Housing & Mortgage
Four Tips for First-Time Home Buyers
Nailing these key steps will save you time, money and boatloads of stress
Renting, historically, has been the less-expensive housing option, compared to the cost of owning. But as the bean counters at the Bureau of Labor Statistics note, rental costs lately have been rising at a faster pace than the cost to own comparable housing. Count that as one more incentive to ditch the rental and buy your first house.
Here’s how to prepare:
1. Polish your FICO credit score. It’s going to play a big role in the mortgage deal you are offered. There are a couple of companies that produce credit scores, but FICO is the one most lenders check. FICO scores range from 300 (yikes) to 850 (excellent.) Manage a credit score of at least 720 and you are going to have a good shot at qualifying for a good interest rate. A credit score of at least 760 can put you in line for the best deal. Check your credit score at least six months before you start house shopping, to give yourself some time to boost your score.
2. Have a down payment of at least 3-3.5% ready. If you’ve been sitting in your rental lamenting that you will never be able to come up with a 20% down payment, you’re worrying needlessly. There are legit, affordable mortgages that require a down payment of 3% to 3.5%. There are a few extra costs, but those shouldn’t be deal breakers. And the larger your down payment, the lower some of those costs become.
3. Decide for yourself – and wisely – how much house you can afford. A mortgage lender will crunch your numbers and tell you the maximum mortgage you may be able to snag.
Many pieces of your financial story are taken into consideration, with your overall debt-load relative to your income playing a significant role. As a general rule, lenders want to see that all your monthly debt obligations – including this new mortgage – do not exceed around 36% of your gross income, though that can stretch above 40% depending on a variety of factors.
What the lender comes up with is not what you should focus on. A mortgage lender is not a financial planner who would aim to suggest a mortgage amount that will allow you to stay on track with all your financial goals. A financial planner would advise that if you stretch your mortgage budget, you are going to be hard-pressed to nail retirement savings or have the cash flow to raise the kids and help them pay for college.
If you want some help figuring that out, the Garrett Planning Network has an army of certified financial planners who can step in. Unlike most advisors who charge a percentage of a client's assets, Garrett advisors work for an hourly fee, which is a better arrangement for young, first-time home buyers. Also, every Garrett advisor is a fiduciary, meaning they have to put your interests first.
4. Get a mortgage pre-approval. In many parts of the country, there are many more eager home buyers than there are sellers. If you’re in one of those markets, you are going to be competing against other buyers to get the seller to say yes to your offer.
Making an offer to buy a home that includes a mortgage pre-approval letter from a lender is going to help you win. A mortgage pre-approval letter is a signal to the seller (and the seller’s agent, who holds some sway here) that you can close the deal. A bid in a seller’s market without a mortgage pre-approval is going to put you at a serious disadvantage.
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