Perhaps you’ve been on your own for a while, renting and trying to save some money to buy your own home. You are finally at the point where you think you’d like to move forward, into the realm of home ownership. But the task seems daunting! Where do you start? Here are some tangible steps you can take to prepare for a stress-less entry into being a homeowner.
EVALUATE YOUR FINANCES: Even if you’ve been saving diligently, conscientiously paying your bills on time and faithfully paying off credit card debt every month, you need to take a look at your finances and your credit rating. Your credit score will have a great impact on your qualifying for a mortgage. In addition, your debt-to-income ratio will influence any lender in approving you. A high amount of debt in comparison to your income or in comparison to your credit limit will make your lender cringe. Start by paying off any debt you are carrying. After you’ve removed your indebtedness, check your credit score. There are various ways to find your credit score – one option is to check your credit annually for free at Annual Credit Report.com. Carefully examine the report for mistakes, dormant accounts, unpaid accounts or collections being levied. Take care of any problems on your credit report immediately. Because repairing and improving credit can take some time, allow yourself at least 6 months before beginning to search for a house to do the credit repair work.
CREATE A BUDGET: After you’ve evaluated your credit and debt-to-income ratio, examine your budget. If you have never lived on a budget, this is a great time to begin. As you are waiting those 6 months for your credit to recover, begin tracking your monthly income and expenses. Figure out how to allocate your income over the month to successfully pay your expenses on time. Also add an allotment for personal spending into your budget, and be disciplined to not exceed that amount. While having a budget sounds as if it would be a drudgery, it actually frees you, because it gives you the security of knowing how your money is spent and that you will have enough. Here is a free tool to help you start a budget: Make Your Budget Work for You.
GET PRE-APPROVAL: Now you know your credit score, your debt-to-income ratio and you have a budget. At this point, you should choose a lender and seek pre-approval. Lenders may include banks, credit unions or private mortgage firms. Choose a lender by comparing interest rates, asking friends for recommendations, looking at customer reviews and examining business ratings.
Your lender will begin the pre-approval process by asking you for several recent pay stubs, several years’ tax returns and W-2s and several months of bank statements. The lender will take that information, along with your credit score and your debt-to-income ratio and will decide if you qualify to get a mortgage. He will calculate not only if you are pre-approved, but also will tell you the price range of homes for which you qualify. The pre-approval allows you to begin working with a builder or realtor to find your perfect home! Some realtors prefer that you have the pre-approval already done.
PREPARE FOR A DOWN-PAYMENT: Now that you know your price range, you should gather a down-payment. If you find a home that you really like, you will first need a deposit, sometimes called earnest money. This deposit can vary and may range from $1000 to $2000. It will become part of your down payment if you go forward with the purchase. If the seller cancels the purchase, you will get this deposit back. If YOU back out of the sale, the seller will have the choice of whether to return the deposit or to keep it.
Next, determine the percentage of the sale price you’d like to do as a down-payment. This can vary from 0% on a VA or USDA loan to as high as you’d like to go. An FHA loan has a minimum down payment of 3.5%. Keep in mind that, depending on the type of loan you acquire, you may have to pay an additional fee of some type of mortgage insurance each month as a part of your mortgage. This insurance will protect your lender in the event that you default on your loan. For example, with an FHA loan, you will pay a Mortgage Insurance Premium (MIP) with every mortgage payment for the life of your loan, unless you have a 10% down payment. If you have a 10% or greater down payment, the MIP is waived after 11 years. With a USDA loan, you will pay a Guaranteed Fee with each mortgage payment, for the life of the loan. In a Conventional loan, the insurance is called Private Mortgage Insurance (PMI), and is based on your down payment. If you have a 20% or greater down payment, there is no PMI. With less than a 20% down payment, you will pay PMI until you have 22% equity in your home, and then the PMI will disappear. A VA mortgage has no monthly mortgage insurance payment, but will have an up-front charge called the Funding Fee.
GO FIND YOUR HOME, SWEET HOME: Finally, you are ready to look for that perfect place to call your own. You know your budget, you know your pre-approval amount, and you know your down-payment. With this information, you can make intelligent choices in your home-buying, without stress or fear. Happy house-hunting! (Keep watch for our next blog post on whether to buy a new home or an old home)
This information is being provided as a courtesy for those considering buying a home. Be sure to consult professionals for legal, financial and real estate advice.
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