Are you on the verge of purchasing your own home? It can be quite the daunting task, especially if you have no real idea of how to go about preparing.
Luckily, we have compiled a list of the things that you certainly want to keep in mind and information you want to have as you prepare for taking the exciting plunge!
Step one – figure out how much you can afford
The first thing to do before you start looking for a home – or even looking for a mortgage honestly. – find out the right price point for the home of your dreams. You will also want to find out what time of year is best to purchase a home.
Typically, owning a home pays off financially if you live in it for at least five years. If you foresee yourself either wanting to move locations, or if you see yourself getting a huge pay increase that will put you in the market of more attractive homes and locations, you may actually want to hold off on buying until those things happen.
One good option is to utilize a rent vs buy calculator that you can easily find online to decide which option is best for you at the moment.
When it comes to how much you should pay for a house, it is typically wise to keep your housing payment under 30 percent of your gross monthly income. When you spend too much on your mortgage, you risk becoming “house poor” which means that while you may live in a beautiful home in a fantastic part of time, you don’t have enough liquid cash coming in each month to cover other monthly expenses.
Also, it is crucial to remember that your housing payments are not just the price of your mortgage payment. Consider taxes, insurance, and general upkeep as well.
Step two – prepare your finances for mortgage application process
The last thing you want to risk happening is to find your dream home only to later find out that you are simply not financially qualified to buy it. To make sure that you are in the right financial situation to buy your first home, you will need a good credit score, cash to close, and a verifiable income.
There are some things to do within this preparation process.
The first one is to check your credit score.
Hopefully this fact is not a big surprise to you, but getting a mortgage requires that you have a strong credit score. To understand more of getting a mortgage, you can find useful information on RateBuddy. Before you start shopping for mortgages, make sure to check if your credit score has any errors on it. Fixing errors is a quick and easy way to increase your score by a few points.
If you are still needing to improve your credit score a bit, one great way to do so is to pay down your credit card balances and stop using them for a couple months before you apply for a mortgage. Also, you will want to avoid applying for any other forms of credit for a few months prior to closing on your new home.
If you are buying a home with a spouse or co-buyer, your mortgage lender will likely consider both of your credit scores in the application process. That can either help your chances greatly, or hurt your chances if one of your scores is less-than-great. If one of your scores isn’t great, it is not an insurmountable issue, but it could make things a bit more difficult.
Finally, remember that improving your credit score significantly can take as long as a year. So start working on it now if that is something that you have to worry about.
The second thing that you will want to do to prepare for the application process is to start saving money to make a down payment on the house you want.
On top of making sure your credit score is as strong as it can be, you are also going to want to save as much cash as possible to make a down payment of your home. The ideal amount is 20 to 30 percent of the total price, but people are known to have as little as 3 to 4 percent of the total price of their home when closing.
As you save and as your account starts to get bigger and bigger, avoid the temptation to take the money you have saved and invest it in the stock market or cryptocurrency. While there is obviously the potential to make a bundle on your investment, there is also a high likelihood that you will lose a whole lot of the money that you have been saving and have to start back as square one. That will be highly discouraging and will likely put your home purchase off by months.
As you save, you will also want to make sure not to underestimate the amount of money you will actually need. Keep a close eye on the housing market in regards to homes that you could see yourself moving into so that you can better calculate how much you will actually want to have on hand when it is time to buy.
The third thing you will want to do is to get your documentation in order.
You will need to collect the documents necessary for the mortgage application. This includes paystubs, W-2’s, bank statements, and copies of your last two tax returns if you are freelance or self-employed.
Step three – start shopping for the right mortgage
It is far too common for people who are looking to purchase homes to start their search for the right mortgage at the last minute. In fact, some people even find the houses they want to buy before they secure the mortgage necessary to do so!
Don’t be like those people!!
When you start shopping for your mortgage, consider the multiple different kinds of mortgage types.
Comparing mortgages can be rather confusing. There are fix-rate and adjustable rate mortgages. You can take mortgages out for as long as 30 years, or as little as five years.
For most buyers, it is wise to look at fixed-rate mortgages, in fact, 30-year fixed-rate mortgages are the most common kinds of loans by far. That being said, it doesn't hurt to familiarize yourself with the other options that are out there.
You will also likely want to take a look at several different scenarios to see how the rate and term will impact your monthly payments and overall costs.
You also want to keep an eye on mortgage fees.
To make matters worse for some first-time home buyers, some don’t realize that there are often fees that come along with mortgages that are not listed on the interest rate that you will be charged. There can be added fees for appraising the home that you want to purchase, for checking your credit score or scored, and for preparing the documentation necessary to purchase the home. Make sure to have an honest and direct conversation with a mortgage lending company about what added fees you might face before taking out a mortgage.
You also want to keep the costs of private mortgage insurance (PMI) in mind.
Private mortgage insurance, or PMI for shot, takes place when you put down less than 20 percent down of the total cost of the home you are purchasing. Your lender will likely charge you this monthly premium that is used as insurance in case you default on your loan and the value of your home subsequently declines dramatically.
Step four – try to get mortgage rates and pre-approval
The only really bad way to try to get a mortgage is to simply walk into your local bank, ask for a mortgage home loan, accept the rates on the spot and walk out. If you do this, chances are good you just lost thousands or even tens of thousands of dollars on your mortgage depending on the price of your home and the length of your repayment term.
You need to make sure that you are doing the due diligence necessary to get the best mortgage available to you by shopping around with different companies and seeing what kind of amounts and rates you can get pre-approved for given your financial status and credit score.
One great way to make sure that you get the very best mortgage available to you is to contact four or five different companies and have them compete for your services. This will force them to make the amount, rates, and terms very attractive to you if they really want to secure your business.
Hopefully his quick rundown of what you need to focus on before you start looking for your first home has helped ease the anxiety quite a bit. Remember, it is going to be hard, but once you cross the threshold of your new home for the first time, it will all be worth it!
