A recent study found that 56 percent of Millennials
believe owning a home is more important than paying off debt or retiring comfortably. They may want to buy a home but they might not be ready for it.
Although many are still hoping to achieve the American dream of buying a home, that doesn’t mean everyone is financially prepared.
Here are important things you need to do before you buy your home.
1. Pull your credit report and check your score
Your credit report
and corresponding score are your golden tickets to buying a home. They showcase your credit responsibility and worthiness. Your credit score can seriously
impact your mortgage rate
. The higher your credit score, the lower your interest rate may be. This means you’ll end up owing a lot less money over the life of the loan.
Payment history: 35 percent, Credit utilization: 30 percent, Length of history: 15 percent
Types of credit: 10 percent, New credit: 10 percent
Cleaning up your credit is one of your first steps prior to buying a home. You can get a free credit report from one of the three major credit bureaus — Equifax, Experian, and TransUnion.
If you’re noticing a high credit utilization, start chunking away at your debt. See if you can
consolidate your debt
, refinance for lower interest payments, or
transfer a big credit card balance
to another card with friendlier repayment terms. Keep your utilization below 30 percent of your total limit.
Avoid getting new credit within a year of buying a home since it can cause a temporary dip in your score. The length of your credit history matters, too. The longer your credit history, the more credit-responsible you look.
2. Review your budget
If you’re working on a clean bill of credit health, give your budget a hard assessment. Use the 28-36 rule to see where your money is going. This is when your maximum household expenses shouldn’t exceed 28 percent of your gross monthly income. Your debt, like credit cards and loans, shouldn’t exceed 36 percent.
Your debt-to-income ratio, or DTI, is important to lenders for determining
how much home you can afford
and if you’re a good candidate to receive a mortgage. You might discover you need to make some adjustments, like spending less on travel and clothing, for example, to make room for a mortgage payment.
Fine-tuning your budget pre-home buying will allow you to put extra cash towards a down payment, closing costs, or potentially higher home costs than you’re paying right now.
3. Get prequalified
With a stellar credit score and a solid down payment built up, you might feel confident in buying the house of your dreams. However, until you get prequalified, that house will stay in your dreams.
Banks base how much they’re willing to lend you based on your entire financial existence: your income, debt, and credit history all pay a crucial role. It’s also there to show you how much home you can afford. If you know you can only get a $200,000 loan, you won’t waste your time looking at half a million-dollar homes.
4. Beef up your down payment
Down payments for homes and cars are very similar: the higher the down payment, the less each monthly payment will be. However, homes are much more expensive, which means the more you can put towards your down payment, the better off you will be every month.
It can be difficult to keep stashing money away for a down payment when you’re trying to afford basic necessities right now. Try cutting back on things you can manage, like dining out, grocery spending, unnecessary purchases, and travel.
Your debt might be holding you back as well. Try making larger debt payments every month until it’s completely paid off. Then the money you were putting towards your debt can now go to your down payment fund.
6. Get an agent
Whether you’re looking for a home 300 miles away or three, it’s a good idea to find someone who knows the neighborhoods better than you.
A real estate gets commission after the home is sold and closed so you don’t have to worry about costs up front. Do your research on local Realtor’s and look for one with top-notch credentials and has a proven track record. It’s similar to interviewing someone for a job, so talking to a potential agent’s former clients through may help you determine if they’re the right fit for you.
7. Don’t skimp on an inspection
You might think getting a home inspection is unnecessary. After all, you toured the home yourself and you would’ve seen major issues. True, maybe you can spot the big problems, but what about the small ones?
go over every single detail of your home, from walls and appliances to the roof and drainage. Getting an inspection is a major part of buying a home because if there are any problems, you can take them back to the seller for negotiation. Either they fix the problem before you buy it or they lower their asking price of the home to accommodate the new cost of fixing the problem.
8. Make a plan B (and C)
As you’ve diligently prepared for your future home, you might not have considered what might happen if it doesn’t work out. What if your down payment is a little low? What if your dream home has an old roof?
Regardless of the setback, build the “just in case” options into your plan. If your down payment is too low, maybe you get an FHA loan instead of a conventional one. That old roof may save you a lot if you talk the seller down, but you’ll need to make sure you can afford to replace after you close on the home.
Throughout the entire home-buying process, you will face different options for every single step you make. It’s important to remember how your choices are impacted along the way.
Every homebuyer has their own priorities when choosing a mortgage. Some are interested in keeping their monthly payments as low as possible. Others are interested in making sure that their monthly payments never increase. Still others pick a loan based on the knowledge they will be moving again in just a few years.
We have a wide range of competitively priced loan programs and a reputation for exceptional customer service. You will have many questions when you are purchasing a home, and having one of our experienced, responsive Mortgage Loan Consultants assist you, can make the process much easier.
We look forward to hearing from you when you are ready to buy a home.
MEET OUR TEAM THAT IS READY TO HELP YOU!