Being a first-time home buyer can be both scary and exciting. If you have never bought a home before, the process can feel intimidating. Luckily, it’s not as daunting as you may think.

Saving for a Down Payment

A lot of people mistakenly think that they need to save up a 20% down payment, which is a lot of money! But you don’t have to. There are many loan options which let you purchase a home with a lot less.

Closing Costs

In addition to a down payment, you will also need to save up money for closing costs. What are those? Closing costs are all the fees you pay to have your loan processed and to close on your home purchase. Some typical closing costs include origination fees, appraisal fees, title search and report fees, etc. 

Closing costs are typically 2-5% of the loan amount. So, let’s say you are buying a home that costs $700,000. If you are putting down 3% as a down payment, your down payment would be $21,000 and your loan amount would be $679,000. In this situation, your closing costs might be around $13,580. 

It’s important to ask your lender what they estimate your closing costs will be for the homes you are hoping to buy. 

Seller Credit Towards closing costs

Depending on the market conditions, you could ask the seller to give you a credit towards your closing costs. Essentially, you are asking the seller of the home to pay for all or some of your closing costs. This situation usually comes about in a buyer’s market. If a seller has multiple offers and is selling in a hot seller’s market, they may not feel the need to agree to this credit.

Time to Get Pre-Approved

A pre-approval letter is an important step in the home buying process. The pre-approval letter is a letter from a mortgage lender which states that they have evaluated your credit and finances and believe that you may qualify for a home loan. This letter shows home sellers that you are serious about buying a home. Pre-approval letters usually last for 60-90 days. Additionally, it may be possible to lock in an interest rate for up to 60 days if rates are rising while you look for a home.

Mortgage Insurance

If you put down less than 20% as a down payment, you will need to pay mortgage insurance. Most of the loan options I reference in this post might include this type of insurance. Mortgage insurance protects your lender if you default on your mortgage payments. Mortgage insurance is pretty lame, but some loans will no longer require that insurance once your equity reaches 20%. Additionally, if you refinance at some point you can also get rid of your mortgage insurance payments.

What Types of Home Loans Are Available?

There are so many different types of loans out there. The best way to approach finding the right loan for you is to speak to a lender who can help you decide which loans you qualify for and what their requirements are. Here are a few.

Conventional First Time Buyer Loans

• Fannie Mae’s HomeReady Mortgage - This loan is ideal for first-time homebuyers with lower incomes, limited cash for a down payment, and credit greater than 620. Your down payment can be as low as 3% and the mortgage insurance is cancellable once you have 20% equity in your home.

• Freddie Mac’s Home Possible Loan - This is a loan that is ideal for first-time home buyers with lower incomes. Your down payment can be as low as 3% and your down payment may be a gift from family or come from an assistance program. Additionally, you may have co-borrowers who will not reside in the home. The mortgage insurance is cancellable once you have 20% equity in your home.

Government First Time Buyer Loans

• CalHFA FHA Program - This is a program that will give you access to local down payment assistance programs.

• CalHFA VA Program - Are you a veteran? This is a program that offers no down payment and a 30-year fixed interest rate.

This link will take you to a resource page with many first time home buyer programs that you can look over.

The fun part

Once you have chosen a loan, you have your pre-approval letter, you know the price range of homes you can afford, and you have some money saved for a down payment and closing costs, you are ready to start home shopping.

Give me a call if you have any questions or need any help. I can recommend lenders that will be a valuable resource to you.