Buying a home takes preparation, patience and perseverance. If you’re looking to buy your first home in the next 5 years or so, you’ll probably need to start now to ensure you’re in the right financial shape to do so. Here’s what you’ll need to get there.
- Improve your credit score
A lot of first-time homebuyers are holding off on buying in hopes they can get a better rate once they improve their credit scores, according to a recent Experian survey, and that’s smart. While you don’t need top-tier credit to get a mortgage, an improved credit score can not only help you get approved quickly for a mortgage loan, it can also make better interest rates available to you.
Most conventional lenders look for a credit score of at least 640, but a credit score of 620 is often a common credit score benchmark for government-backed loans.
If your score is subpar, and even if it isn’t (everyone’s credit can be improved), you can start improving your credit scores by pulling your credit reports, which you can do for free every year at AnnualCreditReport.com. Be sure to review it closely for any errors or discrepancies and then dispute any items that are inaccurate.
- Find out what can you afford
Getting pre-approved for a loan can help you determine the mortgage you can qualify for, but that doesn’t necessarily mean that’s what you can afford. Lenders look at your credit, income, debts and assets, but they don’t take into account your own personal spending and savings.
When lenders look at your income, they prefer that you’ve worked in the same or similar field for at least two years. If that’s not your case, explain your situation in writing, and be sure to include any employment gaps. Lenders also have to show that your income supports your mortgage and any other debt payments. If those debts exceed 45% of your income, you might not qualify for as much house as you might like.
Once you know how much you can comfortably afford and what kind of mortgage you can qualify for, you’ll have a better idea of how much you’ll need for a down payment.
- Save your down payment and closing costs
The bottom line with a down payment is the more you can put down, the less you’ll have to borrow, so your minimum monthly payments will be lower. Also if you have only a very small down payment (5% or less, for example), you’ll qualify for fewer types of mortgages and could also be charged a higher interest rate.
While most lenders would like to see a 20% down payment, some mortgages are available for as little as 3% down. And then there are the closing costs, the fees paid at the closing of a real estate transaction, when the title to the property is transferred to the buyer. They typically range between 2% and 5% of the purchase price.
Whether you’re able to save for your down payment and closing costs can be a good indicator of whether you’re ready to own a home. If you can’t save enough for a 3% to 5% down payment, are you really ready for the financial responsibilities of owning a home? There are a lot of expenses, big and small, that come with owning a home, not just the down payment, mortgage and closing costs.
- Have an emergency fund
You’ll want to be prepared for unexpected emergencies in your new home, and that means having enough savings to cover some of the big expenses. There are home warranties and homeowners insurance to cover some things, but, for example, if a huge rain storm causes your new home to flood and you don’t have flood insurance, you’re going to be stuck with the costs of cleaning up the damage. Having a savings account with at least several months’ income can ensure you have peace of mind and a solid cushion should things go wrong.
- Find a great Realtor
You’re more than likely going to be spending a lot of time with your Realtor when you’re looking for your new home, so it’s important that you like the person. More importantly, having a knowledgeable Realtor who understands your market, knows the neighborhoods, has great connections with inspectors and contractors and has seen his or her share of shady real estate dealings is going to be immensely helpful in your search.
Meet with several Realtors who friends and relatives might recommend. Choose someone you feel is a good fit and who you think you can trust and build a relationship with. Your Realtor can make a big difference in finding the right home and having a smooth closing.