Tips for First-Time Homebuyers

With the high season for residential real estate starting to kick into gear, house hunting is top of mind for many, and not without good reason. Beyond the inherent benefits of having a place that is your own, home ownership can provide long-term stability as well as the opportunity to build wealth and future financial security.

Investing in real estate enables you to grow your net worth through equity as well as through your property’s appreciation in value over time. A home you own can also provide significant tax benefits and predictability as a buffer against rent increases. And over the longer term, your ownership stake can also be a valuable resource to tap into for acquiring additional assets or covering expenses.

But if you’re a first-time homebuyer, it’s easy to get overwhelmed with the homebuying process, especially if you’re planning to buy in a highly competitive housing market where home prices command a premium. Put yourself ahead of the game and gain peace of mind with these strategies for getting into the real estate market as a first-time buyer:

First, find out how much house you can afford.

You’re likely to find the entire home buying process far more rewarding and increase the chances of getting a home you want at an affordable price by first making an accurate assessment of your financial situation and determining a reasonable budget. If you wait until you’ve begun attending open houses and probing the listings on house hunting apps, you may find yourself continually having to shift and adjust your expectations, which can be discouraging.

In addition to your monthly mortgage payment and any down payment you may be required to make, you’ll need to budget for property taxes, homeowners insurance, and closing costs (usually about 2% to 6% of your loan amount). Also be sure to factor in home maintenance, utilities, and moving expenses. Find a Homebuying Budget Calculator here at Freddie Mac.

Understand the criteria used for lending decisions.

Lenders will determine whether to approve a home loan and at what interest rate based on factors including your gross monthly income, debt-to-income ratio, credit score and financial history, assets, obligations, and work history. To protect their investment, they will also consider the down payment and the value and condition of the home you want to buy. But keep in mind that financial experts stress that the maximum loan that a lender will approve for you shouldn’t be the only factor to consider. You’ll want to be sure that you’re comfortable enough with the payments that you won’t have to completely overhaul a lifestyle that is fundamental to your happiness and well-being.

While underwriting guidelines vary, a common standard is to allow you to pay approximately 40 percent of your gross income toward recurring debt payments each month, including the potential mortgage payment as well as any credit cards, car payments, student loans, personal loans, etc. With some exceptions, 43 percent is the highest debt-to-income ratio under which a lender may offer you a qualified mortgage. To determine how much you can borrow to stay within budget, access the Mortgage Calculator from The Police Credit Union,

Be aware that in many cases, you don’t have to wait until you save up 10 to 20 percent for a down payment. 

While a down payment equating to 10 to 20 percent of a home’s purchase price was once standard for a 30-year fixed mortgage, many U.S. homebuyers today aren’t waiting until they can put aside this amount before getting into the housing market. When you consider that 20 percent down may be over $200,000 for the average home in certain markets, it stands to reason that many residents are opting to get in before the price of their future home goes up, and they lose time and money paying rent, rather than building equity in a home.

Certainly, there are notable advantages for making a large down payment, such as avoiding private mortgage insurance (PMI), saving money on financing, and presenting a more attractive bid against competing offers. Still, difficulties in amassing a sizeable down payment don’t have to sideline your dreams of home ownership. 

While a smaller down payment generally means spending more money over the life of the loan, it can make all the difference when it comes to lowering a major barrier to home ownership. For instance, a down payment of 3.00 percent on a home with a selling price of $850,00 would be $25,500. If you were to put 20 percent down, you would need to come up with $170,000. 

Investigate first-time homebuyer programs.

Various mortgage programs are making home ownership more accessible for first-time buyers with favorable loan terms, including low or no-down payment options, lower rates, and even closing cost assistance in some cases. As NerdWallet has reported, counties and municipalities offer grants and forgivable loans for first-time homebuyers who meet low-to moderate-income criteria. However, first-time homebuyer programs are also available to those who meet varied income and eligibility requirements. Some to explore:

The conventional mortgage with 3.00% down: If you are a first-time homebuyer or haven’t owned a home in the past several years, you may be eligible for a conventional loan with a down payment as low as 3.00%, provided that you can meet the lender’s qualifications and underwriting guidelines. But be aware that you’ll likely need to purchase private mortgage insurance (PMI) if you put down less than 20 percent of the home’s purchase price. PMI is intended to protect the lender from losses in case the borrower defaults, and it can be paid in a lump sum or added to monthly mortgage payments. Although rates vary according to credit score and other factors, Freddie Mac reports that you can expect to pay a range of approximately $30 to $70 per month for every $100,000 borrowed. 

