Want to become a homeowner but don’t know where to start? Here’s how to put them together for your home.
When I want to buy a house, I just want to buy a house. I have a lot of debt, a few dollars in my name, and I don’t know where to start.
That was seven years ago. I bought a house last month after finally finishing what I had to do before starting. This is what helped me and a few other things that will lead you to the right home.
Boost your credit score
If you’re planning to get a mortgage (like most people), your credit score is the most important factor when buying a home. The lender will review your history and credit history to determine if you (and fellow borrowers, if any) are the responsible borrowers.
The higher your credit score, the more likely you are to win a home loan with the lowest interest rate available.
It also means that the lower your credit score, the higher your interest rate – if you qualify at all. You can increase your score by:
- Making timely payments: On-time payment history is the biggest factor in calculating your credit score. If your payment history is a little spotty, start making on-time payments right away. Sign up for autopay whenever you can to make sure your payments are never late.
- Lowering your credit usage: If you’re carrying a balance month-to-month on your credit cards, lenders might think you don’t have enough cash on hand to make mortgage payments. Lower your credit usage by paying off your credit cards in full at the end of the billing cycle. If your credit score is pretty good, ask your credit card issuer for a balance increase. This will also lower your credit utilization or the ratio of your credit card usage to available credit.
- Removing bad marks: Check your credit score for free at AnnualCreditReport.com. You can pull your credit report from all three major credit bureaus: Experian, Equifax, and Transunion. From there, you’ll be able to see if there are any errors. If you have mistakes, contract the bureau to report them. Also, contact the creditor that reported the error to see if you need to do anything to fix it.
Start and contribute to a down payment fund
If you run out of cash, now is the time to save a down payment according to the price of the house you are aiming for. Saving your first payment can slow down your home purchase history, but there is a big difference in what you can buy.
While you don’t need the standard 20% deposit, it’s still recommended. You can qualify for a mortgage – FHA or conventional – without a mortgage, but you will need to purchase personal mortgage insurance in addition to your monthly payments.
PMI payments are not intended for your capital or interest portfolio. This goes to the mortgage lender as a layer of protection in case you are unable to repay your loan. With a 20% deposit, you avoid PMI payments and get a lower interest rate (without paying points).
Where to save your deposit depends on when you plan to buy a home. If it’s in the next year or so, you may want to stick with high-income savings account like Marcus or Ally. The returns are not as high as investing in the stock market, but you don’t lose money and make more than a standard checking and savings account offer, usually around 0.09%.
If you have a little extra time when planning a purchase, consider investing your money in the stock market. You can turn to a traditional broker or Robo-advisor such as Betterment or Wealthfront.
Robo advisors manage your wealth automatically by investing in cheap exchange-traded funds. These advisors assess your risk based on a survey that asks what type of investor you are and when you want to benefit from your investment.
This way, you can continue investing in the stock market without having to manually select individual stocks or worry about the technical aspects of trading.
To get the most out of your down payment investment, find ways to contribute often. See if you can set up monthly or biweekly automatic payments. Think of this as a bill that you pay each month to avoid the final payment.
Avoid borrowing money, either through personal loans or through your future with a 401 (k) loan. With a 401 (k) loan, you can borrow money from your retirement fund to help cover the costs of buying a home or closing costs.
While you can use these funds, try to avoid them. Even if you pay the money back, you will lose any potential funds that may have grown from the investment.
Before looking at your dream house, it’s good to know how many houses you can buy. Lenders base their approval on your credit rating, debt/income ratio, income, employment history, and whether you own any assets.
Pre-approval allows you to buy a home that fits your budget. It also shows the seller that you are serious about buying a home and getting deals.
To get pre-approved, you can apply through your bank, broker, or online lender. Since pre-approval is a loan application that generates serious credit, check if you qualify first.
Prequalification is when you answer several questions based on your credit rating and income to see if you qualify for a loan.
Prior approval is when a potential lender reviews your past to make sure you qualify for a loan. Although prequalification is based on your answer, prior approval is based on data available from the credit bureau, your bank account, and other financial information.
Find a real estate agent
Exploring the world of home buying is not easy. The rules are constantly changing, which means that an expert can handle complex processes with greater ease.
Real estate agents are useful in guiding you through what you need and in finding the right person to meet that need. For example, they can identify the ward with the best schools and negotiate fees with vendors when it’s time to bid.
You can also explain the contract information if anything is confusing, e.g. Information about the seller and how much money needs to be invested in fiduciary operations.
The best way to find an agent is to find out which friends and family members recommended them. You may want to find an agent who is familiar with the environment you are exploring.
Set your housing budget
If the bank or broker gives pre-approval of your loan, the pre-approved loan amount will be given. However, even if you have pre-approved this amount, it doesn’t have to be exactly the amount you need to buy a house.
What is the absolute largest amount of money you can spend on a house each month? By determining your ideal monthly payment, you can determine the best target price for your home. Your monthly payment is based on your principal payments, interest rate, taxes, home insurance, and whether or not you paid PMI.
To do this, check your budget and show what a potential new home purchase will look like. Make sure to add any property, utility, and maintenance taxes associated with your new home (e.g pool maintenance). This will give you an idea of the impact on your finances when buying a new home.
Explore the house (at last!)
While seeing potential homes is one of the last things you will do, it’s because there’s no point doing it early. Without knowing how many homes you can afford and prior approval letters, the only way to get hurt is to look at homes you may never be able to buy.
Use your agent to find homes within your budget in the neighborhood you want. If this neighborhood is not within your budget, ask your agent if one has one. Your agent knows the market better than most people you know – take advantage of it.
Whether you’re attending an open house or making an appointment to explore your own home, see as many as you need. Buying a home is probably the most expensive purchase you will ever make. Don’t settle for less than what’s best for you.
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