Investing in your first home can be an intimidating process. After all, you’ve never done it before and it will be one of the most significant purchases of your life. The key to getting the home of your dreams is planning, research, and getting your finances in shape. If you’re ready to kick your feet up in a space you own and enjoy the freedom to remodel as you please, read on.
The first step in preparing to buy a home is creating a budget and monitoring your spending to determine your purchasing habits and monthly expenses. You’ll need to take control of your expenses each month—from your daily coffee to your tv streaming subscriptions. By understanding where every dollar goes, you’ll see your monthly outflow and can then determine how much you can begin to save each month.
Here are a few expenses to budget for every month:
Unless you can afford to buy a home in cash, a realistic and attainable budget is the first step to becoming a first-time homebuyer. Lenders want to minimize risks associated with any new borrower. Having your finances in order will make you a quality candidate for a home loan.
Before beginning the homebuying process and communicating with real estate agents, you’ll need to check up on an important component of your finances—your credit. Lenders like to see a credit score of 684 or higher for first-time homebuyers.
If your credit score is lower than the preferred range, don’t get discouraged. With planning and hard work, you can improve your credit score. A simple way to start improving your score is to pay off credit card debt and keep any credit card balances low. Another easy way to improve your credit is to always pay your bills on time and before the due date. This proves that you are organized and can handle a high level of financial responsibility.
Once a year, you can get a copy of your credit report for free through Experian—this will not hurt your credit and is a good way to monitor your credit score over time. You should be sure to check your credit report for inaccuracies. A study by the Federal Trade Commission found that 26% of participants had at least one error on their credit report.
The housing market is a very fast-paced industry with homes being sold in as little as 13 days. A mortgage preapproval letter is a written estimate of how much you’ll be able to borrow. You’ll need to get this letter from your lender early in your home buying process since you’ll need it to put an offer on a home.
There are a few required documents needed to get pre-approved, including proof of income, bank statements, and other financial documents. Having a preapproval letter will ensure you don’t miss the opportunity to make an offer on a home you love.
The amount of a down payment will affect your monthly mortgage payments—the more you can save up for a down payment, the less you’ll need to borrow. If you put 20% of a home’s value towards a down payment, you will avoid having to pay private mortgage insurance (PMI). Paying 20% can also result in a lower interest rate on your mortgage.
While putting 20% down might be ideal, this isn’t usually feasible for first-time homebuyers. Keep in mind that lenders like to see that you can afford the first two months of your mortgage. To avoid this, you should look into mortgage options that allow for lower down payment terms.
Other upfront costs include closing costs, which can be anywhere from two to five percent of the loan amount. Some closing costs could include appraisal fees, loan fees, lawyer costs, and other various charges. In addition to closing costs, you’ll also need money for moving expenses, furniture, and renovations.
Ultimately, it’s up to you to determine your ideal down payment. Try to find a balance between lowering your monthly mortgage payment while still maintaining a reasonable amount of cash in your bank account.
Your monthly mortgage payment will end up being more than most people think. In addition to the loan amount, you should plan for your mortgage payment to include interest, homeowners insurance, property taxes, and PMI. Many people fall victim to the Zillow Zestimate, as it does not include all of the additional costs that will be included in your monthly mortgage payment.
To get a realistic idea of your monthly mortgage payment, use an online mortgage calculator. By entering the price of a home, down payment amount, mortgage interest rate, and the loan type, you’ll have a better idea of what you’ll pay each month. This will prepare you for the worst-case scenario and show you the benefit of a higher down payment and lower interest rate. Keep in mind that first-time homebuyers can qualify for loans, such as an FHA loan, and get lower interest rates.
The home buying process can be tough when you’re doing it for the first time. Be sure to plan, follow your budget, and save.