First-time homebuyer ? Purchasing your first home is a big decision, one that requires a lot of time, consideration and — you guessed it — money. Buying a house will likely be the most expensive purchase you’ll ever make.
With the median U.S. home value being $244,054, houses are more costly than ever. Make sure you’re well-informed and aware of each step in the buying process. Here are seven points to keep in mind as you move forward.
1. Pay Off Your Debt First
The first step to buying a home is to pay down your debt. Refrain from taking on new debt at this time, as this could negatively impact your credit score. Mortgage lenders and banks will look at your score before offering a loan.
While you could get a mortgage with one as low as 500, a 620 is typically the minimum requirement. The higher your score, the likelier you are to get a better interest and lower down payment rate on your mortgage.
2. Think Long Term
You’ll also want to consider how long you plan to live in the area before buying a home. Generally, if you don’t plan on staying at least five years, you may want to stick with renting.
However, if you do expect to remain for the long term, you can easily build equity and make up for the cost of buying, selling and moving. Plus, if you commit to staying, you won’t have to go through the entire approval and buying process all over again every few years.
3. Know Your Budget
Next, determine how much money you have to spend on a home. What’s your price range? Consider your current income and expenses and take a look at your financial obligations and goals.
Before committing, make sure you can cover all your bases. If you’re struggling to make ends meet right now, adding another large expense to the mix may be detrimental to your financial health. When in doubt, wait it out.
4. Can You Afford the Down Payment?
The cost of a down payment should be part of your budget. Typically, the amount you’ll put toward a down payment is 20% of the home. However, you might consider putting down less if you take out a loan. You may even be able to put down as little as 3.5% for a Federal Housing Administration loan However, it’s best to aim for 20% since this will lower your mortgage loan and interest, reduce your insurance premiums, give you access to lower mortgage rates and leave you with smaller monthly payments.
5. Shop Around
Once you have a functional budget and know your price range for a home, you can begin shopping around. Be a smart first-time homebuyer and try searching at the lower end of your price range.
You might find something you like without having to spend as much. At the same time, keep your options open and tour several different homes. This will help you decide what you can and can’t compromise on and make you aware of what kind of homes are available in a certain area.
6. Distinguish Between Needs and Wants
Speaking of compromise, you’ll also want to distinguish between what you want in a home and what you need. Make a list so you know when to compromise and when to say no to a prospective home.
For instance, you might really want granite countertops, but if the kitchen before you has laminate counters and is still functional, you might need to compromise. It’s all about give-and-take here.
7. Understand the Mortgage Process
There are many steps to take in securing a mortgage. The first few include getting preapproved for a loan, making an offer on your dream home and applying for a mortgage. The application process will access your employment, income, assets, debts, loans, previous financial missteps and your new home’s property information.
Then, once your loan has been processed and an underwriter has signed, you’ll have three days to review the closing disclosure. Once you’ve finally closed on the home, which typically takes 41 days, you’ll walk away holding the keys.
Open the Door to Your Future
Owning a home is the American dream, and by fully understanding the process, you can keep it from evolving into a nightmare. Now that you know the basics, you can move forward being a first-time homebuyer with confidence!