5 Ways to Avoid Debt When Shopping for Your First Home

If you’re a first-time home buyer, chances are
you’re trying to navigate the current real estate market as best as you can
while attempting to save as much money in the process. From exploring different
mortgage options to budgeting for closing costs, here are five ways you can
avoid debt when shopping for your first home.

1. Save for a down payment

One of the biggest ways you can avoid debt as a first-time home buyer is to make sure you can cover a down payment of at least 20% of the home’s price. For example, if you’re looking to buy a $400,000 home, a reasonable down payment would be $80,000. Use a down payment calculator to help you figure out how much you’ll need to hit your down payment goal.

If you don’t think you can reasonably save
enough for a down payment before buying a house, there are a variety of low down payment programs that
offer assistance and competitive mortgage rates for first-time home buyers. Ask
a mortgage lender about your options and look for specific programs in your
state. You could qualify for a Department of Veterans Affairs loan (requires no
down payment) or a Federal Housing Administration loan (requires a minimum down
payment of 3.5%). Note: putting down less than 20% on a house may mean higher
monthly mortgage payments.

Start saving up for a down payment by
creating a monthly budget, setting aside work bonuses, opening up a savings account,
or doing freelance work for extra cash.

2. Explore your mortgage options

A 30-year mortgage is often preferred among
first-time home buyers because of the lower monthly mortgage payments. Lower
payments can help you put more cash toward savings and help you qualify for a
higher loan amount when you purchase a home. However, 30-year mortgages
typically come with a higher interest rate, meaning you’ll have to pay more
money over time. If you can afford larger monthly payments and want a lower
interest rate, opt for a 15-year mortgage. Though you’ll be making larger
payments month over month, you’ll get to build equity faster and be debt-free
after 15 years.

3. Make sure you have a high credit score

Mortgage lenders will look at your credit
score to assess your creditworthiness and decide whether or not to approve a
loan and at what interest rate. To get the lowest rate on a mortgage, you
should have a credit score of 750 or higher. If
you have a lower credit score, you may still be able to get a mortgage by
shopping around and having enough money saved up for a 20% down payment. If you
want to check your credit score, you can request a free credit report once a
year from Equifax, Experian, or TransUnion.

4. Stick to your budget

When shopping for your first home, create a
budget and look at properties that cost less than the amount you were approved
for. If you’re looking to buy in a competitive real estate market, you’ll
probably be bidding on houses that get multiple offers. Though it’s tempting to
make a high-priced offer to beat out competitors, you shouldn’t let your
emotions take over. Consider shopping below your pre-approval amount to
generate some wiggle room for bidding.

5. Budget for closing costs

Most first-time home buyers underestimate the
cost of homeownership and don’t have enough saved up for closing costs. In New
York, closing costs generally run between 2%–5%
of the purchase for buyers. To save money on various closing expenses, like
homeowners insurance, home inspections, a home warranty, or a title search,
shop around and compare prices.

In addition to these expenses, you’ll also
want to budget for any repairs you may have to make after closing. If a home
inspection reveals that the HVAC isn’t blowing air properly or a major
appliance is broken, your home warranty can save you a ton of
money on repairs or replacements. If you don’t have a warranty, you’ll have to
pay out-of-pocket for any necessary repairs or replacements, so make sure you
have extra cash on hand for these situations.

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