Answer With a bit of preparation, first-time buyers can compete with more experienced buyers and land the house of their dreams. Before you go to your first open house, however, there are a few things you need to know about buying a house.
1. Your credit score.
Your credit score helps to determine if you qualify for a mortgage and at what interest rate. The higher your credit score, the more likely you are to qualify and the lower your interest rate is likely to be. According to Experian, a leading credit bureau, you typically need a credit score of at least 620 to qualify for a mortgage, and a score of 740 or higher will open the door to the lowest available interest rates.
2. How much you’ll need for a down payment.
While it’s possible to qualify for a Federal Housing Authority (FHA) loan with as little as 3.5 percent of the purchase price as a down payment, according to the U.S. Department of Housing and Urban Development (HUD), most bank lenders prefer more. According to the National Association of Realtors, the median down payment in 2019 was 12 percent for all buyers, 6 percent for first-time buyers and 16 percent for repeat buyers. In most cases, you’ll need to put 20 percent down to avoid paying an extra private mortgage insurance, or PMI, fee.
3. How to get preapproved for a loan.
You may hear lenders use the words prequalification and preapproval. Prequalification is an estimate — based on information you provide — of how much a lender will allow you to borrow. Ideally, you’ll want to go the extra step and get preapproved, which involves a credit check and an application with financial information that the lender verifies. Sellers tend to lean toward prospective home buyers with mortgage preapprovals because mortgage approval is more likely to move smoothly.
4. What you need (vs. want) in a home.
Before you end up in a home with a swoon-worthy kitchen but not enough bathrooms, figure out exactly what’s important to you. Make a list of what your new home must have and what you’d like to have but are willing to compromise on. If you’re buying with a partner, compare notes. Your list may change as you tour homes, but it will help you keep what’s important front and center.
5. What you can afford.
Just because you’re approved for a mortgage of a certain size doesn’t mean that’s the right amount for you to borrow. Does your job seem secure? Would you rather have a lower mortgage and leave room in your budget for vacations? Is college coming up for your children? Figure out exactly how much your home will cost you each month — for the mortgage, mortgage insurance, home insurance, property taxes and utilities — and use that as a basis to calculate what you’ll have left for the rest of your life.
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