It can be scary to buy your first house. There’s a lot to consider: neighborhood, financing, inspections, and more. There’s no one right way to buy a home for the first time, and often homeowners have a hard time deciding between different options. Single-family, condo, townhouses all have their positives and negatives.
On top of that choice, many first time homebuyers go into the search process considering buying a home they can fix up and renovate.
If you’re planning to buy your first home ever, which is already expensive, thinking about how to finance renovations can be overwhelming. However, the opportunity to create a home that suits your needs can be well worth it.
In this guide, we’ll discuss renovating as a first time homebuyer. Which renovations can you do in your first five years in your home? Which ones should you take on? Read on to learn more about all of your options.
The First-Time Homebuyer Advantage
While sure, buying a home for the first time is difficult, there are lots of positive advantages that come with this life step as well.
There’s a long list of programs and incentives designed for homeowners just like you, that make purchasing and even renovating, a whole lot easier (and cheaper).
There are lots of different government programs to take advantage of, that can lighten the financial burden of a first-time home purchase. However, each program is different and it’s important to read the fine print to discover which program might be right for you.
Most of these programs focus on two factors of purchasing a home: the down payment and the mortgage.
First-Time Homebuyer Programs
FHA loans are a great mortgage option for first-time buyers who haven’t saved up enough money for a large down payment. Mortgages are insured by the Federal Housing Administration.
USDA loans are zero down payment mortgages for rural homebuyers. There are three types: loan guarantees issued by local lenders, direct loans issued by the USDA for low income applicants, and home improvement loans.
VA loans are mortgages for service members, veterans and surviving spouses that are partially guaranteed by the VA and offered by private lenders, often with more favorable terms.
Good Neighbor Next Door
Good Neighbor Next Door is a home purchasing program for law enforcement officers, teachers, firefighters or emergency medical technicians. The program offers a 50% discount on homes in revitalization areas if the buyer commits to living there for 36 months.
HomePath Ready Buyer Program
The HomePath Ready Buyer Program is an education course that offers closing cost assistance. If first time homeowners complete this online course, they can receive up to 3% closing cost assistance toward the purchase of a HomePath property.
Down Payment Assistance
Thousands of down payment assistance programs for first-time, and low to moderate income homeowners exist nationwide. This assistance exists in the form of grants and loans, and can be used to cover down payment and closing costs.
Some DPA assistance programs offer low interest or zero interest loans that are paid back over the course of the mortgage.
Other DPA programs are offered in the form of grants, or loans that will be forgiven if the buyer stays in the house for a certain amount of time.
These loans are mortgages insured by federal agencies, like the FHA, VA, or USDA, as mentioned above. They protect lenders so they can offer applicants more favorable terms.
First time buyers can take advantage of free homebuyer education courses offered by lenders, real estate agents, the HUD, or other organizations. Other courses may charge a small fee.
Should Your First Home Be A Fixer Upper?
This is a tough question, as first time home buyers with slim savings are often tempted by low fixer upper prices. However, there are a few important things to consider.
If you don’t have any experience with renovating homes, not a lot of free time, and you’ve spent every last penny of your savings on a down payment - purchasing a fixer upper as your first home is probably not a great choice.
If you do have a small cushion to make repairs, enjoy the renovating process, are willing to put the time in, and you’ve determined that the necessary changes are small enough to be manageable, it can be a great decision.
Make sure to pay close attention during the home inspection before purchasing to understand exactly what needs to be fixed.
How About Foreclosures?
Foreclosed properties often come at an even more significant discount, with potentially more significant problems. One issue you may run into though is competing with real estate investors, or “fix and flippers,” who will have more cash at their disposal to make a better offer.
The First-Time Home Buying Process
There’s a lot of different steps to buying a home: putting in an offer, inspections, finding a home loan - and it’s hard to know what comes when.
Here’s the general outline of what a first time home buyer can expect:
- Audit your finances: Check your credit scores, DTI ratios, monthly spending, and emergency savings. All of these factors will determine what kind of home you can purchase, how much of a down payment you’ll be required to pay, and more.
- Get pre-approved for a loan: To get a good idea of your budget for home shopping and be able to put in an offer on a home, you’ll first want to get pre-approved for a mortgage. Make sure to shop around with different lenders and compare terms and interest rates. However, just because a lender will offer you a loan for a certain amount of money, that doesn’t mean you can actually afford it. Make sure to calculate your monthly payments to see if they can realistically fit into your budget, and don’t feel pressured to take the maximum mortgage amount. Lastly, make sure to check out all of the first time home buyer programs mentioned above to see if you can qualify for extra savings.
- Find a real estate agent: While some first time home buyers may be tempted to avoid using a real estate agent to avoid fees, real estate agents can help buyers save money in the long run, through negotiation, connections, and research. They’ll also fully review the legal contract to make sure everything is standard.
