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How to Prepare to Buy your First Home

From mortgages to down payments, here's the scoop on buying your first home. 

Your home is likely one of the most expensive purchases you'll ever make. The median sale price of a home in the U.S. in March 2019 was $317,4001. When you're spending that much money, you don't want to rush into things or make the "wrong" choice.

Luckily for you and other first time buyers, there are numerous first time homeowners loan programs out there that help to educate and inform people who are purchasing a home for the first time ever. As you get ready to buy your home, here's a guide to everything you need to know.

Down Payment Details

Many home loans require a down payment, and the amount of the down payment can seem intimidating to plenty of first time buyers. The down payment is the portion of the price of the home that you pay upfront. In many cases, a down payment of 20% is considered ideal. Putting 20% of the price of the home down means that you don't have to pay private mortgage insurance. It can also mean that you get a lower interest rate on your mortgage from the lender.

For plenty of people, saving up 20% of the value of a home can seem challenging, if not impossible. Fortunately, a 20% down payment isn't a requirement for most mortgages. Depending on the type of mortgage you qualify for, you might be able to make a down payment of just 3.5% or even 3%. Some mortgage programs don't require a down payment at all.

How can you decide how much to put down or how much to save for your down payment? It helps to understand what loan programs are out there and whether you qualify for any that accept a lower down payment. Some programs are meant just for first-time buyers and don't require a down payment at all. These programs also offer discounts on closing costs, to make buying a home even more affordable.

What Can You Afford?

Along with deciding how much to save up for your down payment on a home, it's a good idea to think about how big of a mortgage payment you can afford each month. One common rule states that your total housing expenses should be less than 28% of your monthly income2. If you have other debt, your total debt, including housing, shouldn't be more than 36% of your income.

First Time Homeowners Loan Options

Once you have a ball-park figure of what you can afford each month, it's time to examine the types of mortgages available for first time buyers.

Mortgages generally fall into two categories. There are conventional mortgages and government-insured mortgages. Conventional mortgages typically require higher down payment amounts and a higher credit score. A government-insured mortgage might not require any down payment and is generally available to people with less-than-excellent credit.

Some of the mortgage options available for first-time buyers include:

  • Conventional mortgage. The down payment on a conventional mortgage can be as low as 3% in some cases. If you put down less than 20%, you'll pay private mortgage insurance on the loan until you've paid enough principal to equal 20% of the home's value.
  • FHA loan. Federal housing administration (FHA) loans are secured by the government and require mortgage insurance for the life of the loan. Down payments are usually between 3.5 and 5%.
  • VA loan. VA loans are also insured by the government but are only available to veterans or active-duty service members (or their widows/spouses). If you qualify for a VA loan, you can get one without a down payment.
  • USDA loan. Mortgages insured by the USDA are also available without a down payment. To qualify for a USDA loan, the home you buy needs to be in a designated rural area.

Programs Available for First Time Home Buyers

In addition to a variety of mortgage options, there are also programs designed specifically to help first time homebuyers make their first home purchase. These programs can range from seminars and workshops designed to illuminate the home-buying process for first-timers to mortgage programs that aim to make buying a home more affordable for first-timers. Often, first time homebuyer mortgage programs require you to complete workshops or training modules before you can apply for the mortgage.

Quick Tips for First Time Homebuyers

As you get ready to buy a home, the following tips can help to simplify and streamline the process for you.

  • Focus on building your credit. In the months before you apply for a mortgage, work on keeping your credit score up or on improving your score. Try to avoid applying for additional loans or opening more credit cards and keep on making on-time payments.
  • Get pre-approved. Before you begin looking at houses, visit a credit union and get pre-approved for a mortgage. Getting pre-approved will give you a sense of how much a lender will let you borrow and will help you understand whether or not you're likely to get a mortgage.
  • Find a buyer's agent. A real estate agent can help you find the right house and will guide you through the home-buying process.
  • Stick to your budget. Don't be tempted by houses that are out of your price range. Sticking to your budget will help you avoid financial stress throughout the buying process and later on, when you've moved into your home.

Buying your first home can seem intimidating or like it's out of your reach, but it doesn't have to be. There are plenty of resources and aids available to you to make homeownership attainable. Your credit union can be a great first stop when you're getting ready to buy a home, whether you want more information on mortgages or are looking to learn more about programs designed specifically for first time buyers.

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