- Personal Finance
Things to Do Before Buying a Home
Buying Your First Home
The process of buying your first home is undeniably one of the most exciting yet scary experiences of your life. Unless you are sitting on piles of money, you will have to apply for a mortgage in order to purchase your first home. There are many factors in buying a home, below are some necessary steps.
Build and Boost Credit
Often first time home buyers are unaware of the level or amount of credit that they must possess. Gone are the days of getting approved for a home loan simply by handing over a bank statement and pay stub.
There is a difference between a credit score and a FICO score. Most home buyers check their credit scores through free credit reports sites. Your credit score through Experian and your credit score that the bank sees may be quite different. Even if you have ZERO debt, you may not be able to be approved for a home loan. Below are tips to build and boost credit:
- Open up a car loan, even a small loan that is paid on time, and reported to a credit agency will build credit. Make sure when taking out a loan for a car or other large item that you go through a bank to do so, preferably the same one you will go through for your future home.
- Take out credit cards. When I first was looking into buying a home I was proud of the fact that I had zero credit cards. Zero credit cards=zero debt, right? Right, but very wrong in the banks eyes. Open at least two or three (no annual fee) credit cards. Use only 30% of their monthly limit. And then, pay them all off every month. Don't get sucked into the easy minimum payments.
- Monitor your credit. Once you have established loans or credit cards, monitor them often. Sign up for free or inexpensive sites such as Credit Karma or Quizzle that monitor your credit progress and give you advice on how to improve.
- Make sure your credit is up in the 700's before you apply. It might be tempting once you see your credit climbing every month to apply when you credit score is in the upper 600's. But, be patient. The higher your score, the better interest rates and lower down payment you will be required.
- Pay off all debt. Even the small things that pop on your credit may harm you. Sadly, when things are sent to a credit agency they will haunt your report, whether paid or not, for up to 7 years. But, having everything saying settled is a huge benefit.
Save Your Money
While building your credit, it is also a good idea to save for your future home. Obviously you are not going to pay cash for your new home, hence applying for a mortgage, but having a good chunk of cash in the bank will be helpful in the buying process. Below are a few fees that you may need to come up with around purchasing your first home.
- Down Payment. One of the most commonly known house expenses. The bigger your down payment the less you will need in your actual loan amount. Down payments range for 3% of your loan to up to 20%. Have a realistic amount in mind before applying.
- Closing Costs. Closing costs are common for a variety of costs associated with the house transaction. Closing costs are not always required to be paid by the buyer, but it is all situational. Make sure you let your realtor know what you would like to see happen.
- Faults found in inspections. Sometimes during the inspection, there are damages found that you don't expect. Such as a bad part of a roof or leaky pipes. Often times the seller will work out a agreement to pay some or all of these costs, but other times (often when there are other bidders) these expenses will be expected to be paid by you.
- Furnishings. Often times new home buyers are so excited to actually get into their home they forget to budget for the things that they will want for the home. Most are moving from parent's basements or small apartments to a much larger space. Budget for the things you will need in your guest bedroom, office, and various other places in or outside. Your new home will be much more inviting if the money is available to furnish.
Figure Out What You Can Afford
Figuring out how much of a house you can afford is often one of the most annoying home buying processes. Often, home searchers start doing searches and become infatuated with homes that are way above their budget. Figure out your budget before any searching begins so realistic expectations can be set. How to do this:
- For regular FHA loans a general rule of thumb is your monthly home payment cannot excede 31% of your income.
- Be realistic about your other monthly expenses. Calculate monthly car loans, school tuitions, student loans, etc. Break your budget down as much as possible to see what you can truly afford.
- Take advice from a trusted banker. Try to go through a bank that you have been with for a long and trust.
- Use online resources such as a mortgage calculator at the beginning stages.
Get Pre Approved
This may seem like a no brainer, but now days getting pre approved for a mortgage may be a lot more extensive than you'd think. There are many things to have in order before getting pre approved. At least 90 days before you want to be in a home, make sure you have these things lined up.
- Have all your down payment in your bank account. Often times banks will track your statements to make sure money has been available for some time. If you are being "gifted" money for a down payment, make sure this is specified. Do not ever tell the bank you were loaned money if it was truly gifted to you.
- Gather at least 90 days worth of pay stubs and bank statements, or if self employed your last two years of tax returns.
- Make sure your credit is above 680.
- Do not open any more credit cards at least 3 months before applying.
- Do not cancel any cards either.
- If you are currently renting from a private landlord that you give checks to monthly, make sure to get copies of these checks, for up to a year.
Most importantly, don't settle on a home that you are not 100% in love with. A lot of first time home buyers jump at the first decent house that they find. There are lots of houses on the market at the same time. Make sure you do your research.
- Find a great realtor. Ask your friends or family members for recommendations for a realtor. Not everyone thinks a realtor is necessary, but as a first time home buyer it is hugely beneficial. Tell your realtor your needs and wants and locations you desire and he will be able to compile tons of places to look at.
- Browse around yourself. Back in the day the only way to know what was for sale in your area was to drive around looking for for sale signs or to look in your local paper. Although, these are still great resources-- the internet has opened many doors for busy homebuyers. Websites such as Trulia, Homes, and Zillow are excellent home browsing sites that show you pictures, prices, and other interesting community information without even leaving your sofa.
- Remember, even during the home buying process if unexpected things happen, such as rough inspections or unexpected closing costs-- you can always back out until the final papers are signed. Avoid hurt feelings and do what is best for you.