The First Step to Buying a Home
Homeownership is a worthy goal for everyone, but it’s a big process to undertake. If you’ve never owned a home or have been away from homeownership for a while, it can be challenging to know where to begin. These tips will help you get started:
Get your finances in order.
This step will be different for everyone. One person might be saving up a down payment, while another might just be beginning the budgeting process. Once you figure out what it means for you, you’ll need to do what you can to get ready financially for this huge life goal.
There are several factors to consider when organizing your finances: your budget, your savings, and your credit.
Budgeting for Homeownership
More than likely, you are already paying some sort of rent payment you’re making every month. At minimum, you can count on that much to be available for mortgage payments going forward.
But will your new home cost more? Will it need renovations or repairs? Are the taxes and insurance going to cost more? Whatever you currently pay for housing, it’s best to set aside extra to make sure you can afford a new, potentially larger house payment.
Besides the monthly housing costs, it’s essential that you budget to afford an emergency savings fund. Set aside some money into an accessible account so you can afford emergency repairs without going into debt or threatening your mortgage.
Generally, we urge people to have around 6 months’ income in a savings fund for emergencies and unforeseen expenses. This fund can also help you through unexpected housing repairs. Not everything that happens to your home is covered by your insurance. Sometimes you can’t wait to save up for repairs, and that’s why an emergency savings fund is crucial.
For basic budgeting, start with our Budgeting 101 course, available for free in our FIT Academy. Make sure you include goals of saving for homeownership and building an emergency fund.
Saving for Homeownership
The often-cited industry gold standard down payment is 20% to buy a home. Typically having this level of down payment, you may get a more favorable interest rate and save on the mortgage insurance generally associated with loans that have less than 20% down. Therefore, lots of people strive to avoid mortgage insurance by putting 20% or more down when they purchase a home. However, 20% may not be achievable and the good news is that there are many mortgage options available with lower down payment requirements, especially for first-time homebuyers. Generally, having 2 years of stable household income and a strong credit score will also help you qualify for loans at better rates.
Check out this infographic to see why the need to save 20% is a myth: The Myth of Needing to Save Up for 20% Down on a Home (Infographic).
So saving up won’t be as hard as you might expect, but you still need to build up some cash before home shopping. Besides the down payment and emergency fund, you’ll need money for closing costs, moving expenses, inspections, earnest money, etc. You also may want to decorate your new home.
Your Credit and Homeownership
Another aspect of your finances that is crucial to the home buying process is your credit. Get a free copy of your credit report well before applying for a mortgage—at least 30 days in advance, but six months is better. That way there won’t be any nasty surprises when you talk to a loan officer. And if you do find something negative on your credit report, you have time to correct it so your final credit report reflects positively on you.
Improving your credit is a big topic and many people don’t know where to start. Most importantly, avoid for-profit “credit repair”, as this kind of service is usually expensive and there are no shortcuts to “repairing” your credit. You can improve your credit over time, legally and legitimately by rebuilding your credit.
If you need professional help with rebuilding your credit, nonprofit assistance is available. Find out more about Credit Coaching & Credit Report Review here.
For free educational material about credit, start with “Understanding Your Credit Report”, available from credit.org’s FIT Academy.
What NOT To Do First
Too many resources suggest that homebuyers should start with finding a home. This is generally a BAD idea! If you don’t know how much you can afford, you won’t know which houses are worth looking at. If you start home shopping before you get your finances in order, you’ll be setting yourself up for heartbreak if you fall in love with a property only to find you can’t afford it.
By starting with finances, you’ll know what to tell your realtor when it comes to home shopping. You’ll avoid the houses that are wrong for your budget, and make the home buying process more productive.
You’ll also want to start the borrowing process before finding a property. Once you get pre-qualified for a mortgage, you’ll know what you can truly afford, and you’ll know the lender is ready to help you become a homeowner. If you wait until after you’ve found a home to talk to mortgage lenders, you might lose your chance at that property if your initial loan application is rejected.
The bottom line is, don’t start shopping for a home until your finances are in order; that means budgeting, saving, and getting your credit ready to be pre-qualified for a loan.
The Best First Step
Since this step we’ve outlined is a big one, and will be different for every borrower, we’ve got a way to help you get started the right way.
Home Buyer Coaching will pair you with a HUD approved housing counselor. This nonprofit assistance will help you take all the necessary steps to be ready for homeownership. Especially if you are a first-time homebuyer, we recommend a HUD approved homebuyer course. The course is available online or in workshop settings, and will take you through every step of the process so you’ll understand exactly what home buying will entail.
First-Time Homebuyer Education can also help you access special lending programs, so depending on the kind of loan you get, the education might be required for you. The problem is, too many people wait until after they’ve gotten through most of the process before coming to a housing counselor for the required education. It’s much better to start with the education first, so you will have a full roadmap of all of the steps ahead of you.
Just remember, you don’t have to go it alone. There are HUD approved nonprofit housing agencies standing by to offer their expertise, and the sooner you reach out for help, the better the home buying process will go for you.
The content for this post was sourced from www.Credit.org