So you’ve decided to buy your first home. Perhaps you’re a newlywed, and you want to pursue the American dream. Maybe you’re a disgruntled renter, who is just tired of throwing away your hard-earned money every month on someone else's mortgage. Or perhaps you’re a savvy investor looking to turn a profit off the housing market while having somewhere to lay your head at night.
Whatever your reason for buying right now, you’re ready to go do it. Purchasing your first home can be a wonderful, weird, and sometimes intimidating experience to the average person; sometimes it is all those things at one time. By following a couple simple steps first, your transition into homeowner can be a smooth one.
Get Your Credit Straight
It can be tempting to start looking online and searching for the home of your dreams before you do anything else. Before all of that starts though, you have to get your credit in order first. The three major credit agencies who keep track of your credit - Experian, TransUnion and Equifax - will each have their own records and scores for you. Each agency has a credit score on file, and a record of all your debts and payments. Check each of these records independently. If there are errors on any of your reports, it could take a couple of months to correct them. Please take the time to handle your credit prior to house shopping.
Know Your Financial Limits
If you’re a first-time homebuyer, chances are pretty good that a lot of houses will be outside your financial capabilities. What you need to know before moving in is exactly how much house you can afford. The general rule thrown around is to purchase within a price range of about 2.5 times your gross household income. I disagree. I reccommend a payment of no larger than 1/2 of the smallest paycheck in the house. For a more detailed number, you can get pre-approved by a mortgage lender. Be forewarned, they will approve you for the largest amount possible, not what you can truly afford.
Have A Down Payment
The down payment is the toughest part of buying a house. Finding enough cash for a down payment, along with the closing costs (costs associated with buying a home, such as loan fees, appraisal fees, inspection fees, legal fees and title search fees) can be a real problem for a lot of soon to be homeowners. As a first time homebuyer, that’s not a small amount of money , especially when most lenders ask for 20 percent down so you avoid the PMI, or Private Mortgage Insurance. There are other options available though. Several private banks and public agencies offer programs where you can pay as little as 3.5 percent down on a home.
You will most likely have to pay private mortgage insurance (PMI) if you go this route. Mortgage insurance protects the bank in the event that you default on your new loan. PMI will add to your monthly payment.
Find Money For The Down Payment
If you’re just tapped out financially, and you need some quick cash to cover a down payment or closing costs, you still have a few options. If you are a first-time homebuyer, you can take money out of your retirement account without penalty, though you will have to pay income taxes on the amount used. You can also ask your parents. You can receive up to $12,000 in cash from each of your parents per year without them having to pay a gift tax on their gift to you.
Consider teaming up with an investor and/or a sibling. Someone may offer to pay the closings costs and down payment amount in exchange for an equal share of the house when it is sold at a later date. Consider other family members or siblings, for example.
Some companies will also help their employees with a down payment or with a special low-interest loan.
You may consider owner financing options as well. These are properties that the current owner is willing to finance instead of a traditional bank.
Additionally, someone in a really bad situation may be interested in you taking over the house payments in exchange for being able to get out of the payment each month. This is often done with little to no down payment and is referred to as "sub to" financing. This can be an awesome opportunity in the right situation.