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Making a big purchase can be an intimidating and unpredictable experience, especially when it comes to buying your first home. Many first-timers don’t know what they’re getting themselves into, leaving them more likely to make misinformed decisions that will harm their financial well-being later on.
These unprepared buyers risk purchasing a house that turns into a money pit revealing major unexpected expenses, and find themselves in deep fiscal trouble. The ones who take their time and do their research have the best chance at moving into their dream home with fewer obstacles.
Looking to make your house hunt as smooth as possible? Here are some of the things you need to consider before diving into this life-changing endeavor in order to prepare yourself both mentally and monetarily for the rest of your home buying journey.
1.) What is your current financial status?
It’s critical that you know where you stand financially before committing to the home buying process. Studies show that unexpected costs like foundation issues, roofing repairs, or HVAC updates can be detrimental to your finances, so an established savings account is essential before buying a home. A comfortable nest egg in your savings will give you the ability to make a more significant down payment which will subsequently lower your monthly mortgage payments. Not only that, setting money aside can help support some major home improvement projects or necessary repairs in the future, both near or far.
Another crucial aspect of your current financial situation is your credit score. Good credit scores take years to develop, manage, and, in some cases, repair. So, if you’re thinking about buying a home, you should start tending to your credit as soon as possible. According to Lexington Law, the average credit score approved for a home loan in 2019 is 580-640.
Healthy credit scores can be maintained by making timely payments on a consistent basis. Poor credit scores, on the other hand, can be improved through activities like paying off existing debt or opening a credit card account and making payments on schedule. To discover more about your credit score and get a better understanding of ways you can increase it, you can utilize many reputable online credit-checking websites or contact a financial expert.
Finally, your personal amount of outstanding debt is vital information when considering your readiness to buy a home. More specifically, your debt-to-income ratio, or DTI, indicates how much additional debt you are capable of taking on and, if low enough, improves your chances of getting approved by a lender. To calculate your DTI, divide your monthly debt expenses by your gross monthly income. Experts say to keep your DTI below 43% for the best likelihood of getting your mortgage approved.
2.) What is your budget?
Once you establish how much money you can invest into a home, your house hunt will become a whole lot easier. To do this, calculate you and your spouse’s monthly net income, add up all housing costs, and determine how much you can contribute for a down payment. This information will give you a good idea of how much house you can afford and how big of a loan to apply for. The amount you’re approved for and your down payment will also control your monthly mortgage payment and thus influence your overall spending habits.
However, it’s no secret that circumstances are likely to change over many years of owning a home. From switching careers that may cause adjustments in salary to a number of other lifestyle changes, many factors can affect the way you spend your money in the future. It’s comforting for hopeful home buyers to know that there are options to adjust your mortgage payments to better fit your ever-changing lifestyle further down the road. Once you establish equity in your home, you can look into options like refinancing to decrease your monthly mortgage payments or learn about a home equity loan that provides access to cash funds to allow for more flexibility with your money practices.
No matter what, it’s highly recommended that you consult with a financial advisor to establish a budget in the initial stages of your home buying experience so that you don’t bite off more than you can chew. If you over-commit to a purchase this large, you likely won’t be able to build up your savings account or pay off debt which can hurt your finances years into the future. Keep in mind, too, that for the smoothest transition post-approval, you should pay off as much existing debt as you can before you sign on the dotted line.
3.) What kind of mortgage is best for you?
The type of loan you can acquire varies, so it’s important to understand the differences between them and which loans will best suit your financial circumstances. The characteristics of loans range in term, fees, and interest rates that are available. Here are some of the most common forms of mortgages you can apply for:
- Fixed-rate loans are a type of conventional loan in which interest rates and monthly payments don’t fluctuate. These loans are suitable for those who prefer consistency for their budget and plan on staying in their home for a majority of the duration of the loan. Consider that fixed-rate loans require a down payment, which makes having a healthy savings account extremely important.
- Adjustable-rate mortgages (ARMs) are loans with interest rates that are usually lower than fixed loans for a number of years, and then increase or decrease periodically along with your total monthly mortgage payments. ARMs are easier to acquire for those with poor credit, however, the unpredictability of payments makes it less than ideal for those with strict budgeting plans, or simply when money is tight.
- FHA loans are mortgages with fixed interest rates from the Federal Housing Administration that are government-insured, making them easier to get approved for. These agreements require a down payment, although applicants can put down as little as 3.5% of the total amount of the loan, which makes them appealing for those who don’t have the funds available for a huge down payment. If this loan sounds right for you, it’s important to consider that you’ll need to pay for private mortgage insurance (PMI) in addition to the monthly payments, though it can be as small as 1%.
There are many more alternatives for mortgages if you plan on buying a home. Consider your current situation and determine what loan will be best suitable for both your current lifestyle and your financial future. It’s important to consider, too, that anything you’re pre-approved for can be denied later on if there are any major changes in your lifestyle, like a change in career, income, or if you’ve committed to more debt since you were approved.
4.) What do you know about the home?
Throughout the home buying process, you’re probably going to see so many houses that it can be hard to keep straight all the critical information that should be a part of your final decision. But, in order to make a well-informed judgment for you and your family’s lives, there are a few things you need to know about the house you’re thinking about buying.
First, you should look into the neighborhoods in which you’re shopping around to determine whether buying your house is a good decision. For your home to be a good investment, it should have sufficient value. Plenty of factors affect home value, including, but not limited to, the size of the home, age, renovations, other nearby homes in the neighborhood, and many more. All of these factors also impact the home’s resale value, or the price you can expect to get when you go to sell in the future.
You should also make sure that the home is inspected before purchasing. Not only can a home inspection increase or decrease the price you’re getting for the home, but it could also prevent you from facing major unexpected home repairs months or years after moving in. Be sure to use a reputable home inspector and prepare for what to expect. Inspections can cost upwards of $1,000 and can take a few hours. The more you know about them, the more you can prepare both mentally and financially. Remember, also, to make sure that all previous renovations made by the sellers are up to code before agreeing on the purchasing price.
Finally, you should know your options in all aspects regarding the purchase of your home. Don’t be afraid to take your time and analyze all alternatives. Whether you’re dealing with a real estate agent, a lender, or an inspector, you should know who you’re working with is a trusted expert so that you’re making smart moves with your money and your life.
Buying a home is not a decision that should be taken lightly. Make an effort to gain knowledge rather than going in blind. The more you know about your home, the more comfortable your mind and your bank account will be down the road. Don’t get overwhelmed; educate yourself and make smart moves with your money.
Editor’s note: This post was written by Lauren Nowacki.