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6 numbers every first-time homebuyer should know

May 20, 2020 • 4 min read

What we'll cover

  • How to start financially prepping for a mortgage

  • How to calculate your options

  • When to consider an early IRA withdrawal

Whether it’s coming from your parents, a real-estate agent, or a list you found on the internet, everyone has advice for first-time homebuyers. From money-saving tips to house-hunting tricks, it’s easy to get overwhelmed by all the information out there.

So, we’ve boiled down six essential pieces of financial advice to help make your homebuying process as smooth as possible. We promise, the nuggets of information below are as easy to remember as 1, 2, 3 …

Check your credit score at least SIX months out from home shopping.

Your credit score is a major factor in the homebuying process and can have a serious effect on your mortgage loan approval and interest rate . Of course, the higher your score, the better — so, you’ll want to be aware of your credit standing at least six months before diving into the mortgage approval process. That way, you’ll have some time to take the necessary steps to improve your score if need be.

A few ways you can help boost your credit score. Pay your bills on time, every time. And pay down debt (especially high interest rate credit card balances). You’ll also want to avoid taking on any new debt and/or loans or making any large purchases (like a new car) for several months before buying a home. That’s because these actions may hurt — not help — your credit score.

Save for closing costs up to FIVE percent of your home’s value.

When you make a purchase as large as your home, you don’t want to be caught off guard by any unexpected costs, especially the closing costs. Closing costs are fees you have to pay in addition to your down payment at, you guessed it, the close of sale. These funds cover things like the loan origination fee, loan application fee, lender’s attorney fees, and appraisal fee, just to name a few.

Typically, these costs range from 2% to 5% of the home’s value. So, if you’re buying a $200,000 home and your closing costs are 5%, you’d need an additional $10,000 for your closing fees.

Be patient: The average homebuying process takes about FOUR months.

With so many variables in play, it can take anywhere from three weeks to six months to buy a home — but, in general, it’s best to budget around four months from start to finish. That’s because homebuyers usually take about 30 to 60 days to shop and it can take another two weeks to two months to get your loan approved and close on your home. Everyone’s homebuying journey is different, so there’s not a one-size-fits-all timeline for the process. Being prepared for a long game may help avoid frustration if it’s not a quick turnaround.

Make a down payment as low as THREE percent.

You’ve probably heard that the magic number for a down payment is 20% of a home’s price. But for a lot of first-time homebuyers, 20% just isn’t possible. Fortunately, if you can’t make a down payment of that amount, it doesn’t mean you’re out of the homebuying game.

Several lenders will work with first-time homebuyers to help you get a loan that is manageable for you. You might be able to qualify for an FHA loan with a down payment as low as 3.5%. Or, you might consider looking into a Fannie Mae HomeReady mortgage , which can help you purchase a home with a down payment of just 3%.

Finally, you may qualify for a VA or USDA loan: The Department of Veterans Affairs (VA) works with qualified service members and veterans to guarantee loans with 0% down. And the United States Department of Agriculture (USDA) works with lenders in rural areas to help increase access to homeownership with low-to-no down payments.

Compare mortgage rates from at least TWO lenders.

The searching doesn’t end once you’ve chosen your new home (and we’re not talking about picking out décor). You’ll want to spend some time shopping around for the best mortgage rate as well. That means going through the loan pre-approval process with at least two lenders — though the more the merrier. While interest rates may look similar, even a slight difference can add up to some big savings in the long run. So, don’t be afraid to explore your options and ensure you find the best rate for your financial situation.

Note: If you’re concerned that going through the pre-approval process with several lenders will hurt your credit score, don’t worry. Typically, as long as any hard queries on your credit score are all made within 30 to 45 days, they will be lumped together and count as one inquiry.

Consider making a ONE time $10,000 early withdraw from your IRA to fund your home purchase.

While most early withdraws — those taken before you’re age 59 ½ or younger — from your IRA (individual retirement account) will result in a 10% penalty, certain exceptions exist. And, though you may want to save this option as a last resort, one of those allowances is for buying, building, or rebuilding a home.

Qualified first-time homebuyers can withdraw up to $10,000 from a Traditional IRA to help fund these projects without an early distribution penalty.

If you have a Roth IRA, the rules are slightly different. You can withdraw your contributions at any time (since they’ve already been taxed), but you can also withdraw up to $10,000 in earnings for a first-time home purchase without penalty. If you’ve had your Roth IRA for less than five years, you will owe income tax on those earnings. Had your account more than five years? You can withdraw those funds tax- and penalty-free.

Keep in mind, this $10,000 is a lifetime limit and not per each individual retirement account. And before you make a withdrawal from your retirement funds, it’s best to talk to a financial or tax advisor first.

Buying your first home is an awesome achievement — but being inundated with too much advice can make the process feel trickier and more stressful than it needs to be. So, as you head out on this exciting journey, take six deep breaths and stick with these six tips to make the most of it.

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