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Is Homeownership Right for You: Tips for First-Time Home Buyers

A home can be one of the most expensive purchases for an individual or family over their lifetime. How much money do you need to buy a house? Per the Wisconsin Realtors Association, in December 2023, the median sales price of homes sold in Wisconsin was $271,000. Cost estimates can average 6-7% of the purchase price for a first-time buyer.

The Benefits of Homeownership

  • Tax benefits (consult a tax advisor about this)
  • Way to build wealth through amortization and appreciation
  • Personalizing the house and making it your home
  • Increased privacy
  • More predictability in payments; no landlord raising your rent

The Disadvantages of Homeownership

  • Higher upfront costs
  • Harder to move
  • Higher maintenance costs
  • Risk of depreciation

Decide How It Fits Into Your Budget

Start saving. The earlier you start, the better off you’ll be. Look at how much you pay for housing now, and how much would you be willing to pay. In other words: what amount can you still pay for your housing yet continue to save?

As you begin your home search, several important factors must be considered:

  • What kind of home do you want?
  • How much do you need/want to save for a down payment?
  • How much of a mortgage do you qualify for?
  • How much will your monthly payments be?

As a homeowner, your housing payment is a little different from that of a renter. Your payment comprises the loan payment (principal and interest), homeowners’ insurance, property taxes, mortgage insurance (if less than 20% down), and possibly association dues. To assist with determining what you can afford, please use the Heartland Credit Union calculator.

How Much Down Payment Do You Need?

While a down payment of 20% would enable you to skip having to pay mortgage insurance (more on that below), putting 20% is not required. The National Association of Realtors (NAR) states that the average is about 6% for first-time home buyers. Depending on the type of home, the down payment could be minimal.

  • Conventional loans allow as low as a 3% down payment.
  • WHEDA loans, designed by the Wisconsin Housing Economic Development Authority to provide Wisconsin buyers with affordable housing benefits, also allow down payments as low as 3%.
  • VA loans, which are guaranteed by the U.S. Department of Veterans Affairs, require as little as 3.5% down.

There may even be assistance with possible down payment assistance programs.

Another possible source might be a cash gift from an eligible relative or equity from a sale of a home occurring between family members.

Down Payment Assistance

Estimated down payment cost: 6%–8% of the purchase price on average.

Many down payment programs assist first-time home buyers, but some are also eligible for repeat buyers. Requirements for down payment assistance programs vary, but typically you must:

  • Complete a home buyer education course.
  • Meet income limits. Most programs are geared toward low- and moderate-income residents, so a borrower’s household income must be below a certain established threshold.
  • Find a property in an approved location.
  • Stay below the maximum home purchase price, which is usually a percentage of an area’s median home purchase price.
  • Contribute some of your own money toward the purchase.

Polish Up Your Credit

Have you checked your credit score lately and know what it is? Does it need work, or are you all set? Late payments, missed payments, collections, and adding recent new debt could negatively affect your score. The higher the credit score, the easier it can be to get a home loan.

Your credit score is extremely important and impactful in not only determining eligibility for a home loan but also what interest rate you will be charged. Having a general sense of your credit score through a credit monitoring tool or a free credit report from one of the three credit bureaus is a great place to start.

While there are a range of acceptable score types and variations by loan type, most require a minimum score of at least 620. Scores exceeding 740 or more generally received the lowest interest rates.

Talk to Your Credit Union To Get Pre-Approved

Gather the paperwork and meet with a local lender you can trust. Together, you should talk about:

  • What criteria or methods do they use to qualify you?
  • How much loan do you qualify for and the payment amount?
  • Types of loan options available, including rates, down payment options, PMI, and closing costs.

Your lender will likely ask for things like W2s, pay stubs, and bank statements. Additionally, your lender should thoroughly explain the process in terms you can easily understand.

Ask Questions

You will hear the terms “pre-qualification” and “pre-approval,” and it’s important to know that both have very different meanings. A pre-qualification is an informal evaluation of your creditworthiness and how much of a home you can afford based on self-reported information and no verification from the lender. While this provides a good estimate, it is not recommended in today’s market.

A pre-approval is a commitment from a lender to provide you with financing up to a certain amount. So, not only will you complete an application, but the lender will also review your financial information. Here’s a list of what is typically needed to have your mortgage pre-approved:

  • Application
  • Financial stability – credit score
  • Open debt (car loans, student loans, other mortgages, credit cards, child support)
  • Assets (deposit accounts, retirement/pension funds)
  • Income (tax returns, W2s, 1099s, award letters, pay stubs)

The Benefits of Getting Pre-Approved

  • In today’s competitive market, showing a seller that your offer will likely go through will give your offer better consideration.
  • Completing your pre-approval before searching for a home lets you know what you are eligible for, so you don’t have to make changes later. Also, having it done upfront allows you to prioritize 100% of your focus on searching for a home.

Understand Loan Terms

Most home buyers opt for a 30-year fixed-rate mortgage, which is paid off over 30 years and has an interest that stays the same for 30 years. 20- and 15-year loans typically have lower rates; however, the payments are much larger as the loan is fully paid off in a shorter period.

If you plan to stay in the home for a short time, you might consider an adjustable-rate mortgage (ARM). ARMs typically have a lower initial rate that is fixed, and after some time, the interest rate will change periodically based on some predetermined criteria.

Time To Shop for Your Home!

We hope these tips for first-time home buyers helped you better prepare for homeownership. Explore home loans and mortgage options today with the help of Heartland Credit Union to take the next step toward buying your dream house.