Tips for First Time Home Buyers (Don't Forget Insurance!)

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You have many things to do before you buy a home. Start saving early so when the time comes to buy that first home, you’ll be ready. You’ll also want to check your credit score regularly and keep it as high as possible since this has a tremendous impact on the parameters of your mortgage. If you need help with some of the costs associated with buying a home, there are buyer assistant programs you can look into. And don’t neglect to go to a number of open houses as it is a great opportunity to see a selection of homes in a casual context. If you do make an offer on a home you want, get a home inspection so you know what needs to be fixed or replaced. You can use this when negotiating with the seller about the price. Most importantly, buy your own home insurance. Don’t let the lender choose your coverage for you.

If you’re buying your first house, keep reading to get tips as to what to consider when purchasing a new home.

Save as Early as You Can

Start saving as early as possible if you’re intending to buy a house. The average cost of a home in the U.S. hit a record high in 2021 of $453,700, up from the prior year’s average of $391,900. In order to meet these financial demands, you should have as much money set aside as possible. This will allow you to put as much of a down payment on your new home as possible, lowering your mortgage rate and overall costs. And while most people aren't able to pay for the home in full, you may be able to substantially reduce or shorten your mortgage by saving ahead of time. If you're able to do this, you'll own your home, free and clear in a relatively brief period of time.

You should also save for closing costs which can be between 2% - 7% of your home's purchase price. This is important when factoring how much money to set aside. Closing costs often include:

  • Application Fee
  • Appraisal
  • Attorney Fees
  • Closing Fee
  • Courier Fee
  • Credit Reporting Fee
  • Escrow Funds
  • Flood Certification
  • Homeowners Association Transfer Fee
  • Homeowners Insurance
  • Loan Origination Fee
  • Lender’s Title Insurance
  • Lead-Based Paint Inspection
  • Owner’s Title Insurance
  • Pest Inspection Fee
  • Prepaid Daily Interest Charges
  • Private Mortgage Insurance (PMI)
  • Property Tax
  • Rate Lock Fee
  • Recording Fee
  • Survey Fee
  • Tax Monitoring And Tax Status Research Fees
  • Title Search Fees
  • Transfer Tax
  • Underwriting Fee

You may also need to have money for moving costs. This includes money for movers and any repair costs not factored into your mortgage.

Start saving as early as possible if you’re intending to buy a house.

Work on and Strengthen Your Credit Score

Your credit score and credit report are used in determining your ability to get a mortgage and the rate you’ll pay. Your credit score is based on information in your credit report and is considered a measure of the likelihood you will repay your debt. It is not the same as your insurance score which is also assigned based on your credit report.

A high credit score suggests a good credit history. Scores range from 300 to 850 with an average score in 2020 of 710. Generally, a score above 700 is considered good and a score over 800 is excellent. Note that the type of loan you get will dictate the kind of credit score you need to qualify for a mortgage. A conventional loan will require a higher score than a government-backed loan.

Mortgage lenders will typically use your FICO score which can show a different score depending on which reporting agency they use. The numbers don't tend to fluctuate too much, so you don't have to worry about which one the lender uses. Usually, mortgage lenders will look at the scores from the major credit bureaus; Experian, Equifax and TransUnion.

Because of the role your credit score and credit report play when determining your loan, you should check your score and credit report often to make sure there aren't mistakes. If you see something on your report that isn't right, report it to a credit bureau. Once they've made the appropriate changes, your credit score will be adjusted accordingly. However, the change will not take effect immediately. It may take 30-60 days for the adjustment to show on your report.

Be Sure You’re Ready for the Home Loan Commitment

Be ready for the commitment of having a home loan as it is one of the largest expenses you will ever have. Loan terms tend to be either 15 years or 30 years, though some lenders may offer a 20-year term. Ask yourself the following questions:

  • Can I/we commit to this home and location for at least 5 years?
  • Is there an emergency fund that can cover at least 3 months of expenses?
  • Is my/our income stable?

You may need to reconsider getting a loan if you answered no to any of these questions. Part of getting a home loan is looking ahead and planning for the future. Think about if you have any events coming up that could affect your expenses, income or location. Factor these into your decision-making.

Your credit score and credit report are used in determining your ability to get a mortgage and the rate you’ll pay.

Look into First-Time Home Buyer Assistance Programs

There are many programs that exist to help first-time homebuyers secure their homes. These are called first-time home buyers programs and they are designed to give aid to people who haven't owned a home before. These programs are usually government-funded, either federally, state, or locally. Below is a list of some of the programs available for first-time home buyers.

