Author: Alex Delaney
1st in Our First Time Home Buyer Series
The COVID-19 pandemic has wreaked havoc on your average person’s budget. But that doesn’t mean your dream of homeownership is gone. It may just be postponed. If you want to own your own home, you can still start the process to get yourself prepared.
1) Decide if purchasing is the right decision for you. Purchasing a house is a huge commitment. If you plan to stay in a home for less than five years, this may not be the time for you. The costs of a loan are not insignificant. You won’t usually reclaim those costs and accrue enough equity unless you stay in the home for at least 5 years. However, if you are looking to turn the property into a rental when you move, then you will continue building equity, while having someone else pay the mortgage, thus making this a great option.
2) Calculate how much house you can afford. When purchasing a home, many people go for the biggest house their loan qualification will allow. This can be a costly mistake. Have you heard of the phrase, “house poor”? You will be responsible for all upkeep of your new home. If it needs a new roof or the water heater bursts, you have a heavy bill coming your way. You want to make sure your mortgage allows you to keep up with normal expenses, save for retirement, and put money aside for any emergencies, such as a new furnace, or a plumbing disaster.
Calculate your current debt payments, your monthly expenses, and any other normal costs, such as vacations, that you save for. Now, determine what you can set aside for your down payment. Once you purchase your home, keep setting aside the same amount as it will be a lifesaver when catastrophe strikes.
3) Save for a down payment and closing costs. You will need to prove that you can afford the debt of a home purchase. It is common knowledge that you must have 20% of the home value for your down payment. This is not completely accurate, but it is a good rule to follow. If you put down less, you will have a higher interest. In addition, you’ll be required to pay a monthly PMI, or private mortgage insurance. This is a charge that doesn’t do a thing for you except frustrate you that you are paying extra for nothing.
Closing costs can be negotiated in your contract. But with a tight market, you should be prepared to pay some of these costs. They usually run to about 3% to 6% of the property’s value. Some of the costs can be rolled into your mortgage, but again, make sure it doesn’t create a situation where you have to pay that nasty PMI.
4) Preparing for your loan: As you work toward your goal of buying a home, start making a habit of organizing your paperwork. For your home loan, you will need to have at least a two-year work history, shown by your tax returns, and recent pay stubs. Gather these forms in an electronic file so you can easily upload them when you start the loan process.
5) Clean up your credit. Banks will determine what you can afford by determining your Debt to Income Ratio (DTI). This is determined by dividing your monthly debt by your gross monthly income. Your lender will run a credit check and use the reported debts to calculate your DTI.
In addition, your credit score will determine how much your loan is going to cost you over the next 15 to 30 years. Make sure you get that score as high as possible before you start your search. You can purchase a home with a credit score of 620. But to get good terms on your loan and avoid paying high interest, you want your credit score to be at least 720.
6) Check into local First Time Home Buyer programs. These are programs designed to help low to moderate-income families attain the American Dream by assisting with information, support, down payments, and more!
This is an overview of the home buying process. Over the next couple of months, we will delve more deeply into each topic. Our next topic will be a closer look at First Time Home Buyer programs. Stay tuned!