Buying a first home can be a scary process for some. Most of us know the basics of buying a house, but there is more to it than having a down payment and signing a mortgage.
The biggest hurdle that most of us need to overcome is how to save 10-20% to put down. Especially if it’s your first home and you don’t have a house to sell. It seems like an impossible task to many. This was the one thing that stopped us from buying a house for so long, but you don’t need that much as a first-time homebuyer. I wish we knew this sooner.
Did you know that if you have good credit, first-time homebuyers can apply for a standard loan and put just 3% down? Even if you don’t have perfect credit, you could apply for an FHA loan and put 3.5% down. On a $250,000 house, that’s only $7500 for a standard loan and $8750 for an FHA loan.
How to get money
For some, even that can be hard to come by. If you have a 401k then you can take out a loan against yourself and pay yourself back with interest. If you have an IRA instead, you can withdraw $10,000 tax-free for a first home purchase. It gets even better if you’re married. You and your spouse can each take out $10,000 tax-free from an IRA and that will give you a very nice down payment of $20,000.
Find a great agent
Once you have enough money to buy a home, the most important thing is finding a great agent. We got incredibly lucky that the agent we chose was very knowledgeable, available, and hands-on. The process was easier than we ever expected and we attribute this to having an excellent agent. He answered all of our questions and made the process completely stress-free.
We didn’t realize that the down payment isn’t the only money we would need up front. You will also need to consider the closing costs and earnest money.
What is earnest money? It is about 1% of the purchase price of the house that you will need to have access to when you make the offer. You will write a check to the seller for about 1% of the cost of the house as insurance. If you back out for no reason then they can claim your earnest money for “damages” in having the house off the market for a period of time, but if you follow through with the sale the earnest money is then considered part of your down payment. Consider this amount when determining what your down payment will be.
Shop for your mortgage before going out to seriously look at potential houses.
- 1.) many agents won’t show you houses if you aren’t already pre-approved.
- 2.) many sellers will overlook your offer if you aren’t already approved.
- 3.) it will make buying your home go faster.
You don’t want the house of your dreams to slip through your fingers because you have to wait for loan approval when another buyer may already be approved. You can get pre-approved rather quickly now. We were pre-approved within 24 hours.
What if you change your mind?
Depending on your state you may have several opportunities to get out of the contract prior to closing if things don’t live up to your expectations. Here in Colorado, we had a lot of opportunities to get out if we wanted to. Talk to your agent about the rules are in your state before signing a contract on a house.