FAQ for First-Time Homebuyers
Buying a home is a big deal. It could be the biggest purchase of your lifetime — which means there are no silly questions when it comes to the homebuying process. When your money is on the line, you want to make sure you’re getting it right.
Here are some frequently asked first-time homebuyer questions.
Am I Ready To Buy a Home?
Buying property can be a good investment, but it’s a big financial commitment. In the short run, you must be prepared for the costs of homebuying, like a down payment and closing costs. In the long run, you’ll need to cover all the expenses associated with homeownership, including the monthly mortgage payment, home maintenance, and repairs.
Before you decide to become a homeowner, crunch the numbers and find out if it’s smarter to rent or buy a home in your situation.
Learn More: Pros and Cons of Buying a Home
What Is a Good Credit Score To Buy a House?
Credit score requirements vary depending on the type of mortgage. Here are the minimum credit scores for some common loan types:
Credit score requirements for different mortgage types
|Type of home loan||Minimum credit score|
|VA loan||Depends on lender|
|USDA loan||No minimum score, but 640 or higher means you get a streamlined credit analysis|
What’s the Difference Between Preapproval and Pre-Qualification?
Preapproval and pre-qualification for a mortgage are similar in that both help people estimate how much they can borrow to buy a home. The difference is that lenders generally treat preapprovals more seriously than pre-qualifications.
Pre-qualification is often based on self-reported information, and gives you a ballpark estimate of the home loan you might be able to get. Preapproval, on the other hand, requires lenders to review your financial documents and check your credit. As a result, preapproval gives you a more accurate picture of what kind of home you can afford.
Does Applying For a Mortgage Hurt Your Credit?
Applying for a mortgage will result in a small ding to your credit score — but don’t panic. It’s only temporary and a normal part of the lender pulling your credit.
You also don’t need to worry about multiple dings to your credit score if you’re shopping around for the best loan. As along as all the credit checks happen within a 45-day window, they’ll be counted as a single inquiry on your credit report — which means you can apply with different lenders to find the best deal.
Is a Conventional Loan or an FHA Loan Better?
Whether a conventional mortgage or a loan backed by the Federal Housing Administration is better depends on your credit and the down payment you can afford.
For people who have good credit and a 10%-15% down payment saved, a conventional loan generally costs less than an FHA loan. However, if your credit score is lower or you don’t have much set aside for a down payment, an FHA loan could be the most affordable mortgage option.
What Are Mortgage Points?
What Is Earnest Money?
Earnest money — aka a good faith deposit — is the cash you put down when you sign a purchase agreement. It shows the seller that you’re serious about buying the home, which is important if they take their house off the market while the appraisal and inspection are happening.
A good faith deposit is usually 1% to 3% of the purchase price of the home, though it could be much higher in competitive markets. If all goes well, your earnest money can be applied to your down payment or closing costs.
What’s the Difference Between a Home Inspection and an Appraisal?
The inspection and appraisal both evaluate the home you’re purchasing, but they have different objectives.
A home inspection examines the condition of the property to help you uncover any damage, flaws, or faulty systems. If the home passes the inspection, then you can enter the deal with confidence. However, if the inspection reveals major problems and you have a contingency in place, then you’ll need to decide what to do next: negotiate with the seller on the cost of repairs, or walk away from the deal.
An appraisal, on the other hand, is ordered by your lender to determine the fair market value of the home. It verifies that your loan amount is appropriate relative to what the home is worth, and helps ensure you aren’t grossly overpaying.
Can You Use a Credit Card for Closing Costs?
A credit card isn’t the preferred payment method for closing costs because it doesn’t send a clear message that you can afford the home. In general, closing costs run 2% to 5% of the home’s purchase price, and your lender will verify that you have enough money to cover this amount before approving your mortgage. That’s why payment methods like a cashier’s check or wire transfer are preferred.
Read More: How To Reduce Closing Costs
Can You Buy a Home With No Down Payment?
Mortgages backed by the Department of Veterans Affairs and the Department of Agriculture generally don’t require a down payment. However, you’ll need to meet the requirements. VA loans are intended for eligible military service members, veterans, and their surviving spouses, while USDA loans are geared toward low-income borrowers in eligible rural areas.
Keep in mind that you’ll need to make a minimum down payment if you’re buying a home with a conventional loan or an FHA loan.
What Are the Perks of Being a First-Time Homebuyer?
First-time homebuyers could be eligible for certain down payment assistance programs, government-backed mortgages with low down payment requirements, and help with paying closing costs. Check out your state’s local homebuying programs for more information.
A useful tip for homebuyers is you could be considered a “first-time homebuyer” even if you’ve owned property before, as long as you sold it and haven’t owned a home in the last three years.