Buying a home is one of life’s most meaningful milestones, particularly for first-time homeowners. At credit.org, we’re here to provide the information you need in order to pave a clear path toward your homeownership goal. While it is indeed a journey from the time you decide you want to buy through closing and moving into your new home, the process can go smoothly when you have all of your ducks in a row from the very start.
Determining Your Price Range
A mortgage calculator will quickly help you get a feel for what you can afford in your desired city or town. With that said, you should also grasp the general financial numbers that make a home purchase both viable and sustainable. Most financial experts agree that your housing payments should not exceed 30 percent of your gross monthly income. Also, take some time to compare and contrast your current rent vs. your estimated mortgage payment so you can begin to uncover the potential long-term savings in buying a home. We won’t go into the nitty-gritty calculations and variables for the sake of this guide, so remember to consult your financial advisors as you are determining your budget.
Choosing a Neighborhood
Whether you’re looking to move down the street or across the country, you’re making a commitment not just to a property, but also to a community. Conduct thorough research on a neighborhood’s crime rate, economic conditions, amenities, commute times and the school district. Even if you don’t have kids, living in a desirable school district increases your property and resale value. When you understand the pros and cons of a given neighborhood, you are able to make informed comparisons based on your price range.
Most people assume they need to save 20 percent for a down payment – which, in many cases, may be true. However, there are low down payment loans that make it possible to buy a home with as little as 3 percent down. Regardless of where in that range you project your down payment to land, you will want to save extra to cover closing costs. These can amount to several thousand dollars, depending on several factors such as the location of the property and the purchase price where the home is purchased.
With items such as moving costs, renovations, repairs, ongoing maintenance, insurance, and property taxes also to consider, it’s best to make a list of everything you need to save for and put away a set amount each week or month. Pre-purchase counseling can also be helpful.
Most lenders will require you to have at least a few months’ worth of mortgage payments in the bank. The more you can save above and beyond what’s necessary, the better.
Strengthening Your Credit Score
Your credit score is arguably the single most significant factor in determining your qualification for a mortgage loan. Generally, a higher credit score will translate to a lower mortgage interest rate, which means you’ll save by paying less in interest.
Since you’re taking time to grow your savings account, you also have a grace period to build your credit. A score of 700 is a great goal to aim for, but if that’s not realistic, don’t be discouraged. You can still secure a mortgage with a score in the mid to upper 600s but may need a higher down payment depending on whether your score is low due to insufficient credit, high utilization or slow payments. Lenders tend to be more lenient with an applicant whose credit score is being dragged down by insufficient credit history than they will with an applicant who shows high utilization and/or slow payments.
Simple ways to slowly but surely improve your credit score include:
- Paying down (and eventually paying off) credit cards
- Reducing debt rather than simply moving it around
- Paying bills on time
- Only opening credit cards you truly need
- Settling any collections
If you’re buying a home with your spouse, both of you should seek to get your credit into good standing. A fantastic credit score can offset a poor credit score to an extent, but a poor credit score will always draw extra scrutiny from lenders. Getting familiar with and keeping a handle on your credit score will also help you identify any potentially fraudulent activity that might have been dragging you down without your knowledge.
As you’re getting close to having enough saved up to buy a home, you can get a head start on the steps that will follow by compiling the necessary paperwork. The documentation typically needed to buy a home includes:
- W2s from the past two years
- Pay stubs from the past two pay periods
- Bank statements from the past few months
- Tax returns for the past two years
- Photocopied identification
- Investment account and asset statements
Have you checked off all of the above sections and bullet points? Congratulations! You are ready to move on to the next step, which is to get pre-qualified for a mortgage. We will walk you through the pre-qualification process in a follow-up post. In the meantime, be sure to take advantage of our many homeownership resources for more tips, guidelines, and tools to prepare you for this exciting new chapter in your life!