Buying a home is a huge investment of both your time and money. Make sure you are prepared with these six steps before you buy a home. Learn about credit score requirements, mortgage options and other must-do’s.
1. Strengthen Your Credit Score
The higher your credit score, the lower your monthly payments. Below 630, you’re may have to pay sizable fees or a higher down payment. And it may be very difficult to obtain a mortgage with a credit score lower than that. On the other end, a score of 700 to 720 will get you a good deal, and 750 and above will garner the best rates on the market.
Pull your credit reports and ensure you’re not being unfairly penalized for old, paid or settled debts. Get your free credit report today. Stop applying for new credit at least one year before you apply for financing. And keep the do not apply for new credit until after you close on your home.
2. Figure Out What You Can Afford
The buyer’s mantra: Get a home that’s financially comfortable.
There are various rules of thumb that will help you get an idea of how much home you can afford. If you’re using FHA financing, your home payment can’t exceed 31 percent of your monthly income. But with some mitigating factors, the FHA will let you go higher. For conventional loans, a safe formula is that home expenses should not exceed 28 percent of your gross monthly income.
For a rough assessment of how much house you can afford, check out our calculator, How Much Mortgage Might I Qualify For?…
Try on that financial obligation long before you sign the mortgage papers. Before you home shop, calculate the mortgage payment for the home in your intended price range, along with the increased expenses (such as taxes, insurance and utilities). Then bank the difference between that and what you’re paying now.
3. Save For Down Payment & Closing Costs
Depending on your credit and financing, you’ll typically need to save enough money for a down payment – somewhere between 3 and 20 percent of the home’s price. One exception: Veterans Affairs loans, which require no down payment.
Another cash expense? Closing costs. Whatever your loan source, you’ll also need money to pay closing costs. For a $200,000 mortgage, closing costs run (depending on where you live) from $2,300 to $4,000. Get the average closing costs.
Bank your own money and seek down payment assistance. Often, it’s location-based or tagged to a certain type of buyer, like first-timers. Search online with the city name, then the county name, along with word combinations such as “down payment assistance,” “first-time homebuyers” and “homebuyer’s assistance.”
In a buyer’s market, you can also negotiate to have the seller pay a portion of the closing costs.
4. Build A Healthy Savings Account
Building your savings is something you should do over and above saving money for the down payment and closing. Your lender wants to see that you’re not living paycheck to paycheck. If you have three to five months’ worth of mortgage payments set aside, that makes you a much better loan candidate. And some lenders and backers, like the FHA, will give you a little more latitude on other factors if they see that you have a cash cushion.
That money will also help cover maintenance and repair issues that come up when you own a home. While repairs are sporadic, items such as a new roof, water heater or other big-ticket items can hit suddenly and hard.
Set aside money every month. A good rule of thumb: On average, you’ll spend 2.5 to 3 percent of your home’s value annually on upkeep, repairs and maintenance. If you’re buying a $250,000 home, aim to save $520 to $625 per month.
5. Get Pre-Approved
For serious home shoppers they better have everything in order. That means that, before the real home shopping begins, you want to get financing in place.
Get financing in place before you walk through the first house. Otherwise, you will have no idea how much you can afford. Learn how to get pre-approved with our helpful Mortgage Pre-Approval Guide & Checklist.
6. Buy A House You Like
If you’re buying today for yourself and your family, you want a home that will make you happy for the next few years. You can’t always count on a quick sale. And depending on how much you put down, and how much you have to shell out to sell and relocate, short-term ownership can be a pretty expensive proposition.
Step back and making certain you like the house. After all, you can’t exactly return your new home to the store. Buyer’s remorse is a horrible feeling. Be sure that you love your home and it’s neighborhood before you make the move.