First-Time Homebuyers: How to Prepare Your Finances for Your Purchase

The journey of home buying can be stressful but exciting, and buying your first home gives you the first real sense of independence in your life. However, it is very important to be well-prepared financially for the moment. Being on top of your finances only increases your chances of being approved for a mortgage with good terms. Let’s go in depth for the key steps that you should take in preparation of a home purchase. These could help immensely when it comes time to purchase your first home.

Assessing Your Current Financial Situation

The first place to start is contacting a local mortgage professional that can help you review your current financial picture, structure your goals based on your current financial picture and provide options to help you achieve your home buying goals.  

A good mortgage professional should do several things when you contact them.  

  1. Talk through your financial goals, compare it with your current budget and determine options based on your income, credit, assets, and financial objectives.   
  2. Request all of your financial information and the necessary documents to validate that information. This is important 
  3. Talk through 

As you should before every huge purchase, make sure to take a look at your financial situation, even if you are well prepared. Create a budget that helps you identify your spending habits and allows you to determine how much of a monthly payment you truly can comfortably live with in your monthly housing.  Being well-known of your financial status allows you to determine your overall price range in a home. You’ll be much more knowledgable of what you can and cannot afford. Besides, you don’t want to waste your time searching for homes way overpriced for your budget and end up disappointed. Here are a few steps that you can follow to determine how strong your finances are:

Reviewing Credit Scores and Reports

Analyzing Your Income, Expenses, and Debt

  • You can calculate your debt-to-income (DTI) ratio by dividing your total monthly debt payments by your gross monthly income. 

Creating a Budget and Setting Financial Goals

  • Using the steps above to help determine where you are financially will help set financial goals. Along with these steps, you can also list sources of income and the sources of expenses. That way you can map out exactly how much money is going in and out of your account every month. Doing so can help identify where spending money should be reduced if need be. 

Reviewing all of these steps monthly will lend you a helping hand on staying on track towards becoming a first-time homeowner. 

Saving for a Down Payment

It is essential to save money for a down payment prior to a home purchase. When putting down a down payment, you’ll reduce your loan amount, interest cost, and even your monthly payments of the home you purchase. To help you effectively save for a future down payment, here are a few steps to follow: 

Determining the Ideal Down Payment Amount

  • As always, your personal financial situation can determine the ideal down payment amount for your specific budget. However, a 20% down payment is often-times the usual. Differing percentages may be offered for different loan types. 

Saving Strategies

  • After determining your down payment amount, next you should come up with some strategies for saving funds. Setting up automatic transfers in your bank account is a way to easily prioritize saving over spending. This transfers money from your checking account into a savings account. Next you can adjust your budget and see where too much of your money is being spent, such as entertainment or eating out. Lastly, if possible and necessary, you can increase your income. Exploring opportunities like freelancing or even selling unwanted items that aren’t needed can easily give you some extra funds toward your goal. 

Building and Maintaining a Strong Credit Profile

Having strong credit more times than not means you are more likely to be approved for a good mortgage. There are key factors to consider when you’re building your credit: 

The Importance of a Good Credit Score

  • Having good credit directly impacts your interest rates and mortgage loan offers that you can receive. 

Tips for Improving Your Credit

  • If your credit score is lower than what you would want as you’re house hunting, there are ways to improve your credit. It can be very time consuming, but worth it in the long run. Always pay your bills on time, reduce any debt you may have, limit your credit inquiries, and maintain a mix of credit. All of those factors can go into account to improve your overall credit score. 

Monitoring for Errors and Identity Theft

  • Regularly checking and monitoring your credit reports is crucial to ensuring that you do not have any errors or signs of theft. It is also a good time to review where you’re spending your credit and if you can pay it off every month.

Actively following these steps and working on your credit score consistently will only improve your position of making any big purchases, especially a home. Having strong credit proves to mortgage lenders that you really are capable of affording a home. 

Understanding Mortgage Options and Programs for First-Time Buyers

There are several mortgage options to consider when you are in the market for a new home. It can be a very stressful time for anybody, so here is an overview of the options available to you: 

Types of Mortgage Products

  • Fixed-rate mortgages
    • Your interest rate remains the same throughout the term of your loan.
  • Adjustable-rate mortgages (ARMs)
    • Your interest rate may change over time based on the housing market. 
  • Interest-only mortgages
    • Payments are made during the interest portion of the loan for a certain amount of time; these mortgages are suitable for those with a constantly changing income. 

Learn more about the differences between fixed-rate mortgages and adjustable-rate mortgages here.

Programs and Initiatives for First-Time Homebuyers

  • There are several programs and initiatives for first-time homebuyers to choose from that are sponsored by federal, state, or even local governments. They help provide an easier solution for homebuyers and make it easier for them to do so. These programs offer assistance financially and even lower or cover down payments. 

Preparing for Closing Costs and Other Expenses

As stated above, saving finances for a down payment is a crucial step for buying a home, but preparing for closing costs and other unexpected expenses is just as crucial. Here are a few tips that can help: 

Estimating and Understanding Closing Costs

  • Closing costs are about 5% or less of the price of the home and include fees and other expenses. 

Saving for Any Unexpected Expenses

  • Having an emergency fund included in your finances should be something that you incorporate into your new life as a homeowner. As everything, you never know what will happen so saving extra funds annually will only help pay the cost of damage, repairs, etc. 

Moving and Furniture Costs

  • Moving and purchasing furniture always costs money. Of course, it depends on how far you are moving and the size of the home you purchased. The bigger the home, the more furniture is needed. 

Choosing the Right Mortgage Lender/Broker and Getting Pre-Approved

Having a mortgage lender is essential to the home buying process, they can make the experience a lot less stressful for all involved. Not to mention, they also save you time. The next step is becoming pre-approved for a mortgage. The pre-approval helps you understand how much of a house you can afford, which keeps you in your budget. 

There are several factors and preparation that goes into buying a home for the first time. It is an exciting and life-changing process, but trust us, it is very rewarding. Learning your financial status, maintaining your credit, learning about mortgage options, and saving for closing costs, are just a few of the steps that first-time home buyers encounter. However, if you take control over these steps and understand what factors in, your journey to owning a home will be successful. 

Get started with your home buying journey here with us at First Integrity Mortgage.