Buying a home can feel like a huge challenge, but if you plan your finances well, you can make it a reality. June is National Homeownership Month, a good time to discover ways to simplify your homebuying journey, starting with Travis Credit Union. In this blog, we will discuss ways you can prepare for your first home purchase.
How To Plan Your First Home Purchase
Becoming a homeowner starts with reviewing your financial situation and creating a plan based on where you are today. Understanding your credit, having money saved, knowing how much home you can afford and identifying programs you can use will help make your homebuying journey smoother.
Before you can get to the exciting part of househunting, you’ll need to get your finances in order. There are several things you’ll have to do to put yourself in the best position to be approved for a home loan.
Credit Score, Savings, Affordability and Assistance Programs
Start your homebuying journey by checking these key factors:
- Credit Score: Your credit score is a great starting point when reviewing your financial standing. It is determined by several factors, including your credit and debt payment history. Many mortgage lenders require a minimum credit score of at least 620. You can check your credit history and credit score each year for free at annualcreditreport.com. Having a high score gives you a better chance of being approved for a mortgage and getting a lower interest rate, which means you’ll pay less interest over the life of the loan, with more of your money going to pay down the principal.
- Savings: Buying a home typically requires a substantial amount of money upfront. Costs include a down payment, closing fees, home inspection, moving and more. Having enough savings puts you in a better position when looking for a mortgage. Some lenders may require a down payment of up to 20% of the sale price, while others may require just 3%. Having the funds to cover these costs keeps you on budget and your home journey on track.
- Home Affordability: Another key factor is knowing how much home you can afford. This lets you set up a realistic, manageable budget. One tip is to use an online calculator, such as NerdWallet’s “How Much House Can I Afford?”. This calculator takes information such as your pretax income, debt payments and recurring payments and gives you an estimated monthly mortgage payment. To get a more accurate amount, get preapproved with your chosen lender. They will run the numbers and give you an exact amount.
- Look for First-Time Homebuyer Assistance Programs: As a first-time homebuyer, there are government programs that provide financial assistance. That help may include low interest-rate loans and aid with down payments and closing costs. In some cases, grants may be available.
Many first-time buyer programs have income limits, so do some research to you to see if you qualify. Other programs offer help depending on the home’s location and your occupation. Doing your homework with first-time buyer programs will let you make better decisions when choosing the right loan.
How Much Home Can You Afford?
As mentioned, knowing exactly how much you can afford will guide which homes you visit. When finding the right home, other additional costs to consider are local taxes, homeowners association (HOA) fees, the area’s cost of living and any improvements or renovations to the property that you’d like.
Why Mortgage Pre-Approval Matters
Getting a mortgage preapproved before you start shopping gives you a target price range that will help you stay focused on homes within your budget. Once you apply for a preapproval, your lender will review your finances, including income, debt, credit history, credit score and debt-to-income ratio.
What Lenders Review and How Rate-Shopping Affects Your Credit
When you apply for a preapproved loan, your credit report will show a new ”hard” inquiry which can affect your credit score. Don’t worry if you get multiple lenders checking your credit while rate-shopping in a short period. Credit scoring models generally treat those inquiries as a single one. This helps limit the impact on your credit score while you compare loan options.
Comparing Mortgage Options for First-Time Buyers
The types of mortgages offered by lenders vary. Each one has its own set of eligibility requirements, down payment amounts, terms and other features.
Let’s explore some of the mainstream loans:
- Conventional Loans: Conventional loans are non-government loans that are offered in the form of fixed-rate or adjustable-rate mortgages. The down payment for a conventional loan could be as low as 3% of the home price. Fixed-rate mortgages keep your interest rate the same throughout the life of the loan. Adjustable-rate mortgages have an initial fixed period, usually five years, and then the rate adjusts annually based on the market rate. Terms for fixed-rate loans can range from 15 to 30 years. Private mortgage insurance (PMI) will be required for conventional loans with less than a 20% down payment. PMI is removed once the home’s equity reaches 20% of the loan value.
- Federal Housing Administration Loans: Known as FHA loans, these are government-backed mortgages designed to help first-time buyers or those with lower credit or savings qualify for a home loan more easily by reducing the lender’s risk. Down payments on FHA loans may be as low as 3.5%. FHA mortgage insurance is required and can only be removed by refinancing into a non-FHA loan. The loan can only be used for the borrower’s primary residence.
- Veterans Affairs Loans: VA loans are backed by the U.S. Department of Veterans Affairs and are available to buyers who are active duty, retired or U.S. Armed Forces veterans. No down payment is required as the loan is considered a military service benefit. There are additional requirements to verify eligibility and additional fees, so ensure you have enough funds to cover them, as well as closing costs.
The type of mortgage you select matters. Do your research and discover what works best for your unique financial situation.
How Can TCU Help?
Travis Credit Union is focused on your financial wellness, which includes helping you buy your first home. TCU offers mortgages that fit your homebuying journey, along with a dedicated home loan team that will be with you every step of the way. Visit traviscu.org to learn more about how we can help you reach your financial goals. To learn more about buying a home, start with our free Knowledge Base online financial education platform.
Frequently Asked Questions (FAQ)
What is National Homeownership Month?
National Homeownership Month in June highlights the importance of owning a home and encourages individuals to explore the path to homeownership. It’s a great time to start planning your homebuying journey.
What credit score do I need to buy a home?
Most mortgage lenders require a minimum credit score of around 620 to qualify for a home loan. A higher score can help you secure better interest rates and lower overall costs.
How much money should I save before buying a house?
You should save for a down payment, closing costs, inspections and moving expenses. Depending on the loan, down payments can range from as low as 3% to 20% of the home price.
How can I determine how much house I can afford?
Use an online affordability calculator or get preapproved by a lender to understand your price range. This helps you set a realistic budget based on income, debts and expenses.
What are first-time homebuyer assistance programs?
These programs offer benefits, such as down payment assistance, lower interest rates or grants, to help make homeownership more accessible. Eligibility may depend on income, location or occupation.
Why is mortgage preapproval important?
Preapproval shows how much a lender is willing to offer and helps you focus on your home search within budget. It also strengthens your offer when competing for a home.
What types of home loans are available to buyers?
Common options include conventional loans, FHA loans for easier qualification and VA loans for eligible military members. Each has different requirements, benefits and down payment options.