- Put in an offer: Your real estate agent will help you decide what amount to offer on the home you want. The homeowners may come back with a counter offer, they may accept, or call it quits and pick someone else.
- Escrow: The seller will take the house off the market for 30 days under a good faith agreement that you’ll buy it, contingent on the home inspection.
- Home inspection: Before officially signing the contract, you should have a trained professional come and inspect every inch of the property. Your real estate agent can also be present to ask questions and offer their input. If this inspection reveals problems that affect your decision to buy, you have a chance to rescind your original offer.
- Close: The last step is signing a mountain of paperwork and paying any closing costs.
And that’s it!
How Much Should a First-time Home Buyer Put Down?
Most conventional loans require that homebuyers put down 3% of the overall cost, and FHA loans generally require 3.5%. But does that mean you should put down the bare minimum?
The average first time home buyer actually puts down 6%. You may have heard in the past that you should make a 20% down payment, but that’s not necessarily true. The main reason lenders encourage this amount is because it’s less risk for them, and in many cases if you put 20% down you won’t have to pay mortgage insurance.
However, there are lots of reasons to make a down payment of less than 20%. One is that a higher down payment will lower your rate of return, because homes, on average, appreciate 5% each year. Also, if the housing market collapses and your home value drops, if you’ve made a smaller down payment, the bank is at risk, not you. If you’ve made a larger down payment, that money you’ve put into the home is gone.
What Are the Biggest Mistakes When Buying a First Home?
There are three major mistakes that folks make when buying their first home:
- Spending too much: Many homeowners decide to purchase their first home without considering all the added costs: maintenance, monthly mortgage payments, homeowner association fees, property taxes, and more. Other homeowners go in without a financial cushion, or with unpaid credit card debt or student loans. It’s important to find a house with a loan that’s well within your budget and leaves you enough cushion each month to feel comfortable. If that’s not possible, it’s better to wait.
- Not focusing on the neighborhood: With home buying, the neighborhood should come first, over the house. The neighborhood will affect everything, from schools, gas costs, property taxes, home values, and quality of life in general. It’s much better to pick the smallest house in the better neighborhood over the nicest house in the worse neighborhood. It’s a lot easier to renovate than to move a town over.
- Not looking into first time buyer programs: Many first time buyers don’t spend enough time evaluating different options that may be available only to first time buyers, like education programs, or government-backed loans and grants. At the very least, buyers should compare lenders and conventional loan options before settling.
How to Go About Renovating Your First Home
Once you’ve purchased and moved into your new home, there’s most likely a few things about it that you’ll want to change. From new paint colors, to new flooring, or appliance updates, it’s pretty likely that your home will need a refresh in the first couple years of living there.
The problem is, after purchasing a home, most first time buyers don’t have a lot of extra savings laying around to make major changes.
That’s why so many first time home buyers choose to use RenoFi Loans to finance their home renovation.
Why RenoFi is the Best Option for First Time Homebuyers
Say hello to RenoFi Loans.
We’ll explain a little more about what these are and how they work in a moment, but for starters, let’s show how a first time home buyer’s borrowing power changes when comparing a RenoFi Home Equity Loan to traditional home equity loans or lines of credit.
Let’s say the Jenkins purchase a home for $500,000 and they put 10% down - so their outstanding mortgage balance starts at $475,000. After one year, they’ve paid that down to $465,000.
While they have some money saved, they’d like to keep that in case of emergencies. However, they have a few renovations that they’d like to complete, totaling around $25,000.
If they made these repairs, on average they’d get a 70% ROI, making their home’s after renovation value:
500,000 (x 1.05 for appreciation) + 25,000 (x 70%) = 542,000.
Here’s how much they could borrow with different kinds of home equity loans:
|Home Equity Loan
|Home Equity Line of Credit
|90% Current Home Value
|90% Current Home Value
|90% After Renovation Value
This is more than sufficient to finance the $25,000 remodel that’s on the cards.
But you’re probably left wondering how the Jenkins’ borrowing power suddenly increased by so much…
It’s because RenoFi Loans allow you to borrow based on what your home’s value will be after your renovation is complete. Essentially, you’re tapping into that increase in equity right now.
The Jenkins’ want to make improvements to their home, and its value is going to increase. But most types of financing don’t acknowledge that.
A RenoFi Loan is a new type of home renovation loan that combines the best bits of a construction loan with the simplicity of a home equity loan, whilst letting you borrow at the lowest possible interest rate and avoid the need to refinance.
Here’s what you need to know:
|RenoFi Home Equity Loan
|RenoFi Home Equity Line of Credit
|Loan amounts from $20k to $500k
|Loan amounts from $20k to $500k
|Same low fixed rates as traditional home equity loans
|Same low variable rates as traditional HELOCs
|Term up to 20 years
|10 year draw period, followed by 20 year amortization
The most money and lowest monthly payment for your renovation
Borrow up to 90% of your future home value with a RenoFi Renovation Loan
WHAT IS YOUR PROJECT?