How To Prepare Financially For First Time Home Ownership
Buying a home is exciting and it is a major accomplishment. Instead of living with family, you’re on your own and forging your own path in a space that’s completely yours.
All that said, there’s no doubt that buying a home can be intimidating and requires a considerable amount of preparation. Before you close, you’ll want to know not only how to mentally and emotionally prepare, but how to prepare financially for home ownership as well.
Understand What You Can Afford
Before you start the home-buying process, make sure it’s the right time in your life. In most cases, owning a home will pay off financially over time - especially if you are planning to stay there for a few years or more.
While you might be tempted to invest outside your price range. Buying a home that you can afford today, right now, will pan out better. When buying out of your price range, you might end up being ‘house poor,’ AKA you live in a nice house but you’re unable to save or afford much else.
Keeping your house payment under 28% of your gross monthly income is a good rule of thumb.
Boost Your Credit Score
Before you get approved for the home you want, your credit score has to meet the lender’s requirements. They look at your credit to see how risky it would be to lend money to you and to get an idea of your ability to pay your mortgage payment consistently every month.
If you raise your credit score before applying, you’re more likely to have access to better financing options. At Interra Credit Union, you can easily find your FICO credit score, which is the score that many lenders (including us) use.
A few ways that you can repair your credit and raise your FICO score include:
● Checking your credit report for errors.
● Paying your bills on time.
● Lowering the amount of debt you owe.
At the minimum, it can take about six months to significantly improve your credit score. If this step is relevant to you and you want to buy a home, it’s wise to get started ASAP.
Pay Down Your Debt
If you have a lot of debt in your name (credit card balances, personal loans or other types of consumer debt), consider paying down the amount you owe before applying for a mortgage loan. By paying down debt, it will lower your debt-to-income (DTI) ratio.
If your DTI is low, it increases your chance of your home loan application being approved. DTI requirements will vary from lender to lender, which means there’s no universal number to work with. But, no matter the lender, the lower your DTI, the better your chances of getting approved will be.
Start Saving Now
You probably already know by now that buying a home is anything but inexpensive. You’ll want to start saving as early as possible for your down payment and closing costs normally associated when obtaining mortgage financing. There are many loan programs available that require a nominal down payment, but come with an added cost if the down payment is less than 20% of the purchase price.
Shop Around for Mortgages
Before choosing the home of your dreams, it’s best practice to obtain a mortgage Pre-Approval from your lender. A Pre-Approval is a document from your lender telling the Seller of a home that your credit profile (Income, Assets, Employment, Credit History…) have been reviewed and approved by the mortgage underwriter – which typically strengthens your offer with the Seller. Another type of letter that your lender might offer is a Pre-Qualification. This type of letter is easier and quicker to obtain, but no approval from the lender is guaranteed.
If you wait until the last minute to obtain your Pre-Approval, the Seller may choose someone else who already had their credit profile reviewed.
Avoid Big, Money-Related Life Changes
When in the process of applying for a mortgage loan, you really don’t want to take on any new debt, because it can complicate the lending process. If you must make a large purchase, it’s in your best interest to communicate that with your lender in advance.
It’s a best practice to avoid big life changes, like:
● Switching jobs
● Buying a car
● Buying a boat
● Maxing out credit cards
● Closing existing accounts
● Spending your money meant for the down payment
● Buying furniture
● Co-signing for family or friends
Estimate Your Future Homeowner Expenses
To estimate future property taxes, contact your assessor to get the local assessed value of your home so you can get an idea of how much you’ll be paying in taxes. You can also ask if they expect taxes to be reassessed in the near future or if any big projects are planned that will affect the local taxes.
Other home maintenance expenses can include:
● Lawn care
● Homeowners insurance
● A homeowners association fee
● Replacement or repair of appliances
● Remodeling costs, including painting
Preparing With Interra
At Interra Credit Union, we’ll answer your questions and provide the tools you need to prepare financially to own a home. The home buying process can be confusing, but we’re here to help you. We offer a wide variety of mortgage loans that can fit the type of home or property you want to buy or build.
Schedule an appointment with us today to get your home-buying questions answered. Interra has the peace of mind you’re looking for.