Being a first-time homebuyer is exciting and scary. There are a lot of unknowns, and your first home will likely be the biggest purchase you’ve ever made. I have compiled a list of frequently asked questions first-time homebuyers often have. Please ask your questions in the comments below, and I will answer them, too!
What is a mortgage, and how do I get one?
A mortgage is a type of loan used to buy a home. Find a mortgage lender in your area who can help you get pre-approved. They will ask you questions about your financial and job situation and run a credit check in order to determine what rate options are available for you. They will also give you a pre-approval letter, so everyone involved in the process will know that you can purchase a home within a specific price range. (This is different than being prequalified, which means you “might” be qualified to borrow a certain amount).
How much do I need to put down for a down payment?
The first step for buying a house is saving for a down payment. Oftentimes, people who would be first-time homebuyers hear myself or others speak about the fruitfulness of real estate investing and get really excited to start. However, they have no money! This isn’t meant to be discouraging. A young man in Dallas came to me positively overjoyed to begin his real estate journey— with no cash. I challenged him by saying, “Come back to me when you have $10,000 saved.” Six months later, he called me, and I walked him through buying his first investment property. Since then, he has owned over 60 investment properties!
A down payment can be as low in today’s market as 3% (5-6% is the national average). In Colorado, the average price for a home is $431,000. That means that you could potentially have a down payment for an average house with less than $13,000. (Of course, Colorado’s market is high, and there are cheaper properties within the state to be found!) I recommend calculating how much you can comfortably save each month and how long it will take you to save the amount needed for a down payment. This will give you a realistic time frame and the ability to adjust your savings if needed.
Are there other funds I need?
Mortgage companies charge fees for processing loans. Typically, you will need 1-4% of your loan price to cover what are called closing costs.
Is my credit score important?
Yes! The health of your credit score determines the interest rate you will pay on your loan. It can make or break whether or not buying is a good financial decision for first-time homebuyers. You should aim for a credit score above 640. While it may take some time to bring up a low credit score, it is doable. Begin by taking an in-depth look into your credit report. If there are any errors or incomplete information, consider disputing them by contacting the credit bureau. Even if they are small mistakes, they can make a difference when it comes time to buy your first property!
What does it mean to have equity in my home?
Equity is how much ownership you have in your home. Calculating it is easy— subtract the amount you still own on your mortgage from your home’s current market value. For instance, if you owe $200,000 on your mortgage, but your home is worth $300,000, you have $100,000 of equity in your home. As you continue to pay off your mortgage, your equity will increase.
How do you make money from a house / why is it considered good debt?
Real estate appreciates in value from the time you purchase it to when you sell it. Because of this, you can make money from this expense. So, it’s considered an asset. Remember, you make money when you buy, not when you sell. And, you have to think about the long game. Is your first house going to make you money in a year? Probably not. But, you will be investing in your own wealth rather than throwing money away to a rental property. A first-time homebuyer can make money off a house by either living in it for a time, buying another house, and renting the first one to acquire passive income. Or, if you decide to sell, the house’s appreciation will give you more money than you paid for it originally.
Did you learn something today? I hope that this post inspired you to make a move in your wealth-building journey. If you already have a home but know someone who wants to become a first-time homebuyer, I encourage you to share this post with them. For more content about the early stages of wealth-building (what I like to call the first X), check out the free content on my YouTube channel by clicking here.