Buying a home for the first time is a huge step and a great accomplishment.
As a homeowner, you have the chance to start building equity and stop paying rent. However, working your way into a new home can be a difficult process, especially as the housing market fluctuates.
Fortunately, if you start planning ahead, you’ll have an easier time getting into an affordable house with the amenities that are most important to you.
For a start, here’s what you need to consider:
4 Things You Must Consider Before You Buy Your First Home
Can You Afford The Mortgage?
First, you need to make sure that you are able to afford the deposit and the mortgage on the home that you are thinking about purchasing.
Be aware that there are always ways to make this more affordable. For instance, if you are a doctor, then you might be able to explore physician mortgage loans.
Something to keep in mind is whether or not your income is stable. If it isn’t then now probably isn’t the right time to buy a home.
Do You Have a Rainy Day Fund?
You need to remember that when you buy a property, you’re completely responsible for it and anything that might go wrong. That does include the plumbing and the heating system. This is always going to lead to expensive repairs somewhere down the line.
That’s why you need to make sure that you have enough money put away to prepare for issues here. If you don’t then you have to take out a loan or wait until you can afford it and own a home that isn’t really in a livable condition.
Will You Put The Work In?
It definitely takes a lot of work to own a property. You can’t be hands off here.
You need to make sure that you are putting the work in to keep it well maintained and that you are doing what you can to ensure that it remains clean and tidy. If you don’t do this, then you’re quickly going to develop issues that could be quite expensive.
It’s also important that you are completing the right checks on the property. This includes inspecting the roof for any damage after a storm. If this is left unchecked it could lead to damp.
Are You Planning to Stay Put?
Finally, you need to think about whether you’re planning to stay put for the foreseeable future. It’s more difficult than you might imagine to sell a home on the market. Don’t assume for a second that it’s going to be easy to free yourself from this type of investment or move away once you have purchased the home.
You could be stuck there for quite sometime so if you’re not ready to settle down, then this is never going to be the right decision for you. Instead, you’re going to have to need to think about renting a little longer.
How to Prepare for The Purchase
Improve Your Credit Score
The best time to start preparing for your home purchase is a few years before you plan to buy. This gives you time to check your credit and take steps to improve it.
Work on getting your score up to the high 500s and into the 600s. You can improve your score by getting bills paid on time, paying down any existing debts, and keeping any loan balances low.
If you pay off any credit cards, keep them open and don’t use them.
One of the best ways to improve your credit score is by improving your debt-to-income ratio. This number shows the percentage of your gross monthly income that goes to debt.
Your debt-to-income ratio should be below 43 percent and, ideally, around 30 percent or less. Make a list of all your debts, including student loans, car loans, and credit cards. Choose your preferred strategy to make consistent progress toward reducing your debt.
Make Significant Investments in Your Savings
The bigger the down payment you have available, the better your chances of getting a good loan.
Most mortgage providers want to see a down payment of three to five percent of the price of the home. Although the percentage seems low, the cost of a home means that you’ll need several thousand dollars as a down payment.
If you can manage to save 20 percent of the home cost, you may avoid paying mortgage insurance.
Sometimes, states offer assistance with down payments. You may have a friend or family member willing to provide a “gift” of a down payment.
Lenders may or may not accept these alternatives, but it is worth your time to look into these options if you have difficulty saving the down payment amount you need.
Study the Available Loans
There are several good loan options available to many first-time borrowers. These include an FHA Loan, a VA Loan, conventional 97 loans, the USDA loan, and a HomeReady Mortgage from Fannie Mae.
Each of these options has pros and cons that vary with each home buyer. As you research these loans, compare some of the most popular mortgage factors:
- Low percentage rates
- Low monthly payments
- No early payoff penalty
- Low down payment
- No mortgage insurance
It’s okay to talk to more than one loan office to get as much information as possible and to compare the options available to you.
Clean Up Your Financial Paperwork
Whether you’re working through a bank or another lender, you’ll probably need to share bank statements and other financial documents, including your credit score.
Make sure that all of this paperwork is in order. If you have any disputes with the information on your credit reports, make sure you’ve taken care of those before you speak to a lender.
Determine Your Home Budget
There are a variety of tools available to determine how much of a monthly payment you can afford.
You must make sure you can also factor in money for additional homeowner costs, such as homeowner’s insurance, routine maintenance, yard care, and furnishings.
You’ll also have to pay for utilities that may have been included in your rent.
Prepare an Earnest Money Amount
If you live in an area where affordable homes are in demand, you may need to use an earnest money deposit to show that you’re interested in buying the home.
This is separate from the down payment and may be paid before you are eligible for a loan. If you follow through in purchasing the home, then this deposit will go toward your closing costs or the down payment.
The purchase of a home is a serious investment. The time and effort you put into preparing for this step can help you reduce the amount you pay over time. You’ll find that it’s much more comfortable to buy a home when you know what to expect and when you have time and a down payment on your side.