Buying a home is a bold step that elicits various emotions. Other than happiness, you may feel anxious because it’s one of the most significant decisions you’ll make in your life. Before committing to a purchase, you should do detailed research on the process. This is especially crucial if you’re a first time home buyer.
How To Prepare Financially For A Home Purchase
This life-altering decision is influenced by factors such as your budget, family size, location, desirable amenities, and future needs. Once you have these defined, determine whether your finances are in order by taking the following steps:
#1 Review Your Credit Score
A good credit score improves your chances of getting a mortgage at favorable terms. It shows potential lenders that you’re capable of repaying it, while also helping them set a loan pricing mechanism.
You can access your credit report at a fee from TransUnion, Equifax and Experian. This service is accessible for free once a year from AnnualCreditReport.com. Your credit card provider or lender might also offer it for free, depending on your type of account.
#2 Reduce Your Debt
Paying down or eliminating debt makes it easier to manage a mortgage. Lower debt means an improved credit score, which attracts lower interest rates. The first step is to list all of your financial obligations.
These include credit card, medical and student loan debts, auto loans, utility bills, and payday loans. Although paying off debt isn’t easy, there are various ways of doing it. Two of the most popular ones are debt avalanche and debt snowball.
#3 Budget for Your New Home
The golden rule here is only to purchase a house you can afford. As a first time buyer, you might be tempted to shop for one based on the highest amount your lender is offering. Remember, getting a mortgage exposes you to expenses other than the monthly repayments.
These include credit card rates, utility bills, cable TV and phone subscriptions, maintenance costs, and repairs. According to financial experts, you should set aside up to 25% of your take-home pay towards servicing your mortgage. If you don’t have any significant debts, this amount can rise to 30%.
If your mortgage payments account for a larger percentage of your income, you might become house poor. This means you might struggle to meet your obligations or even face foreclosure. Proper budgeting helps you avoid such situations.
#4 Look for A Suitable Mortgage Lender
Mortgage rates vary from one lender to another, depending on various factors. Shopping around could save you thousands of dollars in annual payments. Once you have a favorable credit score and a suitable debt-to-income ratio, it’s time to study the lending landscape.
Key players include mortgage bankers, credit unions, savings and loans (S&Ls), correspondent lenders, and mutual savings banks. You can check with the Nationwide Multi-state Licensing System Registry to confirm that a particular lender is legitimate. The Better Business Bureau also contains genuine, objective reviews on various lenders. Going through them will help you choose one with the best possible mortgage services.
#5 Get Pre-Approved
Getting a mortgage pre approval letter is beneficial because it shows potential sellers that you’re serious about purchasing a home. This gives you an edge over other buyers when bidding for a house. It also saves you time later on when you decide to make an offer. That’s because lenders already have the necessary financial information they require to process your loan. This includes:
- Salary and employment details.
- Your social security number and those of any co-borrowers.
- Savings, investment, bank, and checking account details.Outstanding debts such as credit cards, student loans, and car loans.
- Two years’ worth of tax returns, including W-2 and 1099 forms.
- Details about the down payment you’re willing to make, as well as the source of those funds.
It’s advisable to get pre approval letters from various lenders. This gives you the chance to compare their loan estimate forms and determine the ones that offer the best terms.
#6 Save For a Down payment
In the past, lenders required a down payment of 10 to 20% before advancing mortgages. Today some offer 100% financing. You’ll be required to pay for private mortgage insurance (PMI) if your down payment is 20% or less.
Such mortgages are considered high risk, so PMI insures the lender against possible defaults. PMI ranges from 0.5 to 1% of the borrowed amount. The rate you receive depends on factors such as your income, financial background, and credit score.
A down payment of 20% or more offers several benefits, including:
- Starting with a smaller loan balance.
- Reduced interest expense.
- Lower mortgage insurance premiums.
- Manageable mortgage payments
- Paying lower mortgage rates. The higher your down payment, the lower your loan-to-value (LTV) ratio is.
#7 Compare Different Mortgage Lenders
Starting your search online will show you some of the best mortgage rates in the market. Remember, these are estimates. The actual rate you’re offered will depend on your credit information and overall financial standing.
Having several quotes allows you to negotiate rates that make financial sense to you. There are also several online mortgage calculators to help you calculate your repayment schedule, rates, and associated costs.
#8 Hire A Realtor
A skilled realtor can make a massive difference in the amount you pay for your new house. That’s because they know some information that you might not be privy to. Experienced realtors can help you negotiate lower rates, or tell you whether the house you’re buying is worth its asking price.
Once you get pre-approved, it’s easier for your real estate agent to find a house that fits your budget and needs. They can also give informed opinions on some essential requirements related to the purchase. These include home inspections, tax obligations, home insurance providers, and potential repairs.
The best way of finding good realtors is through recommendations from friends and acquaintances. Most listing sites also allow users to review real estate agents they worked with before.
These tips will come in handy when planning your home purchase. If you’re looking for practical financial advice, the pro-finance blog is your answer. We offer high-quality articles addressing the biggest money-related problems. Contact us today for more details.