Buying your first home is an exciting venture. Maybe you have a growing family or you want the freedom to decorate and remodel the way you like. Perhaps the market you’re in makes it more affordable to buy versus rent. Whatever your reasons, there are important steps you can take to ensure you are financially prepared for home ownership. Most people falsely believe that it’s just as easy as renting, but there are additional financial considerations when it comes to homeownership. Whether you’re just starting to save up or you’re ready to get pre approved, here are financial tips to help you on your journey to becoming first time home buyers.
Get Your Credit Score in a Healthy Range
Paying off bad debts and getting your debt-to-income ratio low are two great ways to get your credit score into a healthy range. While some lenders will approve loans for those with under 700 credit score, you’ll be in a better buying position when your credit score is 725 and above. Having good credit makes lenders feel more comfortable giving you a large home loan. If you’re not sure of other ways to boost your credit score you can work with professionals who help people improve their credit.
Don’t Make Major Purchases While You’re in the Home Buying Process
One of the biggest mistakes people make is in making large purchases or getting large loans while they are in the home buying process. Most lenders advise their clients not to make large purchases like for an auto loan. Does refinancing a car hurt your credit? It’s not necessarily about whether or not it hurts your credit. It has more to do with carrying additional debt that can make you a risky buyer. Lenders don’t like to see major changes in your bank account or in your credit while you are buying a house. The stability is critical to get you to closing without issue.
Save for a Large Down Payment
While there are options for zero and low down payment home loans, you’ll also be paying mortgage insurance if you have less than 20% down. The more you can put down on a house the better off you’ll be. A large down payment means you’ll get better interest rates and loan terms than if you have 3.5% or less. In some cases, this may not be possible, but you’ll spend less in the long-term if you can do it.
Save Money for Repairs
Right now, you’re probably renting and if anything expensive breaks, you aren’t responsible. When the roof leaks, the landlord will fix it. When the air conditioning goes out, you won’t have to come up with thousands of dollars to repair it. It’s a good idea to think about all the things that could possibly break when you own your home and put money in an account for repairs. That way you’ll be prepared when you get home and something does break. Not only will you have money to fix it, you’ll be in the habit of saving for house emergencies.
Get Pre-Approved With More Than One Mortgage Company
Maybe you got a great deal at your local bank, but just like anything else you never know if you could get a better rate or terms if you don’t shop around. It’s a good idea to get at least 2 pre-approvals with terms and conditions so you can compare rates. One might have lower interest rates but higher fees and vice versa. Pre-approval gives you a good idea of your buying power.
Don’t Take a Loan for the Maximum Amount You’re Approved For
It’s tempting to stretch your budget to the max. The truth is that most lenders will approve you for a home loan for far more than you could realistically afford. Don’t take the bait. You will be much more comfortable and financially secure if you buy a home for less than the maximum you’re approved for. Your job situation can change at any time and most people prefer to have a buffer each month rather than spending all their income on a mortgage payment. One rule of thumb is that your house payment should be no more than 25% of your monthly income.
Shop Around for Homeowners’ Insurance
Each insurance policy is different and will add different costs to your monthly bill. It’s important to shop around not just for the best rates, but for the most comprehensive policies. Some areas don’t offer flood insurance, or it has to be purchased separately as a rider on your policy. Other areas have high rates for fires or other natural disaster coverage. Read the policy carefully to learn what’s covered and what’s not. You’ll also want to check out different deductible amounts.
In some cases, a policy might have a $500 deductible no matter what the issue is, while others will have varying deductible amounts depending on the claim. It doesn’t hurt you to get quotes from multiple different companies and the extra time spent looking for insurance up front can save you thousands of dollars per year.
Consider Tax Rates
Different neighborhoods have different taxes on homes. You can find out tax rates for comparable properties by checking with the local assessor’s office or asking your real estate agent. This can give you a better understanding of the full cost of owning a home in that neighborhood.
Decide Whether or Not You Want an HOA
Homeowners’ associations can help keep the prices of homes stable in a particular neighborhood. They can also be a sore issue when they don’t do what they are supposed to or they police the neighborhood with a heavy hand. When you want to plant a flower bed and need to ask permission for every little thing it can be overwhelming. It also adds additional costs that may or may not be worth it. Some HOA’s only offer snow removal for the neighborhood while others pay for amenities like a swimming pool and gym memberships.
