Preparing to buy a home for the first time can be a daunting task, from selecting a property to securing the financing you’ll need to break into the housing market. In this blog, we examine how the home financing process works for first-time buyers, including key steps you’ll need to take to secure your loan, and frequently asked questions about how financing works.

Read on to learn more!

Unlocking Dreams: How to Prepare to Buy a Home

There’s a lot to think about when you are preparing to buy a house for the first time. Most important of all is making sure you have access to the financing you need to afford a place of your own. You can reduce stress and set realistic expectations by following these steps.

1. Start Saving Early

Begin saving for a down payment as soon as possible. While most young people have many demands on their extra cash, putting away more for your home should be a priority.

It helps to have a dedicated savings account to track progress toward your home purchase goal. Listerhill Credit Union offers a range of savings products to help you build your home down payment nest egg.

2. Decide How Much Mortgage You Can Afford

Be realistic about how much long-term debt you can afford to take on. Although it’s tempting to put as much as possible into a property that will usually increase in value over time, overextending yourself on a mortgage may prevent you from being able to save for other priorities like education or retirement and may leave you vulnerable to unplanned expenses.

You can use Listerhill’s mortgage affordability calculator to work out how much you can really afford by comparing your income, expenses, property taxes, and financial goals.

3. Review Your Credit and Improve It

Your credit score is the single biggest factor determining the annual percentage rate (APR) you are offered on your loan. Take the time to obtain and review all your credit reports regularly, and do everything you can to correct any inaccuracies and pay down debt, especially on short-term revolving credit like credit cards.

4. Lower Your Debt-to-Income Ratio

Also important is your debt-to-income (DTI) ratio, or the amount you owe each month relative to your gross monthly income. You’ll attract the best rates for scores of 30% or below, while most mortgage lenders will want a rate of 45% or lower to extend credit at competitive rates.

The best thing you can do to improve your debt is to lower your outstanding debts and avoid taking on new credit.

5. Don't Forget Closing Costs

As you calculate what you can afford to spend on a home, don’t forget to include the closing costs on your loan, including inspections, appraisals, title transfers, and other fees. These typically add up to between 2% to 5% of the value of your loan. Avoid unexpected budget shocks by saving for closing costs in a separate savings account.

6. Explore Different Mortgage Options

Be sure to understand exactly what type of mortgage might be available to you, and how these will affect your financing options. In particular, understand what is meant by a conventional loan, as well as the potential advantages and disadvantages of both fixed-rate and adjustable-rate mortgages and how each of these might best fit your needs.

7. Research First Time Home Buyer Loan Programs and Grants

There is a wide range of resources available to help first-time buyers afford homes. This includes loans backed by the Federal Housing Authority designed for those with lower credit scores and less money to put down to qualify for loans, as well as a variety of state, city, and county-level initiatives.

You also might qualify for additional loan assistance as a veteran (VA loans), government employee, or first responder.

8. Get Pre-Approved

It’s not worth looking at specific homes to buy until you have been pre-approved for mortgage financing. This will allow you to make offers on properties with confidence that you will be able to secure the mortgage you need. Take the time to gather the required documentation, including proof of identity, address, tax returns, and information about your existing liabilities.

9. Work With Professionals

To get the best deal you should work with professionals like real estate agents and qualified mortgage loan officers. Listerhill and other credit unions not only offer lower rates than big commercial banks but can offer more personalized service and products tailored to their members' needs.

10. Understand the Home Buying Process

Forewarned is forearmed, they say, and this is true of buying your first home. The more you know about the process going in, the better you’ll understand the critical choices you will need to make. Make use of critical resources like Listerhill’s Banzai! Financial Wellness program.

First-Time Homebuyer Frequently Asked Questions

There’s always more to learn about buying a home and mortgage financing. Here are answers to your most frequently asked questions.

What is the first thing to do when preparing to buy a home?

Start saving for a down payment. Set up a dedicated savings account to keep your house payment nest egg separate from your daily spending and create a timeline to track progress towards your goal. Also, begin reviewing your credit reports. Pay down as much debt as you can, and consider saving money separately to cover your closing costs.

How much money should you have saved before buying a house?

You should aim to have at least 20% of a home's purchase price saved for a down payment to attract a competitive rate and avoid private mortgage insurance (PMI). You should also plan to save 2% to 5% of the loan amount for closing costs.

What are the three most important things when buying a house?

From a financing point of view, the three most important things when buying a house are your credit score, your debt-to-income ratio, and your down payment. A good credit score helps secure better mortgage rates, a low debt-to-income ratio improves your loan approval chances, and an adequate down payment saves on interest, reducing your loan costs.

How much should I make a year before buying a house?

You need to be earning enough to comfortably support your mortgage payments with money left over for all your other expenses and savings, plus emergencies. To secure the best funding, your loan payments should not exceed 30% of your gross monthly income.

Benefits of Getting a Mortgage from a Credit Union

We’ve already discussed how choosing to work with a great local credit union like Listerhill can help you secure:

• Lower rates

• Tailored loan terms

• Personal service, including end-to-end support and guidance

In addition, as a credit union member, you can take advantage of:

• Fees lower than those charged by commercial banks

• A more streamlined application process

• Better understanding of the local property market

You’ll enjoy all these benefits when you choose to finance your home through Listerhill Credit Union, along with:

• Up to 100% financing

• Flexible terms

• Adjustable or fixed-rate mortgages

• FHA, VA, or USDA loans

• No charge for mortgage insurance.

Contact us today or step into a branch to find out more, or click below to learn about grants that can bring home ownership closer for first-time buyers.

First-Time Home Buyer Grants: State-by-State Guide