In today’s real estate market, high interest rates and inflated housing prices can be discouraging. While many experts predict that the housing market will become more favorable for first-time buyers over the next few years, there are some things you can do now to help achieve your dream of homeownership.
Here are 6 tips for first-time home buyers:
- Know how much you can afford.
Before you even start looking for a house, you should have an idea of how much house you could afford. You can use a house affordability calculator to determine what your monthly payment will be on different priced homes. Be sure to factor in taxes and homeowner’s insurance into the payment. You will also need to factor in closing costs. On average, closing costs can range between 2% and 4% of the purchase price and many of them can often be rolled into your mortgage payment. However, some closing costs will need to be paid outright such as your home inspection and appraisal. When determining how much home you can afford, be sure to factor in other home-related costs as well, such as monthly utilities, regular home maintenance, and the cost of furniture.
- Start saving now.
Once you have an idea of home prices that would fit into your budget, you’ll want to determine where your down payment will come from. While there are mortgages available that don’t require a down payment, you will typically have to pay for private mortgage insurance (PMI) if you don’t put down at least 20% on your new home. PMI can increase your monthly mortgage payment, so the more money can put down, the better. If you don’t already have the funds to cover a down payment, you should start saving now. A high interest savings account can help you save faster, and a savings calculator can be a good resource in helping you understand just how much you should be putting aside each month to reach your savings goal by a certain date.
- Ensure your credit score is in good shape.
In most cases, improving your credit score can help you qualify for lower mortgage interest rates. Check your credit report to ensure that all of the information in it is accurate. Get a sense of what information could be dragging down your score and start working to turn those bad marks around. Keep in mind that a lack of credit history can also make it difficult for you to secure a mortgage. If you need help establishing credit, you might consider taking out a secured credit card, a credit-builder loan, or ask to be added as an authorized user on a trusted family member’s credit card.
- Focus on paying down any debt.
One thing that factors into whether you qualify for a mortgage is your debt-to-income ratio (DTI). Generally, lenders like to see a DTI below 36%. To calculate your debt-to-income ratio, you should add up all of your monthly debt obligations, including existing loan payments (personal loans, car loans, student loans, mortgages, etc.), credit card payments, child support and alimony, as well as any rent or lease payments, and divide that total by your gross monthly income (your income before taxes). Paying off credit card balances can help lower your debt-to-income ratio.
- Look for first-time home buyer programs.
If you are a first-time home buyer, ask your bank research first-time home buyer programs. You may be able to qualify for a program that offers lower interest or a lower down payment. FHA loans, VA loans, and USDA loans can also be helpful for first-time home buyers who qualify.
- Keep an open mind.
Ultimately, if you find that buying a single-family home isn’t realistic for you in the current market, you should consider some alternatives. Purchasing a multi-family home, a townhouse, or a condo, could be a more affordable option. With a multi-family home you could live in one of the units while renting out the others, and that anticipated passive income could help you qualify for the mortgage. Condos and townhouses are typically less expensive than single-family homes, but you’ll need to be sure you factor in any HOA fees or other related expenses.
Buying your first home is no easy feat, but by taking some steps to prepare and save you will have a better chance of navigating the challenges of today’s housing market. Bank5 Connect can help you reach your savings goals faster with a high-interest deposit account. Our savings accounts and money market accounts have interest rates well above the national average, and can help you grow your nest egg as quickly as possible. We also have a special add-on CD that allows you to earn a competitive rate while letting you make additional deposits as often as you’d like. Best of luck you to you on your homebuying journey!