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Getting a new home is a great achievement. But the journey to get there, especially for first-time homebuyers, can feel more like a maze than a straight path.
It’s a journey that requires careful planning, budgeting, and a solid understanding of the financial commitments involved.
But don’t worry! This blog will cut through the jargon, lay down the facts, and share top tips to help you land your first home loan.
1. Keep A Close Eye On Your Credit Score
Your credit score plays a big part when it comes to securing a home loan on favorable terms. The higher your score, the lower the interest rate on your home loan.
So the first step for getting your first home loan is to check out your credit score. Get free reports from the big three bureaus — Equifax, Experian, and TransUnion. Review them carefully, and if there’s a mistake, make sure to dispute it.
Next, try to keep your score high. How? Well, keep your credit card balance low and pay all your bills on time. Also, don’t close old credit cards, even if you don’t use them often. Closing them will lower your score by increasing the credit portion you use.
Lastly, keep checking your score. And if you see it going down, consider consulting a professional credit repair service to help you out.
2. Decide How Much House You Can Afford
Home buying is exciting, but you want to be smart with your money. Before you start dreaming of that four-bedroom villa with a pool, it’s crucial to figure out what kind of house you can really afford.
Also, don’t just think about the price tag of the house. There are other costs that come along for the ride when you buy a home. Insurance, property taxes, house maintenance, and that all-important mortgage are just a few of the ongoing expenses you’ll need to cover.
So, how do you figure out what’s doable? A good trick to use is the 28/36 rule. It’s a simple idea: no more than 28% of your monthly income should go towards home-related costs. And total debts, including car loans, should be no more than 36% of your income.
This rule can help you stay within your means and avoid financial stress. To make this calculation even easier, you can use this calculator to determine your borrowing power.
Once you’ve done your sums, make sure to double-check them with your lender. They can confirm if your estimates align with what they think you can afford.
3. Explore Mortgage Options
There are various home loans in the market. And knowing your choices can help you select the one that fits your situation best. Here are some options:
- Conventional mortgages – These are your standard, run-of-the-mill home loans offered by most lenders. They aren’t government-offered loans and require as little as a 3% to 5% down payment.
- FHA loans – These are backed by the Federal Housing Administration and are a popular choice for first-time buyers because they often require a low down payment.
- USDA loans – The U.S. Department of Agriculture offers these to rural property buyers who meet specific income requirements. And the best thing is: these loans don’t require any down payment.
- VA loans – If you’re a veteran or active-duty military, a VA loan, backed by the Department of Veterans Affairs, could offer you favorable terms. Understanding how VA home loans work can be significant in making the most of this loan type.
All of these loans can come with different payment structures. The most common is the 30-year fixed-rate mortgage, which, as the name suggests, is paid off over 30 years and has a fixed interest rate.
There’s also the adjustable-rate mortgage, or ARM, to consider. With this type, the interest rate can change over time, starting off low and then adjusting—up or down—based on market conditions.
4. Get Familiar With First-Time Home Buyer Programs
Taking the leap into homeownership is a huge deal. Thankfully, there are several first-time homebuyers and down payment assistance programs to help make the transition smoother. These initiatives are specifically designed to ease the financial burden and provide a more accessible route to owning your first home.
Now, it’s important to know that these programs aren’t open to everyone. Many of them are tailored to assist borrowers with an income below a certain level. The goal here is to help those who may find homeownership more financially challenging.
Another thing to keep in mind is that these programs often set a limit on the home’s price, so they are not a good option if you’re looking for something very luxurious.
5. Get The Paperwork Done
Paperwork may not be the most thrilling part of buying your first home, but it’s certainly one of the most crucial. Lenders need to see your financial history to ensure you’re a reliable borrower. So, roll up your sleeves, and start compiling the following documents:
- Proof of income and employment, along with two years of tax returns and W-2s
- Bank statements
- Records of debt payments, like student or car loans, credit card bills, or any other ongoing expenses
6. Secure A Preapproval Letter
A preapproval letter is a document from a lender that shows you’re a serious buyer and that you’ve been pre-approved for a mortgage up to a certain amount. This can give you a competitive edge when house hunting, especially in markets where sellers might have multiple offers to consider.
To get pre-approved, you’ll need to provide your lender with all the paperwork we discussed in the previous section. They’ll then review your financial situation and credit score to determine how much they’re willing to lend to you.
7. Choose A Real Estate Agent Carefully
Think of your real estate agent as your guide. They’re there to lead you through the process, answer your questions, and act as your advocate.
Importantly, they aren’t there to advise you just about properties. With years of experience in the industry, a real estate agent can be a valuable source of financial advice and may very well help you secure your first home loan.
So when choosing a real estate agent:
- Look for an experienced agent who specializes in working with newcomers.
- Look at their knowledge of the local market to guide you properly.
- Consider their communication style. You’ll want an agent who listens to your needs and keeps you updated at every stage of the process.
- Don’t be afraid to ask for references.
The journey of purchasing a new home can be exciting and uncertain. By following the tips mentioned above, you’ll be on your way to securing your first ever home loan (hopefully on favorable terms). Good luck!