Take These 5 Steps Toward Homeownership
1. Understand What You Can Afford
To get a rough estimate of what you can afford, most lenders suggest that you should spend no more than 28% of your monthly gross (pre-tax) income on your mortgage payment, including principal, interest, taxes and insurance. This percentage also factors into securing a loan for your home.
It is extremely important to avoid becoming “house poor” as you consider what you can afford. First time home ownership can have hidden costs for renters. You are going to be responsible for any improvements, repairs, and lawn care. It can add up quickly. You want to avoid being at the upper limit of what you can afford to ensure you can cover unexpected expenses.
Use this Home Affordability Calculator provided by My Home by Freddie Mac to get started.
2. Take Control of Your Credit Score
Your credit score impacts every aspect of securing a loan. Make sure that you understand what it is and what your number means. Review Understanding Credit Scores by Experian for complete information on what a credit score is, factors that determine your credit score, how lenders use credit scores, and what makes a good credit score. You can check your FICO score for free as well.
Compile all of your debt with a tool that works for you. Review How to Prioritize Debt and Rebuild Your Credit by Experian. Remember to include everything. Any money that goes out is debt! Include all of your bills, loans, and credit card debt in your assessment. Do not overlook including an estimate of what you spend on necessities like groceries and transportation every month. Then, make a plan of attack and determine which debt you can eliminate completely. Start with anything carrying a high interest rate.
3. Prepare for All Closing Costs
Closing costs can take first time home buyers by surprise. Make sure that you understand all aspects of the finances you will be expected to provide to close on your home. Consider lender fees, title fees, inspection fees, and Realtor® commission. The National Association of Realtors® offers a list of Common Closing Costs for Buyers. This can help to prepare you for what you may need to close on your home.
4. Make a Savings Plan
The more money that you can provide as a down payment, the better. You have completed your assessment of what you can afford, what you need to pay off to improve your credit score and your debt to income ratio, and what you will need for closing costs. Look at all of your expenses and consider what you can eliminate and put in a savings account for your down payment. Remember, you are saving for your future!
5. Set a Goal Date
Now that you have a full understanding of what you need to accomplish financially, take a realistic look at when you will be ready to look for your new home. Do not be swayed by talk of interest rates or the “best” time to buy. You will benefit greatly if you are financially prepared. You also do not want to fall in love with a home before you can realistically afford it. The right time to start looking is unique to you.
Taking these steps will not only get you to the finish line, but they’ll get you ready to find the home of your dreams with the ability to enjoy it! You know what you can afford, have everything in order to secure a loan, and understand what you will need to provide to close on your home. Add the perfect real estate professional to the mix and your house hunting will be what it should be: an exciting adventure!