The challenges that first-time home buyers face in purchasing a home can feel difficult to overcome. While the primary monetary challenges include saving up for the required down payment and financing the home’s purchase price, a lack of knowledge and experience as a first-timer can also create anxiety. However, there are many home loan and down payment assistance programs, along with  other resources, which can help first-time homebuyers take the necessary steps toward homeownership. 

If you’re preparing to buy your first home, educating yourself on the homebuying process can help you feel more confident with your decision to become a homeowner, regardless of the size or cost of the home you purchase. Connecting with a home loan officer can also help you navigate the process with greater success to help you achieve your goal of owning a home.

What you need to know as a first-time homebuyer.

As you learn more about what it means to own a home, consider these eight homebuyer education tips to help you make a more informed decision. If you have additional questions or concerns, speak with a home loan officer to discuss your options.

1. Buying vs. renting

Despite the immediate advantages that renting may offer a prospective homebuyer, buying a home typically puts you further ahead in the long run. As a renter, you’re unable to build equity in an appreciable asset that you own. Rent typically increases with each new lease you sign, based on the going rates in your immediate area. 

On the other hand, homeownership brings several tax advantages, along with an actual space to call your own. For instance, you can deduct the cost of your mortgage loan interest payments and property taxes from your federal, and in some cases, state income taxes. You can also rent out part of your home to help supplement your primary source of income. 

2. The critical value of credit

Before you start prequalifying for a home loan, find out where your credit stands. You can request a free report every year from AnnualCreditReport.com, review the listed credit entries, and dispute any errors with the appropriate credit bureau (i.e., Equifax, TransUnion, or Experian). 

Since your credit score can impact the loan terms you may receive,  consider paying down existing debt  to reduce your credit utilization and debt-to-income ratio. Addressing these factors can help improve your chances of getting approved for a home loan. 

The last thing you want to do during the prequalification process is to open a credit card, obtain a car or personal loan, or do anything else that may adversely affect your credit. Maintain your credit profile even after you’ve pre-qualified for a home loan, as the lender will circle back and recheck your application before granting it. Staying with your current job, which provides you with a steady employment history and income, can also contribute to the success of your home loan application. 

3. Work with a real estate broker

A real estate broker can help walk you through the homebuying process and answer any questions you have on any aspects of homeownership. For instance, most real estate brokers are familiar with the following: 

• Details regarding the home and the surrounding neighborhood, schools, shopping, and traffic volume
• What homes match your list of desired features 
• New homes that have arrived on the market
• What mortgage types best suit your situation
• How much home you can afford 
• How to structure your offer 
• Logistical details regarding paperwork and processing 

4. Understand the true cost of homeownership 

The cost of owning a home depends on several factors, including the home’s purchase price, any earnest money you put down, the required down payment, and closing costs. Additional costs of owning a home could include the following: 

• Utilities 
• HOA or condo association fees
• Property taxes
• Applicable city/county taxes
• Private mortgage insurance (PMI), if applicable 
• Homeowners insurance
• Buying points (that lower your interest rate)

As a first-time homeowner, it’s also essential to maintain an emergency fund. You’ll likely draw from these funds to cover unexpected repairs, moving expenses, and any unforeseen costs that may pop up. There are also mortgage options, such as a low 3% down payment mortgage, which can help ease your path to homeownership.

5. The anatomy of a mortgage payment

A home mortgage payment commonly consists of four elements: principal, interest, homeowners insurance, and property taxes. The principal represents the amount you borrowed to purchase the house, while the interest covers how much you pay to borrow that amount based on your application. With any traditional 15- or 30-year mortgage, you typically repay the interest first and then the principal. 

Lenders require homeowners insurance, which may cover the property against smoke, fire, theft, and other hazards. In areas susceptible to flooding, your lender may also require flood insurance. Finally, the state or local government where you live may assess property taxes that you would need to  pay possibly in one or two large payments a year. However, if you’ve chosen to escrow, your lender will collect your taxes and insurance (including flood insurance), and pay these items when they become due.

6. Types of mortgage rates 

A fixed-rate mortgage and an adjustable-rate mortgage (ARM) are the two most common mortgage options, which feature different rate terms . With a fixed-rate mortgage, your principal and interest payments stay the same for the home loan term. These types of mortgages are ideal if you lock in a low interest rate or plan on staying in your home for a long time. 

With an adjustable-rate mortgage, more of your early payments go towards your principal. Adjustable-rate mortgages tend to have lower principal and interest payments, but interest rates—and your corresponding principal and interest payment—can change multiple times in one year. ARMs may be the best option if you don’t plan on staying in your home for very long.

7. How to apply for a mortgage 

Applying for a mortgage requires submitting several personal documents to give lenders a better view of your financial profile. These legal documents could include: 

• Social Security Number for everyone applying for the mortgage 
• Recent paycheck stubs 
• Evidence of any other assets (e.g., stocks or bonds)
• Copies of deposit account statements 
• List of all credit card accounts and approximate monthly payments 
• Copies of personal income tax statements 
• List of all account numbers and balances due on outstanding loans
• The name, address, and contact information for someone who can verify your employment 

8. What happens at closing?

When you close on a home, you typically meet with the closing agent, your broker, the seller, and the seller’s real estate agent. Closing, also known as escrow or settlement, involves reviewing the paperwork required to transfer ownership of the home and signing the appropriate legal forms. Your home mortgage lender will give you a Closing Disclosure that indicates your loan terms,   closing costs, and estimated real estate taxes, as well as insurance and other expenses. Closing costs range from 2% to 5% of the home’s selling price but can be more depending on the agreed-upon terms.. Lenders usually require the closing cost payment in the form of a cashier’s check or wire transfer. 

Start your homeownership journey with your best foot forward.

Regardless of where you are on your journey to homeownership, your home loan officer can help you navigate any challenges and bring you closer to achieving your dreams. Contact Popular Bank today to learn more about how we support first-time homebuyers along every step of your journey toward homeownership.

For additional homebuying information, make sure to read our home-buying process guide.