If you recently shared with friends or family that you’re ready to buy your first home, you have no doubt been offered plenty of well-intentioned bits of advice about the process. But be aware: Not everything you’ve heard may be accurate.
Here are some common misconceptions first-time home buyers may have and the real facts behind them. Remember that every home buyer’s situation is unique, so do what you feel is best for yours.
This may be true if you’re planning to rent for a short period of time. But if you’re planning to rent for several years, you might be better off purchasing a home. A fixed-rate mortgage is stable for 15 to 30 years, but rents may increase on average as much as 5% per year.
Money spent on a mortgage each month is building equity in something you’ll eventually own, and is a foundational means to growing wealth. Consider using a rent vs. buy calculator to run the numbers and see if owning makes better financial sense for you in your area.
A 20% down payment will help you avoid paying private mortgage insurance (PMI), but you can secure a conventional mortgage with as little as 3% down. You may be able to put down even less if you qualify for a U.S. Department of Agriculture (USDA) or U.S. Department of Veterans Affairs (VA) loan. Check with your loan officer to see if you qualify for any first-time buyer programs.
As mentioned above, a 20% down payment usually allows you to avoid paying private mortgage insurance. But with a downpayment less than 20%, a lender typically requires the buyer to take out PMI — which generally costs between 0.4% to 2.25% of the mortgage annually, and is rolled into your monthly mortgage payment. PMI can be removed once the homeowner has paid down enough of the loan’s principal.
A less-than-perfect credit score doesn’t preclude you from buying a home. Lenders consider several factors, in addition to your FICO score, when evaluating your mortgage application. Your income, outstanding debt, savings, assets, and other investments are just a few of the factors examined by a potential lender.
However, while many lenders do offer mortgages to home buyers with FICO scores in the “Fair” and “Good” range, it pays to work on improving your credit score as much as possible. The higher your credit score, the better your chances of securing a loan with more favorable terms.
The notion that you must be free and clear of student loans in order to qualify for a mortgage simply isn’t the case. Mortgage lenders look at your debt-to-income ratio (DTI) to assess how much outstanding debt you owe compared to how much income you have. Your DTI is calculated as a percentage of your gross income, and lenders usually like to see a DTI of 50% or lower.
So while it’s true that the less debt you have, the better when applying for a mortgage, outstanding student loan debt itself will not prevent you from securing a mortgage.
Applying for a mortgage requires several key pieces of documentation, beyond providing your prospective lender with a Social Security number and a pay stub. The required documents may vary slightly from lender to lender, but it’s never too early to start gathering:
A home sells for what a buyer is willing to offer and what a seller is willing to accept. In other words, the listing price is negotiable. In highly competitive markets, that may mean homes are selling for well above asking price, and it might be wise to look at homes well below your budget in case you need wiggle room to raise your bid. Less competitive markets have more room for straightforward negotiations.
This is where working with an experienced real estate agent has its advantages. A seasoned agent will guide you through the buying process and help to create an offer strategy that best suits your situation. They’ll likely have knowledge of the seller’s motivations, can ask the right questions of the seller’s agent, negotiate on your behalf, and will have completed a comparable market analysis (CMA) on homes in the area to know what a fair and reasonable offer might be.
A down payment is a big part of your upfront costs, but you’ll also be responsible for closing costs and other expenses as you approach the finish line, including:
In addition, you may have other variable fees and expenses including costs for a home inspection, appraisal, attorney fees, and a real estate agent commision. You may also want to budget money for moving costs, and any immediate needs you may have once you move in, like replacing appliances or small fixes that your home inspection turned up.
For most people, buying a first home is not only a major milestone, but likely the largest financial investment they’ll make in their lifetime. Rely on professional expertise to help navigate the process and ensure you’re getting the best deal for you.