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A Guide to Buying Your First Home

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If you're thinking about buying your first home, you may feel confused or overwhelmed about where to start. After all, this will probably be one of the largest investments you've ever made. But as many an elated homeowner can attest, it really is possible to get out of the rental game and move into a place that's truly yours.

Check your credit score

Unless you happen to have a few hundred thousand dollars lying around, you'll have to get a loan. This is a great time to check your credit score. Your score will not only determine if you qualify for a mortgage, it will also impact the interest rate you pay.

If your score is 740 or higher, you'll get the best possible rate. If it's lower than 620, you'll have a much harder time getting a loan, and any loan you do get will come with a higher interest rate. A low score could be a sign that you should wait to get into a house. Give yourself time to improve your score, and you can look forward to a better deal and more secure future.

Shop for a lender

Before you start looking at houses, you should shop around for a lender that can pre-approve your loan. When you do eventually choose a house, it will be easy to seal the deal with the financing already in place.

Whether you go to a bank, credit union, or online lender, you'll have to ask some questions and make some decisions. Find out how long it will take to approve the loan. And make sure you understand all costs and fees, not just the bottom-line interest rate. First-time homebuyers sometimes apply to the first mortgage program they see online and lose out on better deals. You can't find the best mortgage rate without putting the time into research.

Most lenders offer both fixed-rate mortgages and variable-rate mortgages (aka adjustable mortgages). Adjustable-rate mortgages may offer a lower rate at first, but that could surge when the market changes and make your payments unaffordable. You'll also have to choose between a 15-year and 30-year loan.

The monthly payments on a 30-year loan are lower, making it a popular option. If you can afford the monthly payments, a 15-year loan will be cheaper to pay off in the long run. Even if you get a 30-year mortgage, you can still pay down your loan a lot earlier by making an extra principal payment each year, as long as the mortgage has no prepayment penalty.

In fact, avoid any loan with prepayment penalties or balloon payments. Being able to pay off your mortgage whenever you want to is important. So is getting a fixed mortgage rate and an escrow account so you can pay your property taxes and home insurance month by month rather than in one whopping annual payment. All this will help prevent problems down the road.

Determine the best loan type for you

Conventional mortgages usually require a 20% down payment. If you don't have enough money for that, you might consider a Federal Housing Administration (FHA) loan, which requires a much smaller down payment. FHA loans are especially useful if your income is in the low to moderate range, especially since FHA loans offer lower down payments and less-restrictive requirements for credit scores. The drawback is that they have tight loan limits and require that you get private mortgage insurance. If you live in a rural or semi-rural area, you might also want to check out a USDA loan, which offer loans with no down payments.

Consult trusted professionals

If you're buying a home for the first time, you'll likely need expert advice. One of your best allies is an experienced real estate agent. Working with an agent who knows the neighborhood you're interested in is an enormous advantage. Your agent may even be able to notify you about new houses that go on the market even before the house is put on the MLS (multiple listing service) -- something that will give you an edge over other buyers. (No matter how experienced an agent is, it's also important that you feel comfortable with him or her, so trust your gut on this one.)

Your real estate agent can help you assemble a team of professionals, including a loan officer. He or she may also recommend an attorney or settlement agent to handle the closing, depending on the state you live in.

Your real estate agent may also be able to recommend a good home inspector, and you may also want to engage a contractor to look at the property and write up a cost estimate for any repairs, such as a torn roof or cracked foundation. Your agent can often use that information to negotiate a lower offer on the home you want.

Follow up with your lender

You'll have about 30 to 45 days to get ready to get ready to close after you sign the contract. Try not to quit or change jobs, keep paying all your bills on time and don't order any new credit cards -- not even a store card. These changes will surface on your credit report, and many a first-time homebuyer has been shocked to find that something as small as the Target card they got to save $5 on a purchase may delay their closing.

Lenders don't mind if you check in weekly to make sure everything is headed for for a smooth close. Keep copies of all the electronic documents your sent your lender in one easy-to-access folder and print out the whole file, in case there are any last-minute requests for missing documents.

Unless you are paying for your house in cash, lenders usually require a years' worth of prepaid home insurance. You will need to prove you have insurance before the closing. On closing day, bring an extra copy of your home insurance policy.

What to expect at the closing

The big day has finally arrived. It's closing day and the house will soon be yours. What happens next? How you close on a house depends on state law and where you live, but most closings follow the same general process.

At the closing, you'll be handed a pen that you and any other borrowers can use to sign and initial the loan contract (some lenders let you keep the pen as a souvenir). The essence of the agreement is that you promise to repay the loan, and you understand the lender has the right to foreclose and evict you if you fail to repay it.

You'll also sign a Closing Disclosure ,which itemizes all the financial transactions involved in your loan. Take a look at the figures in the Closing Disclosure and compare them to the Loan Estimate you received before the closing. Check everything carefully. If there are differences, talk with your lender about it and work things out before you sign.

Keep an eye out for one of the most important pieces of paper at your closing -- the title documents. The title documents prove the ownership rights from the previous owner have been conveyed to you.

Expect the closing to be businesslike but hectic. Even though legal documents being handed around the table like hotcakes, don't let yourself get rushed: Take the time to read over each document carefully. Feel free to ask whatever questions you need.

Once everything is official, you'll get the key. Go ahead and put a nail in that wall and tear out the shag carpet. The place is yours; you've earned it.

References

Buying a Home. Department of Housing and Urban Development.

Guide to Credit Scores. Equifax. https://www.equifax.com/personal/education/credit/score

Loan Estimate. https://www.consumerfinance.gov/owning-a-home/loan-estimate/

Closing Disclosure. https://www.consumerfinance.gov/owning-a-home/closing-disclosure/

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