells lenders how reliable of a borrower you are.
To improve your credit score, make all your payments on time (and in full, if possible) and begin paying down your debts. It may not improve overnight, but these steps will put you in a better financial position in the long run.
The easiest way to calculate your maximum monthly mortgage payment
As you’re working toward improving your credit score, you should also begin setting a realistic budget for your first home. This will help you narrow your search and understand some of the additional costs of homeownership.
Bankrate recommends beginning to build your budget by figuring out how much you (and your partner, as applicable) earn each month in addition to other revenue streams. If you’ve already done some research online, you probably have an idea of how the homes in a particular area you like cost. Add this rough estimate as well as the size of your down payment, property taxes, homeowners insurance premiums and the estimated interest rate as your expenses.
This will give you an approximate idea of what you can afford in relation to how much you earn a month. However, you should also tally up other monthly expenses (like groceries and utilities) that already eat into your current revenue.
While there are some helpful mortgage calculators online, Bankrate.com also recommends that you follow a general 28%/36% rule for home affordability. The site advises that homebuyers spend no more than 28% of their monthly income on housing costs, and no more than 36% on total debt obligations (including credit cards, student loans and so on). This will establish a baseline for monthly payments you can manage without maxing out your income.
Make sure to budget for expected and unexpected costs
One of the biggest mistakes a new homeowner can make is not saving money for extra expenses. While you might be financially prepared for a monthly mortgage, what about some of the upfront costs of purchasing a home? NerdWallet explains the ideal down payment is 20% or more of the total home price, but the average is far less than that, especially among first-time buyers.
Additionally, closing costs can run between 2% and 5% of your loan amount. Add in homeowner’s insurance (which most lenders require for any down payments under 20%) and you’re looking at some significant upfront and recurring costs.
Then, take into consideration money you may need to furnish your new home, cover repairs and maintenance and build an emergency fund as a “just in case.” Before purchasing your first home, try to save money for these specific purposes so you can be prepared for the expected and unexpected costs of homeownership.
Protect the investment in your home
While homeowners insurance allows you to be covered for damages to your home - as long as they're circumstances named in your policy - it usually doesn’t meet all of your needs. Having a home warranty plan in place before things go awry can help alleviate the stress and cost of dealing with unexpected home repairs.
If you're ready to get your first home off to a good start, see how plans from HomeServe can help you with the costs of covered repairs. They have something to fit many budget and homeowner needs.