Tips for first-time homebuyers in a seller’s market

Learn some tips on how to improve your chances of landing the home you want as a first-time homebuyer. (Shutterstock)

A seller’s real estate market can spell trouble for homebuyers. In a seller’s market, buyers face increased competition, low housing supply, and fewer concessions. And, for first-time homebuyers, a seller’s market can be even tougher to navigate since they have no experience buying a home. 

If you’re a first-time homebuyer in a seller’s market, here are some tips to improve your chances of buying your dream home.

Credible can help you easily compare rates and mortgage options from multiple lenders.

• Save for a down payment
• Check your credit
• Set a budget and stick with it
• Get pre-approved for a mortgage before you start shopping
• Don’t get discouraged

Save for a down payment  

Lenders generally require you to put some money down before they’ll grant a mortgage loan. The amount you need for a down payment has traditionally been 20% of the price of the home. But many lenders today require only 5% down for a conventional loan. Some may even require as little as 3%.

You might not need to make a down payment at all if you’re a veteran and take out a VA loan, or if you qualify for a USDA loan by buying in a rural area. 

Even if you qualify for a no- or low-down-payment mortgage, it’s often advantageous to put down 20% or more on a home. Some of the reasons behind this include:

• No private mortgage insurance (PMI) — If you put down less than 20%, you’ll need to pay PMI. PMI varies based on your loan amount and how much you put down. For example, on a $180,000 loan, you’ll pay about $80 a month for PMI. As soon as you have 20% equity in your home, you can request to cancel the PMI.
• Smaller monthly payments — The more money you put down, the less you’ll owe.
• Less interest expenses — The less you borrow, the less you’ll pay in interest over the life of the loan.
• Lower interest rates — Having a substantial amount saved, like 20%, might make you look like a stronger financial bet to lenders. The less risk you pose, the better chance you have of securing a lower interest rate.
• More desirable buyer — A larger down payment makes you look like a more serious and reliable buyer, which could help you win a home that has received multiple offers.

SMART REAL ESTATE ADVICE FOR FIRST-TIME HOMEBUYERS AND SELLERS

Check your credit 

While you’re saving money for a down payment, this is a good time to check your credit report. You can get a free copy of your credit report once a year from all three credit bureaus — Equifax, Experian, and TransUnion — through AnnualCreditReport.com. Here’s what lenders look for before they grant you a loan:

• Credit score — You can often see your credit score for free through your financial institution. If not, you can pay a small fee to the credit bureaus to see it. You’ll want to have as high a score as possible. A good way to get a high credit score is to first establish credit — usually by taking out a credit card — then use the card (up to what you can comfortably afford) and pay what you owe on time each month.
• Debt-to-income ratio — Lenders also look at how much you owe. You need to keep your debt load as low as possible, otherwise lenders may not grant you a mortgage.
• Negative information — If you have negative information on your credit report, it’ll remain on the credit report for up to seven years. The longer it’s been since the negative incident occurred, the better.
• Any errors — Credit reports often have mistakes, such as the report showing an unpaid debt that you paid. Look over the credit report to ensure all the information on it is accurate before you apply for a mortgage. If you find an error that’s lowering your credit score, you should report it immediately to the credit bureau to correct the error.

Set a budget and stick with it 

Regardless if you’re renting or buying, a budget is an essential personal finance tool that you’ll want to maintain. Before you apply for a mortgage or start looking for a house, make sure you know how much you can afford. You should consider spending no more than three to five times your annual household income on a home.

Don’t forget to budget for other homeownership costs like property taxes, homeowners insurance, and closing costs. 

With Credible, you can easily check mortgage rates from multiple lenders without affecting your credit.

Get pre-approved for a mortgage before you start shopping 

Once you know what you’re comfortable spending, focus on getting pre-approved. This can help increase your chances of securing a home.

A pre-approval is different from a prequalification. Prequalifications are geared more toward buyers who are seeking an estimate of how much home they can afford. Pre-approvals require a deeper dive into your financial profile. Your lender will pull your credit report and ask you for certain financial documents, such as income statements, tax returns, and proof of savings.

Once you have a pre-approval letter in hand, you can make an offer with confidence. The pre-approval letter gives you an advantage over buyers who don’t have one, because it shows the seller that you’re a serious buyer and that you have the ability to purchase the home at the listed price.

17 QUESTIONS TO ASK YOUR REALTOR WHEN BUYING YOUR FIRST HOME

Don’t get discouraged 

Buying in a seller’s market can be challenging. But keep plugging away, and be ready to make an offer as soon as you find a house that meets your criteria. 

You might have your offer rejected multiple times, and that’s normal, especially in a seller's market. Working with a diligent and experienced real estate agent can improve your chances of becoming a homeowner.

To explore your mortgage options, check out Credible.