There are several ways that first time home buyers can obtain financial assistance to help them purchase their first home. These include government and nonprofit homeownership programs, tax deductions, employer-sponsored programs and special loans.
Some of these programs may be available statewide, while others are limited to specific cities or areas. Regardless of which one you choose, there are some key things that you should know.
1. You need to save a down payment
A down payment is an initial non-refundable payment that homebuyers make upfront for the purchase of a property. It’s a form of equity that gives lenders a sense of security, and it reduces the risk for them.
The amount you need to save for a down payment depends on the house you want to buy and your financial situation. In most cases, you need to have at least 20% of the house price saved up before you can buy a home.
While saving up for a down payment, you should also be prepared to cover other unexpected costs that arise. These can include car repairs, uncovered medical expenses or even the temporary loss of a job.
It’s best to start by paying off all your debt, and then save an emergency fund of 3-6 months of living expenses. Having these two bases covered will give you more room in your budget to save for a down payment, and can help you be financially stable during the process of buying a home.
2. You need to have a good credit score
Having a good credit score can help you get a better interest rate on your loan. A credit score is a three-digit number that lenders use to measure your risk and determine how likely you are to repay your loans.
A good credit score typically ranges from 300 to 850. It is also referred to as a prime credit score.
To have a good credit score, you should pay your bills on time and keep your credit utilization ratio low. You should also avoid applying for too many new credit lines at once, which can negatively affect your credit.
You should also check your credit report and scores at least once a year. This will help you spot any inaccuracies or issues that could hurt your credit score.
3. You need to have a good income
Having a good income is crucial to getting a home. You need to be able to afford the home you want, as well as any associated closing costs or down payments that you might have to make.
But the amount of money you earn plays a much smaller role in determining how much mortgage you can get than you might think. Lenders consider your debt-to-income (DTI) ratio, down payment and credit score more than just how much you make.
Generally, it is recommended that you do not devote more than about 30% of your income to housing expenses. However, this percentage can vary depending on your circumstances.
4. You need to have a good savings account
First time home buyers often need to put a chunk of their savings away for the down payment. Fortunately, there are many ways you can help yourself reach this goal.
One way is to automate your savings by setting up automatic transfers from your checking account to your savings account each pay period. This can be a lot easier than you might think and can make saving a lot more fun.
Another way to save is by asking family and friends for gift money that you can use to cover your down payment. However, you should check with your lender early in the process to ensure that they are okay with this.
There are also several options for earning interest on your savings, such as a certificate of deposit (CD) or a money market account. You can find these accounts at banks and credit unions, and they usually come with FDIC insurance. It can take a bit of shopping to find an account that offers good rates and other features.