Coventry Enterprises of America Guide for First-Time Home Buyers

Buying your first home involves navigating a process that most people encounter only once or twice in a lifetime. The terminology is unfamiliar, the stakes are high, and there is no shortage of people whose interests do not align with yours trying to guide you through it. This guide from Coventry Enterprises of America gives first-time buyers a clear picture of what to expect and what to watch for.

You Need More Than a Down Payment

Most first-time buyers understand they need a down payment. Fewer realize how many other costs are involved. Closing costs on a home purchase typically run 2 to 5 percent of the loan amount. On a $280,000 loan that is $5,600 to $14,000, paid at or before closing. You will also need to pay for the home inspection (typically $350 to $600) and the appraisal ($400 to $800), which are usually due before closing day.

After you close, your home will need maintenance. A commonly cited guideline is to budget 1 percent of the home's value annually for maintenance and repairs. That is not a fixed number; a brand new home will likely cost much less in the first few years, while an older home might cost considerably more. The point is to have reserves available so that a plumbing problem or roof issue does not put you in financial crisis.

Down Payment Options for First-Time Buyers

You do not need 20 percent down to buy a home. Conventional loans are available with as little as 3 percent down through programs like Fannie Mae's HomeReady and Freddie Mac's Home Possible. FHA loans accept 3.5 percent down with a 580+ credit score. VA loans (for eligible veterans and service members) and USDA loans (for eligible rural properties) require no down payment at all.

The trade-off for a smaller down payment is private mortgage insurance (PMI) on conventional loans or mortgage insurance premiums (MIP) on FHA loans. PMI typically costs 0.5 to 1.5 percent of the loan amount annually. On a $280,000 loan, that is $1,400 to $4,200 per year added to your housing cost. FHA MIP is structured differently and includes both upfront and annual premiums.

The Pre-Approval Process

Pre-approval is more than a formality. Sellers in competitive markets may not accept offers from buyers who are not pre-approved. The pre-approval process involves a credit check, income verification, and review of assets. Gather your two most recent pay stubs, two years of W-2s and tax returns, two months of bank statements, and information on any other assets. Having these documents ready speeds up the process considerably.

Apply with multiple lenders and compare their Loan Estimates. Rate shopping with multiple lenders does not significantly damage your credit score if you complete the applications within a short window (typically 14 to 45 days, depending on the scoring model).

Common First-Time Buyer Mistakes

• Making large purchases on credit before closing (can change your DTI and jeopardize the loan)
• Opening new credit accounts during the mortgage process
• Skipping the home inspection to make an offer more competitive
• Waiving the appraisal contingency without understanding the risk
• Choosing the first lender they speak with instead of comparing offers
• Underestimating total monthly housing costs beyond the mortgage payment