Buying a house for the first time can be exciting and overwhelming. Homeownership is a significant milestone, but you should master its financial side to know the type of home and loan that works best for you. PSECU, a full-service, digital-first credit union, shares five financial tips you’ll find useful as a first-time homebuyer.
1. Be Honest With Your Budget
Selecting a home you can realistically afford is timeless advice. Balance what you want against what you need to choose a house that can support your lifestyle in the foreseeable future without overextending yourself.
An oversized house can be impractical. It generally costs more to purchase and maintain, inflating your spending over the long term. A high-maintenance home can be burdensome when you have a limited budget and negatively affect your ability to save, invest, and enjoy life.
2. Prioritise Understanding Mortgage Basics
Mortgages can be complex, but understanding how they work is simple enough if you take your time to know their underlying concepts. Many are content learning about their loan amount, interest rate, term, and monthly mortgage payment. Go further and discover how they affect one another.
In a nutshell, your loan amount is your principal, which dictates how much interest you have to pay monthly. Your term determines the size of your monthly mortgage payment, which also affects how much interest you pay over the life of your loan. In other words, lower principal and shorter term translate to less interest overall. However, it can increase your monthly mortgage payment since you need to repay your mortgage debt in fewer installments.
A lender willing to sit down with you to explain mortgage basics more deeply, estimate closing costs, and note nonnegotiable recurring expenses as a borrower like homeowners insurance matters. In most cases, credit unions outperform banks regarding customer service.
As nonprofit financial institutions, credit unions view borrowers as members, not customers. They equally value financial education and personal connection to help you make informed decisions when comparing your mortgage options.
Working with a lender keen on establishing a collaborative relationship is beneficial in the long run. Such an institution can help you finance your home and take out a secondary mortgage like a home equity loan or line of credit to meet your future financial needs.
3. Improve Your Creditworthiness Patiently
Combining mortgage literacy with creditworthiness is a recipe for success. It allows you to negotiate for favorable terms and bargain persuasively.
Aim to grow your earnings while lowering your debts to keep your debt-to-income (DTI) ratio below 35%. Ideally, your total monthly debt payments should be less than 35% of your monthly pretax income. The lower your DTI ratio, the more room your budget has to accommodate a monthly mortgage payment. If your DTI ratio is higher than 43%, it usually means you’re too indebted to take out a home loan.
Avoid changing jobs shortly before applying for a mortgage. Proving you have a stable source of income inspires confidence. If you need a bump in your salary, ask for a raise or a promotion.
Pay attention to your FICO® Scores from the three major credit bureaus. Mortgage providers typically check all three when making a lending decision. Target a score of at least 670 to have good credit. Bringing it up to 740 makes it very good, while 800 means excellent.
Avoid late payments, pay down your debts, and keep your credit accounts active to boost your FICO Scores as fast as possible. Applying for a new credit card negatively impacts them, so put it off.
Accumulate adequate cash reserves. Most lenders want to see that your savings account’s balance is large enough to cover up to six months of monthly mortgage payments to avoid falling behind if you experience a financial emergency. Build your reserves steadily instead of depositing large amounts of cash irregularly to avoid arousing suspicion.
4. Maximise All Financial Assistance
First-time homebuyers qualify for special mortgage programs to reduce the roadblocks to homeownership. Take advantage of them to minimise your out-of-pocket and recurring expenses.
Moreover, government agencies, charities, and community organisations also offer homebuyer grants, especially to low-income earners who need financial assistance for down payment and closing costs. You may also use monetary gifts from acceptable donors, like your parents.
5. Get Preapproved Before Putting in Offers
Preapproval gives a reliable estimate of how much your prospective financial institution will lend you. Getting preapproved before house hunting makes you a legitimate buyer, prompting sellers to take your offer more seriously.
The process involves a hard inquiry, which is a request to review your credit report as part of the mortgage application process. A hard inquiry slightly drops your credit score, so do it only when you’re ready to buy.
Buy Your First Home Successfully
Buying a house is a major milestone and financial decision. PSECU’s first-time homebuyer mortgage can finance up to 100% of your purchase price without paying for private mortgage insurance. This is an expense you normally have to pay when you put down less than 20% until your principal falls to 80% of your home’s value. The program’s no-income cap means you can qualify as a high-income earner. It also allows seller assistance of up to 3%, so a seller can help you cover some of your closing costs.
If you play your cards right, you can qualify for a mortgage, own a home that suits your needs, and start a new life chapter with fewer cash problems.