Down Payment Assistance Mortgages

These are loans that are used for the down payment of a home, usually with favorable terms. Home buyers borrow money from a financial institution at possibly 1% interest with potentially ten years to pay it back.

You can also look at deferred mortgages to assist with down payments. A deferred mortgage is a loan that doesn’t require repayment for a specified amount of time.

An example would be you borrow $30,000 for a down payment with a deferred mortgage and you sell your home after five years when the value has doubled. You’ll pay the $30,000 back to the lender and keep the rest of the profit for yourself after closing. Down payment assistance mortgages are usually only available through local governments and local foundations and are typically limited to first-time buyers with income below the area average. Credit history typically has to show a decent record of on-time payments.

There are also what are called forgivable loans for down payments. Lenders erase the debt when a buyer meets certain conditions within a window of time. For instance, say a first-time home buyer uses a forgivable loan for a $30,000 down payment. If they still live in the home after five years and have paid the mortgage as agreed, the lender may write off the forgivable mortgage loan for down payment with no interest due and no payments made. The loan is forgiven and its lien removed from the title.

First-Time Home Buyer Tax Credit

A first-time home buyer tax credit is a financial incentive wherein the federal government offers you a substantial tax cut for purchasing a home. The IRS already gives a tax credit to home homeowners through its mortgage interest tax deductions. However, federal and state governments will add extra tax benefits for homebuyers. For example, homebuyers in 2009 received up to $8,000 in tax credits!

Closing Cost Assistance Programs for Home Buyers

Closing cost assistance programs can pay up to 100% of the closing costs, which include mortgage fees, title expenses and transfer taxes. They’re meant for lower-income home buyers that have average credit scores. You can usually apply through your local housing agency. Go to the National Council of State Housing Agencies website to look up your state’s housing agency.

Research and Explore Mortgage Options

Research and see what type of mortgage will work best for you depending on your finances and where you’re buying a home. Below is a list of mortgage types for you to consider.

  • Conventional loan: These are good for borrowers with good credit scores
  • Jumbo loan: These are good for borrowers that have excellent credit scores that are looking to buy an expensive home
  • Government-insured loan: These are good for buyers who have lower credit scores and a smaller amount of money for a down payment
  • Fixed-rate mortgage: These are good for borrowers who want a mortgage rate that is unchanging and predictable.
  • Adjustable-rate mortgage: These are good for borrowers who won’t necessarily stay in their home for a long period of time and who are fine with the possible risks associated with larger payments down the road
First-Time Home Buyers - Compare Insurance Quotes!

Make Sure To Get a Pre-Approval Letter

A pre-approval letter is a document from a lender that shows how much they’re willing to loan you for a new home. This helps give you credibility when speaking to sellers as they will see that you have access to the appropriate amount of funds to buy the property.

Getting pre-approved can also help you understand how much you’re able to afford before you start house shopping. And keep in mind that in a seller's market, like what we’re experiencing now, where there could be several buyers bidding on the same home, pre-approval for a loan will give a key advantage to having your offer considered or accepted.

Once the lender has issued the pre-approval letter it will only be valid for a certain period of time, typically 30, 60, or 90 days. It will outline the terms of the offer, which includes any fees, the maximum allowable purchase price and the interest rate the lender has proposed.

Once you’re ready to move ahead with the mortgage process, your lender could ask for any updated financial documents and they may potentially pull your credit again. Depending on if there was a change in the market, you may be offered a different interest rate as well.

Pre-approval will cause a hard inquiry on your credit report which can lower your credit score but only by a few points. The score impact for something like a pre-approval is only temporary and should not stop you from securing the best rate possible.

List Out Your Needs and Wants

List your needs and wants when you begin your home buying search. For instance, a need might be air conditioning. That means any house that doesn't have air conditioning is immediately out of the race. A want could be your two minutes away from a grocery store. This means you’re not necessarily going to pass up on a home because it’s ten minutes away instead. Take some time and think about what the things are you really can’t do without. If you’re stuck, ask your friends and family. And be realistic about what you think you can get.

Research and see what type of mortgage will work best for you depending on your finances and where you’re buying a home.

Find the Right Real Estate Agent and Agency

You'll need to find a real estate agent and agency that knows exactly what it is you’re looking for at the price you want. Real estate agents are experts in the home-buying process and should have a good knowledge of your local market. They can help by:

  • Showing you properties that match your needs for the budget you want
  • Attending showings in order to learn more about your priorities as a homeowner
  • Informing you on what you should offer for a property you’re interested in
  • Submitting offer letters for you
  • Assisting with the negotiation process
  • Making sure everything is in order for you during the closing

Take Advantage of Open Houses

An open house gives you the opportunity to look through homes at a leisurely pace, giving you an idea of what the home looks and feels like. You're usually able to roam through the property freely without the stress of having to interact with a listing agent. What interactions you do have can be limited to any questions you may have.

