So, you’re in the market to buy a home. Whether it’s your first foray into the exciting homebuying process or you’ve been through it before but forgotten the details, this guide provides first-time homebuyer tips to prepare you for what’s ahead.
A first-time homebuyer might refer to someone who has never purchased a home before, but in some contexts, the definition is actually much broader. Homebuyers who don’t have a substantial down payment could be eligible for down payment assistance through first-time homebuyer grants and loan programs, even if it isn’t their actual first time buying a home. To qualify for many of these programs, buyers must simply not have owned a home for at least the previous three years.
There are perks to being a first-time homebuyer.
One is programs designed for first-time homebuyers that can make purchasing a home cheaper. Some lenders offer slightly discounted mortgage rates and many states and local governments have programs that offer down payment assistance or other help to people looking to buy their first house.
Some of these programs have other requirements, such as income maximums, while others have no restrictions. Search in your local area for first-time homebuyer opportunities you might be eligible for.
Check your credit reports and score, examine your budget and assess your ability to make a down payment and pay closing costs.
With a higher credit score, you can get favorable loan terms that will save you lots of money over the life of your mortgage — although you can still get a loan with a score as low as 500 (for an FHA loan) or 620 (for a conventional loan). Generally, a score of 760 or higher is enough to qualify you for the lowest rates and most favorable terms.
Look at how much debt you have relative to your income, or your debt-to-income (DTI) ratio. According to conventional wisdom, the ideal spend for housing costs, including the mortgage payment, property taxes, homeowners insurance and homeowners association dues, is 28 percent of your gross monthly income. For all of your monthly debt payments, including housing costs, the ideal spend is 36 percent. Many mortgage lenders look for a DTI ratio of no more than 43 percent, but some go higher, up to 50 percent. The higher your DTI ratio, however, the more likely you are to pay a higher interest rate for your mortgage because you’re considered a riskier borrower. A higher DTI ratio can also be a strain on your finances.