First-Time Homebuyers
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Understand Your Homebuying Budget
Your first step toward buying a home is to understand your budget. You need to have a good handle on your finances, as well as know what you can afford to spend on a monthly basis for your new home.
To determine this, you should:
Know how much you bring in on a monthly basis (you and any co-buyers)
Tally up your monthly expenses and debts
Assess your savings scenario
Determine an appropriate monthly payment that fits your budget. You can also use a mortgage calculator for a more exact number. Keep in mind there will also be additional costs that may come with being a homeowner, like maintenance and repairs, utilities, property taxes, mortgage insurance, homeowners insurance, and more.
VERY IMPORTANT - Assemble the Mortgage Paperwork
You don’t need to get a loan until you have an accepted offer on a house. Once you do, however, you’ll want to close on the loan quickly. So it’s better to get a jump on the mortgage process even before you start the home search.
Tip: Get prequalified and preapproved for a mortgage so that you can better understand how much a lender will loan you and what interest rate you might receive once you’re ready to officially secure a mortgage.
Most lenders will require you to submit a significant amount of paperwork to show that you can afford to make your monthly payment and, ultimately, repay the loan. This documentation can take some time to assemble.
Prepare a folder with the following documents:
Two years’ worth of tax returns
Your recent W-2’s
Your most recent pay stubs from the last 30 days
Your two most recent bank account statements
Other asset and investment statements (401k’s, bonds, stocks, etc.)
If you have everything organized ahead of time, you can potentially close on a loan within weeks.
Gather the Down Payment
Keep in mind that you’ll need to have a certain amount of cash on hand to fund your home purchase. In general, you’ll need a down payment, normally 3% to 20% of the purchase price. You’ll also need cash to cover closing costs, which can usually add up to another 2% to 5%, as well as moving expenses.
Your required down payment will depend on the type of mortgage loan you choose. FHA loans require as little as 3.5% down, while conventional ones generally require at least 3%. In order to qualify for the best mortgage rates and save more money, however, you may need to put down as much as 20%.
There may be some exceptions. If you qualify for a VA loan (for veterans and military members) or a USDA loan (for homes in eligible rural areas), you may not be required to come up with a down payment at all.
During your homebuying journey, your mortgage lender can tell you the types of loans you may be eligible for and the down payment that’s required for each.