Another benefit of going to an open house is you don’t have to make an appointment. Usually, there’s a window of time where you can show up, making it more convenient.

Pay for a Home Inspection

You will have to pay for a home inspection before buying a house. A professional inspector is brought to the home and examines the structure and systems. An inspection includes a visual examination of the building from top to bottom. This includes the central air-conditioning system, drainage, foundation, heating system, plumbing, roof, walls and windows. Basically, anything that can be easily seen and reached by normal means is included in the inspection.

Get an inspection done right after you’ve made an offer. There's typically a grace period for home inspections and you can also factor in a home inspection as being part of the buyers agreement. Oftentimes, necessary repairs are discovered and can become part of the negotiated purchase price. Home inspections also help protect you from surprise problems you weren’t expecting once you move into your new home.

Negotiate With the Seller

Depending on the market conditions for home sales, it is not unusual to negotiate price, repairs, closing costs, length of escrow, etc. Your real estate agent can help with this so you know how much negotiating power you have.

Shop Around for Homeowners Insurance Before Closing the Deal

You are required to purchase homeowners insurance if you’re going to get a loan from a mortgage lender. It’s designed to protect you and your lender, which is the reason lenders usually won’t agree to lend money for your home until they know you have a policy.

Paying for homeowners insurance will initially be handled through escrow, and the cost will be included in your monthly mortgage payments. If you don’t find your own policy, the lender has the right to buy a home insurance policy on your behalf. The problem with this is that you may end up paying more than you have to. It’s always a good idea to shop around and buy your own homeowners insurance.

A home insurance policy can offer:

  • Dwelling coverage: covers home’s structure against perils listed in your policy, such as
    • Fire or lightning
    • Windstorm or hail
    • Explosion
    • Riots
    • Aircraft
    • Vehicles
    • Smoke
    • Vandalism
    • Theft
    • Falling objects
    • Weight of ice, snow, or sleet
    • Accidental discharge or overflow of water or steam
    • Sudden and accidental tearing, cracking, burning, or bulging
    • Freezing
    • Sudden and accidental damage due to short-circuiting
    • Volcanic Eruption

Most importantly, buy your own home insurance.

Dwelling coverage doesn't protect against floods, earthquakes or routine wear and tear.

  • Loss of use: pays for additional living expenses (ALE) up to your policy limits should you be required to live elsewhere because of a covered incident.
  • Medical payments coverage: pays the medical expenses of anyone injured on your premises, no matter who's at fault.
  • Other structures coverage: insures facilities not connected to your main home structure, including sheds, gazebos, fences and detached garages. Up to 10% of this coverage protects detached structures.
  • Personal liability coverage: protects your legal liability when someone suffers bodily injuries or property damage at your home.
  • Personal property coverage: protects your belongings if they are damaged, destroyed or stolen. It covers 50% to 70% of your home's dwelling limits to protect your furniture, electronics, clothing and jewelry.

If you don’t have homeowners insurance and your mortgage lender finds out, they may put force-placed insurance on your home, which may cost more.

Home Buyers FAQ

Do I need homeowners insurance to buy a home?

If you are going to get a mortgage, then you will need to get homeowners insurance. This lets the lender know their investment is protected. If you don’t buy it, they will buy it for you, probably at a higher cost.

What’s the best mortgage if you don’t have good credit?

People with low credit scores should consider getting a federally backed mortgage through the FHA (Federal Housing Commission), VA (Veterans Association) or the USDA (United States Department of Agriculture).

Can I get homeowners insurance with bad credit?

You can get homeowners insurance if you have bad credit, though your rates will likely be higher as you will be seen as a greater financial risk to the insurer.

Key Takeaways

  1. Make sure you save as early as possible so you can make repairs, make a downpayment or possibly pay off your home in full.
  2. Get a pre-approval letter. This will help show you what you can afford and it shows the sellers you're a serious buyer.
  3. Use open houses to get a good feel of the home you’re interested in as well as the neighborhood and the others who live there.
  4. Get a home inspection so you know about any work that may need to be done. You can use a home inspection as a bargaining tool with sellers, having them deduct the cost of certain repairs from the price.
  5. Buy your own homeowners insurance policy to save money.

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