Buying your first home represents a major life decision. Being prepared as a first-time homebuyer makes the mortgage process easier and less stressful, as does finding the right mortgage lender to guide you through finding your first home mortgage.
Before hunting for a house, decide how much you can afford to spend on your first home mortgage. Generally speaking, housing costs should not exceed 28% of your personal budget. To determine your personal budgets, you should measure your total income against your debt and monthly expenses. Using an online calculator can also be a good tool to determine how much you can afford on your first home mortgage.
Also, check your credit score. Low credit scores often result in higher interest rates, or in some cases, denial of a home mortgage. Paying off existing debt like student loans and credit cards can improve your debt-to-income ratio and raise your credit score, while also freeing up some of your budget as you prepare to pay your first home mortgage payments.
How to buy your first home
Once you know your budget, start saving for a down payment and decide how much you can afford to put toward the mortgage. This will dictate the type of financing you qualify for, such as a conventional 30-year mortgage loan or an alternative option like a Federal Housing Association (FHA) loan, which requires a lower down payment.
Ideally, you’ll invest 20% of the cost of your home in a down payment. For instance, if your first home mortgage totals $100,000, you would aim to pay $20,000 when closing on the loan. How much you put down determines whether you are required to pay for private mortgage insurance (PMI) as part of your monthly mortgage payments. For most lenders, mortgage insurance is required until the homebuyers acquire 20% of the home’s equity. Mortgage insurance also increases your monthly mortgage payments — something many first-time homebuyers want to avoid.
Begin the pre-approval mortgage application process online, at your local bank or at a preferred lending institution. Getting pre-approved gives you an idea of what your monthly mortgage payments will cost and also makes you more appealing to sellers. First-time homebuyers should prepare copies of their bank statements, most recent pay stubs, tax returns and W2s when applying. Additional documentation may be required.
Find the perfect house and close the deal
Many people search online to find their first home. Tools offered on realtor websites often allow you to search by price range, while specifying the desired number of bedrooms, bathrooms, square footage, etc. Using these tools, first-time homebuyers can easily find options tailored to their wish list. Many homebuyers opt to work with a realtor, who can help first-time buyers navigate the process and find a lender.
Once you make an offer and it’s accepted, prepare for a home inspection and appraisal. Home inspections alert first-time homebuyers to any repairs that may be needed and point out potential health and safety hazards, such as mold, outdated electrical systems or foundation concerns. This gives homebuyers an option to opt out if the home’s conditions don’t meet expectations or negotiate a lower cost from the sellers to address serious problems before finalizing the home sale.
Most lenders require home appraisals to ensure the current value of the home aligns with the home’s proposed purchase price. Appraisals take into consideration factors such as the value of recently sold homes in the area (also referred to as comps), the home’s age, condition, location, amenities and more.
Closing a home loan requires several fees, including title costs, PMI, escrow fees, etc. In many cases, the seller pays the buyer’s closing costs as part of the purchase agreement. However, you may need to pay closing costs if you purchase a foreclosed home, or if it’s a term of your loan financing.
Finding a home can be an intimidating yet rewarding process for a first-time homebuyer. We recommend working with an expert who can help you navigate the process step by step.
Want to buy your first home? Speak with a First Merchants Bank mortgage expert today by calling 1.800.205.3464 or visiting a local branch. We invite customers to start the pre-approval application process online.