First-Time Home Buyers What to Know Before Taking Out a Home Loan

In most of the country, rental prices have skyrocketed. Depending on where you live, you can expect to pay at least $1,300 for a two-bedroom apartment. Yet, mortgage payments for a similar-sized house are the same or slightly more than that amount, making it a no-brainer for millions to switch to a mortgage instead of monthly rent payments.

But buying a house for the first time isn’t something you should jump into just as your lease is ending. It takes months, and possibly years, to prepare your overall financial picture for a mortgage.

If you do it right, your first home loan doesn’t have to drain your bank account each month. Ready to get started? Here are the must-know tips for every first-time homebuyer to understand before taking out a mortgage.

1. Credit Scores Count

Unless you plan on paying cash for the entire amount of the purchase, you’ll need to have a solid credit score before a bank will consider giving you a loan. By solid, we mean a decent number (typically over 580 for most loans unless you can put 10% of the loan amount down). But your credit picture is more than that number.

Of course, the higher your credit score, the lower the interest rate you may qualify for. Even with a great score, some lenders won’t consider you if you have any past-due accounts in collections. Check your free report from the three major credit reporting agencies: (Equifax, Experian, and TransUnion. If there are any mistakes or anything in collections, take care of them before applying for a loan.

Finally, look at your credit utilization ratio. This is the term used to refer to how much credit you have versus how much you’ve used. If your credit cards are close to their limit, spend time bringing them down. When your ratio is 30% or less, lenders see you as a safer candidate.

2. Decide Your Budget Before Shopping

Sit down with your numbers and be sure you know exactly how much “house” you can afford. It’s not just the mortgage loan. You’ll also pay insurance and property taxes, utilities, and, in some cases, homeowners association fees. The more your house is worth, the higher the insurance and property taxes become. Larger houses are also inherently more expensive to heat and cool, meaning bigger electric bills.

How much can you afford each month for all of the regular costs? Will that number give you any cushion to set aside money for maintenance and upkeep?

Only shop for homes within or below your budget. Otherwise, you could find yourself falling in love with a house outside your price range. You may get approved for the loan, but it will be hard to keep that monthly payment up for 20 or more years.

3. Prepare Your Non-Negotiables Before Talking to a Realtor

Now that you know how much you can afford, it’s almost time to talk to a real estate agent. First, write down a list of “wants” and a list of “must-haves.” This will help the realtor help you find a home that is more desirable to you and avoid a lot of wasted time looking at places that don’t suit you.

Start with your non-negotiables. This could be factors like the number of rooms and bathrooms, school districts, neighborhoods, and price ranges. Then, make another list of things you’d like but that aren’t necessary, such as a pool, two- or three-story floors, and new appliances or a roof.

When your realtor knows the dealbreakers and the negotiable aspects, they can search for homes that meet your criteria.

4. Look for the Best Lender Options

Don’t agree to a loan until you’ve looked outside the box. What are your personal variables that could possibly help you get a better rate?

For instance, if you have hefty student loan debt from med school, it’s going to be challenging to find a traditional mortgage lender. But there are alternative lenders with loans designed especially for those situations. Ask for a Neo home loan review to see if you qualify.

There are other lenders who specifically finance veterans, state employees, healthcare workers, and other professionals. Make sure you’ve explored all of the possibilities before deciding on your preferred lender.

As you compare home loans, look at the rates you’re quoted and the terms of the mortgage. Are there prepayment penalties? How much are the late fees? Is the interest variable or fixed?

One more thing to check for is the stability of the lender. It’s not uncommon for smaller companies to sell their loans to another mortgage lender, but once they do, the new lender could change your terms. Try to find a company that has been consistently the same for a long time.

When you’ve found the lender you prefer, get the evidence of your financial stability together. Include pay stubs and other proof of income. This will be important to have before you can get your preapproval letter.

Many real estate agents want to see this document before they’ll work with you, and that’s wise. It shows that you’re a legitimate buyer and lets them know for certainty what your shopping limit is.


Finding the perfect home as a first-time buyer can be challenging. But when you start early and follow these tips, you have a great chance of obtaining a loan with the best terms possible for your situation.

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