If you’re a first-time homebuyer, then you have no shortage of things to be concerned about. Buying your first home is likely the biggest financial investment you’ll have made up to this point, and for many people, their home remains their most valuable asset.
You need to find what homes are in your price range, and to do that you’ll need to check your credit score. Your score will affect whether or not you can qualify for a mortgage loan, the loan amount, and the kind of interest rates you can expect for your mortgage payment.
You can obtain a free credit score annually from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Use these scores to estimate how much you can get for a home loan and how much home you can afford.
You also need to start saving as early and as much as possible because of all the extra fees that can go into purchasing a home. You’ll need to make a down payment on the home, and the amount will depend on your lender. Some will allow for a small down payment, as low as 3%, but you may not be that lucky. It’s important to consider your mortgage options as well before you start with applications. A conventional loan isn’t guaranteed, but some options are.
For example, an FHA loan is insured by the Federal Housing Administration (FHA). There are also USDA loans insured by the Department of Agriculture for rural homebuyers, and these often require no down payment. Veterans can get VA loans, which are guaranteed by the Department of Veteran Affairs and require no down payment.
You may be able to find a time homebuyer program that can help you find a low-rate mortgage and offer cost assistance with down payments and closing costs. Check with your local government to see if you qualify for your city’s first-time homebuyer program.
Once you’ve found an agreeable mortgage program, it’s a good idea to get a preapproval letter. This is proof that a financial institution is willing to accept you in a loan program and it shows sellers and real estate agents that you’re serious and ready to buy your new home. Speaking of real estate agents, you’ll want to hire one to search the market for the right home that fits your income limits.
While the seller should pay for a basic home inspection, you may want to conduct your own to avoid potentially costly repairs. Depending on the seller, you and your realtor may be able to negotiate the purchase price before signing the final paperwork.
Of course, all of this doesn’t even take home insurance into account, which is crucial for any buyer, and a first time homebuyer may not even think about it at first. Homeowners insurance isn’t just important for protecting your new home in case of emergencies—virtually any lender will require borrowers to have it before approving a loan application. Whether you’re buying a mansion, condo, or a fixer-upper, insurance is a basic part of home ownership. Here are the basic kinds of coverage and more homebuyer education.
This is the most basic form of home insurance that any home buyer will need to invest in. Your options range from the HO-1 form to HO-8, and each number increase generally offers more advanced coverage. Most any time homebuyers will be fine with an HO-3 to HO-5 policy.
Most lenders don’t like the HO-1 form anymore, and they’ll argue that it doesn’t provide enough coverage. It protects against natural events and disasters such as fire damage, hail, wind, lightning, and explosions. It also protects against damage from vehicles, theft, vandalism, and riots. While this may sound like decent coverage, the HO-2 form is much broader and protects home buyers in cases of falling objects, freezing systems, pipe damage, and it even covers personal belongings.
The HO-3 form is the modern standard for all time home buyers, and it covers any damage to your home and belongings except damage due to events excluded in the policy. Such events frequently include things like flooding and earthquakes, so a first-time homebuyer may need to purchase specific coverage for these events depending on their area. Policies get more comprehensive up until HO-5.
The remaining policy forms are generally meant for specialized homes such as condos or mobile homes. Naturally, your monthly payments for insurance will depend on the level of coverage you purchase, so you’ll need to determine how much money you can afford and budget appropriately.
This insurance protects your personal belongings in your home, and most forms of homeowners insurance will include this. If you’re still renting your home, however, you may need to purchase it separately as renter’s insurance.
This expense, as well as potential high costs of utilities, are just some of the disadvantages of renting. This coverage generally covers items whether they’re damaged or stolen. Make sure to get an appraisal for your most valuable items, so you can get the right amount of coverage.
Personal Liability Coverage
This is protection against bodily injury that may occur on your property, such as a guest falling and breaking a bone. While this may seem like just an extra bill to drive up your monthly payments, forgoing this insurance is one of the most common mistakes a first-time home buyer can make.
Paying a comparatively small amount of money now is vastly preferable to potentially huge out-of-pocket costs due to medical expenses and possible lawsuits. Liability insurance is as crucial a part of homeownership as dwelling insurance in the long run.
Cash Value vs. Replacement
When signing up for a home insurance policy, homebuyers generally have a choice between being reimbursed via the actual cash value of the home and lost items or through replacement cost. An actual cash value policy will reimburse you the cost of your house and belongings after taking away depreciation costs.
This means you’re being paid the current value of the items and not necessarily what you paid for them originally. Most educators and insurance pros recommend all time homebuyers to purchase replacement policies since these don’t deduct depreciation, and extended plans can even cover your home for more than its value.
Private Mortgage Insurance
PMI is meant to protect lenders rather than home buyers, but you may be required to pay it, especially if this is your first mortgage loan with either a small down payment or a bad credit report.
Typically, PMI is covered via an additional fee added to your monthly mortgage payment. Agreeing to a loan with PMI may help you qualify when you otherwise wouldn’t, but it’s important to remember that this insurance doesn’t benefit you in any way. If you fall behind on payments, you can still lose your home.
While it may sound similar to insurance, a home warranty covers repairs and replacements, not for your home itself, but for the appliances and systems within it. Think things like your washer and dryer, kitchen appliances, and HVAC system.
These plans generally last for one year, and you can customize them to cover most anything you want, even a pool. Keep in mind that these policies are meant to cover ordinary wear and tear, and they absolutely don’t substitute for homeowner’s insurance.
To learn more about our services and the homebuying process, contact us today. Our team is ready to help you make the best first-time home-buying decisions as possible.