Buying your first home is an amazing feeling of freedom. But when you fall into the first-time homebuyer category, the whole process can seem majorly overwhelming. Before you start shopping around (the fun part), you’ll want to understand your options and needs, and save up properly (yup, we’re here to help you with those things). And luckily, there are a plethora of programs for first-time homebuyers that can further help you achieve the American Dream of homeownership (thanks, USA!).
Buying your first home like one of the pros is easier than you think—take the process in stride and find ways to enjoy the ride.
Stride 1: How Much Can You Afford to Spend on Housing?
Before you start shopping around, you’ll want to know how much you can spend. This way, you won’t set yourself up for disappointment when you look at properties above your range.
To arrive at the right number, ask yourself:
- How much take-home pay do you have coming in after savings and expenses?
- Can you reduce expenses to increase your savings for a down payment and emergency fund? (This home budget analysis calculator can help.)
- Is planning to have a child or expanding the family on your radar? If so…
- Will one person stay home to raise the child?
- Will an extra bedroom be needed?
- Will the child go to a private or public school?
(Want to see how much the government estimates that it costs to raise a child? Read our post, bundles of joy cost baskets of cash.)
Pro Tip: Warren Taylor, BankMobile’s President, suggests that you shouldn’t spend over 28% of your gross monthly salary on a mortgage, with the addition of taxes, and insurance, which is known as the front end ratio.
Stride 2: Figure out Your Housing Needs
Next, you’ll want to determine your needs in a home.
To determine your needs, ask yourself:
- Do you need (or want) to live close to a city or can you settle down in the suburbs?
- Do you want to be close to family?
- How many bedrooms do you want?
- Is a yard important to you?
- How close to do you want to be to neighbors and/or schools?
- Do you need to be close to public transportation?
- Do you want to climb stairs, or is a ranch more your style?
Pro Tip: Check out HUD’s homebuyer’s checklist—a perfect resource for any first-time homebuyers.
Stride 3: Your Credit Score
Before you start signing paperwork, make sure to do your best to clean up your credit. A lower score may hurt your chances of qualifying for a mortgage; while a higher credit score may help you get a lower interest rate. If you’re planning to buy a home with another person, keep in mind that if you have excellent credit but your partner doesn’t, that may hurt you as well.
Pro Tip: Don’t let a less than perfect credit score get you down, get empowered to improve your credit score.
Stride 4: Save up for Your Down Payment & Closing Costs
Your monthly payment isn’t all that you’ll need to afford when buying a home – you’ll also need to cough up a large sum of money to pay for your closing costs and down payment.
To start this process, do the following:
- Use a homebuyer savings calculator to make a plan on how much you’ll need to save.
- Open a free high-yield savings account.
- Then, set up a recurring transfer to your savings account via your mobile banking app (just set it and forget it—this will also help you grow your emergency fund to cover any unforeseen expenses, like a new furnace or roof).
Pro Tip: Most traditional mortgages require a 20% down payment. For example, if you’re purchasing a home for $200,000, you’ll need to put down $40,000. That’s a big chunk of change! If you’re not in the position to throw down that much loot, you can check out an FHA loan, if you’re a first-time homebuyer. More on that in Stride 5.
Stride 5: Explore an FHA Loan
The Federal Housing Administration (FHA) is a government agency that provides mortgage insurance on loans for approved FHA lenders in the US and its territories. They’ve insured 34 million properties since they began in 1934, without the help of any tax dollars. If this is your first home, you may want to take advantage of an FHA loan, which can help you get a home with generally more flexible credit requirements than a conventional mortgage product. To protect lenders from mortgage defaults, the FHA insures each mortgage, and certain requirements must be met to qualify.
About those requirements:
- You must live in the home
- You need to be a U.S. citizen or permanent resident alien, have a valid Social Security number, lawfully live in the country, and be of legal age to sign for a mortgage
- You need to get a home appraisal by an approved FHA appraiser
And there are several types of FHA loan programs to choose from, including:
- Adjustable and Fixed rate mortgages
- Graduated Payment Loans
- Energy Efficient Mortgage Program
- Reverse Mortgages for Seniors
- Office of Manufactured Housing Programs
- Condo Loans and more
Pro Tip: The major benefits to an FHA loan are lower down payments and closing costs, and flexible credit qualifications compared to a more conventional mortgage product. An FHA loan can help by reducing the amount of your down payment to as low as 3.5%, for those with a credit score of 580 or greater, for buying a home with 1-4 units. To compare with our example above with a $200,000 home purchase price, if you qualify for a 3.5% down payment, you’d only need to put down $7,000.
Stride 6: Take Advantage of Free Resources (like HUD)
If you need help coming up with your down payment, HUD may be able to help you out. HUD, short for the U.S. Department for Housing and Urban Development, has a ton of resources on both the national and state levels. There are limits on how much you can borrow from a HUD-backed mortgage, which vary by state. For example, HUD offers a Good Neighbor Next Door Sales Program, which helps police officers, teachers, firefighters and emergency medical technicians possibly qualify for a discount of 50% from the list price of the home.
Pro Tip: HUD offers grants for first-time homebuyers – here’s a listing of each of the homebuyer grant programs by state. Not every state offers a grant program, but it would be wise to find out.
The views and opinions expressed by the author are not necessarily those of BankMobile. The blogs are intended as general financial knowledge that may or may not be applicable to your individual needs. Always contact your accountant for tax advice.
All company/product/service mentions in this post are not intended as an endorsement and the views of that company do not represent the views of BankMobile or Customers Bank.