Along with your down payment, you’ll also need to pay for closing costs. On average, closing costs are about 3-4% of the purchase price of your home. These fees pay for important steps in the home-buying process, including appraisal, home inspection, credit report, attorney, and homeowner’s insurance.
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# Alabama Housing Finance Authority

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## Homebuyers

# Tips for Buying Your First Home

Homeownership is one of the best ways to secure financial strength and a unique feeling of pride and accomplishment. Promoting affordable housing for all Alabamians is AHFA’s primary goal, and we believe in helping you become an informed homebuyer.

## 1. Get credit ready.

Buying a home may be one of the largest financial decisions you will ever make. Be prepared. When applying for a mortgage loan, your credit will be one of the key factors in whether you’re approved, and it will help determine your interest rate and possibly the loan terms. So check your credit before you begin the homebuying process. Dispute any errors that could be dragging down your credit score and look for opportunities to improve your credit, such as making a dent in any outstanding debt.

Large purchases, such as a car loan or lease, may impact your debt-to-income ratio. Changes to this number may affect your ability to qualify for the loan amount you require. Avoid taking out any loans or adding significant debt to your credit lines before you try to purchase a home.

## 2. Know what you can afford.

Before you start looking for a new home, you need to know what’s actually within your price range. Check your monthly budget to determine how much house you can afford and to understand how a mortgage payment will fit into it. You need to leave room in your budget for other things, so make sure your monthly housing costs are going to be no more than 25% of your monthly take-home pay. Be sure to include additional costs like property taxes, insurance premiums, homeowners insurance, homeowners’ association dues (if applicable), etc.

## 3. Start saving for your down payment.

Do you have 20% of your target purchase price available for a down payment? It’s common to put 20% down, but many lenders now permit much less, such as AHFA’s Step Up mortgage product. Putting down less may mean higher costs and paying for mortgage insurance, and even a small down payment can still be hefty. Some tips for saving for a down payment include setting aside tax refunds and work bonuses, setting up an automatic savings plan, and using an app to track your progress.

Along with your down payment, you’ll also need to pay for closing costs. On average, closing costs are about 3-4% of the purchase price of your home. These fees pay for important steps in the home-buying process, including appraisal, home inspection, credit report, attorney, and homeowner’s insurance.

## 4. Find a lender you can trust.

Once you’re confident you have enough cash saved to pay for the down payment and closing costs, you’re ready to talk to a mortgage lender. It is often suggested that a homebuyer should begin the process of buying a home by speaking with a lender. By doing this, the buyer will know how much home they can afford based on their income and debts. Many real estate agents prefer customers do this before looking for a home because it helps define the search criteria based on what the buyer can afford. Don’t forget to ask if they are an AHFA participating lender.

## 5. Explore your mortgage options.

There are lots of mortgage options out there, each with its own combination of pros and cons. A lender you can trust will help you navigate those options.

Conventional mortgages conform to standards set by the government-sponsored entities Fannie Mae and Freddie Mac and require as little as 3% down.

- FHA loans are insured by the Federal Home Administration and permit down payments as low as 3.5%.
- VA loans are guaranteed by the Department of Veterans Affairs and sometimes require no down payment at all.

If you want the smallest mortgage payment possible, opt for a 30-year, fixed-rate mortgage.

In addition to federal programs, many states offer assistance programs for first-time home buyers with perks such as down payment assistance, closing cost assistance, tax credits, and discounted interest rates. AHFA offers a dollar-for-dollar tax credit through the Mortgage Credit Certificate as well as an affordable income subsidy grant for certain qualified borrowers. Both of these can be combined with Step Up’s affordable financing and down payment assistance for even greater purchasing power.

## 6. Get preapproved for a loan.

You can get pre-qualified for a mortgage, which simply gives you an estimate of how much a lender may be willing to lend based on your income and debts. But as you get closer to buying a home, it’s smart to get a preapproval, where the lender thoroughly examines your finances and confirms in writing how much it’s willing to lend you, and under what terms. Having a preapproval letter in hand shows sellers that you’re a serious buyer, which is a great way for homebuyers to get ahead in a competitive market.

## 7. Research neighborhoods for the best fit.

You may assume you’ll buy a single-family home, and that could be ideal if you want a big yard or a lot of room. But if you’re willing to sacrifice space for less maintenance and extra amenities, and you don’t mind paying a homeowners’ association fee, a condo or townhouse could be a better fit.

But even if the home is right, the neighborhood could be all wrong. Visit the area at different times, including during heavy commute times, weekends and later in the evening. Ask your real estate agent for information on crime rates and the quality of schools around your prospective neighborhoods. Map the nearest hospital, pharmacy, grocery store and other amenities you’ll use. Only choose a neighborhood that you and your family feel good about.

## 8. Attend open houses and think long term.

Once you’ve narrowed down the neighborhoods, attend a few open houses. Looking at homes that are for sale—even if they are not a perfect fit for you—is a great way to learn more about the area. When you eventually do find a house you love, you’ll know how your place compares to better or worse homes in that neighborhood. When you’re touring homes during open houses, pay close attention to the home’s overall condition, and be aware of any smells, stains or items in disrepair. Ask a lot of questions about the home, such as when it was built, when items were last replaced, and how old key systems like the air conditioning or heating are. It’s easy to look at properties that meet your current needs. But if you plan to start or expand your family, it may be preferable to buy a larger home now that you can grow into. Consider your future needs and wants and whether the home you’re considering will suit them.

AHFA has prepared a few resources to help homebuyers while they are shopping for a home. The Homebuying Wish List helps buyers think about and identify the features they want in a home. The Homebuying Checklist can be used when buyers tour homes to help them keep track of what each home offers and whether it meets their needs.

## 9. Stick to your budget.

When it comes to buying, a good strategy is to find the most affordable house in the best neighborhood. If you buy at the bottom of the price range in a good neighborhood, you’ll have more room to build home value. Look at properties that cost less than the amount you were approved for. Although you can technically afford your preapproved amount, it’s the ceiling—and it doesn’t account for other monthly expenses or problems like a broken dishwasher that arise during homeownership, especially right after you buy.

## 10. Go for it.

Your first home is a big purchase—maybe even the biggest one you’ll have ever made up to this point in your life. Because of that, you don’t want to risk messing this up. However, trying to time the market perfectly is impossible. Find the home that is right for you. Waiting may cause you to miss out on lower rates, lower home prices, or even that perfect home.

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