The H.E.R.O. Loan: The Police Credit Union provides this zero-down payment mortgage with no private mortgage insurance requirement exclusively to active-duty law enforcement buying their first homes in California. Short for “Helping Enable Residential Ownership,” the H.E.R.O. Loan also features a quick approval process and eligibility for our “End of Watch Debt Forgiveness Benefit.” Loans are available with limits up to $1 million*, with a maximum combined limit of $2 million for qualified buyers.

The FHA Loan: Backed by the Federal Housing Administration and issued by approved lenders, this type of loan can be a good option if you have limited savings or don’t have a strong credit score or a solid credit history (a very limited credit history is allowed). Along with more lenient credit qualifications, an FHA loan allows for a 3.50% down payment and tends to offer lower interest rates as compared with a conventional mortgage, since the lender is protected from the risk of borrower default. One downside is that it comes with an extra cost in the form of an upfront mortgage premium of 1.75% of the loan’s value, which can be paid in cash or rolled into the life of the loan. 

Although FHA loans don’t have a minimum income requirement, you would be expected to demonstrate that you can reasonably afford to make your monthly payments. To help make home ownership more affordable for first-time homebuyers, The Police Credit Union allows a non-occupying co-borrower to help qualify for our FHA Loan, provided that this person is an eligible family member. 

The VA Loan: For U.S. military veterans, active-duty military personnel, or an eligible surviving spouse, this low-interest loan is an excellent option. VA loans provide up to 100% financing, have no mortgage insurance requirement, and tend to come with lower fees than conventional loans. In addition, credit requirements are less stringent. However, they do come with a one-time, upfront funding fee, typically ranging from 1.25% to 3.3% of the loan amount. 

The USDA Loan: Guaranteed by the federal government, this is another zero-down loan that frequently offers lower interest rates as compared with conventional loans. However, USDA loans only apply to properties in specific rural areas and outlying suburban areas. The program also has fairly stringent requirements related to income-eligibility and limitations.

Review your credit and do what you can to improve it before applying for a mortgage.

It’s a good idea to review your credit reports at least six months before you begin seriously looking for a home to buy. This will give you time to correct any errors, and to take other proactive measures to boost your score. Your credit score has a major impact on whether a lender will approve you for a mortgage and for what amount, and the interest rate you are offered. In terms of mortgage rates, even a 1.00% difference can mean thousands or even tens of thousands of dollars of savings in one year.

To get your credit in the best possible shape, request free copies of your credit reports from the three national credit reporting agencies, Experian, Equifax, and TransUnion, and dispute any errors. During this time, be sure to make timely payments on your bills and keep your debt levels as low as possible. Pay down credit cards to reduce your debt-to-income ratio, but do not close any accounts once you have paid them off, since this can adversely affect both your credit history and your credit utilization, the portion of revolving credit you are using as compared to what is available to you. Also refrain from opening any new credit accounts before applying for a mortgage.

Compare mortgage products but confine your loan shopping to a short timeframe.

Finally, it’s advisable to get three to five different quotes when shopping for a mortgage. However, it’s best to do this within a limited window of time so you don’t take unnecessary hits to your credit score. When a lender receives direct authorization from you to check your credit report for the purpose of extending a loan, this is considered a “hard inquiry,” which may result in your credit score dropping by a few points (generally about five). However, multiple inquiries for a home loan are treated as one in terms of impact to your score if you complete all the applications within a relatively short timeframe. This window of time varies depending on the scoring model, but it’s generally safest to complete your comparison shopping within a 30–45-day window.

When you’re ready to make your goal of home ownership a reality, a great place to start is your credit union. We can help you get the financing you need with a wide variety of home loans to fit different budgets and lifestyles, from FHA and VA loans, to first-time mortgages featuring highly competitive rates, low fees, and down payments as low as 3.00%. In addition, our non-commissioned loan officers provide objective guidance to help you through the loan process. Many of our first-time homebuyers also appreciate the ability to use gifted funds for their down payments. And if you are an active-duty peace officer buying your first home in California, our H.E.R.O. Loan is an excellent option. Not only does it enable you to buy a home with 0% down and no private mortgage insurance requirement, but its eligibility for our “End of Watch Debt Forgiveness Benefit” offers peace of mind and a valuable potential financial safety net for your family.

Law enforcement professionals turn to The Police Credit Union for home loan options that fit their budgets and lifestyle goals.

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