If you’re one of the many Americans counting down the days until you’re no longer “throwing money away” for rent, you’re not alone. Buying a home is the largest purchase the average person will make in their lifetime, which is why it’s essential to prepare for such a significant investment. If you’re ready to make your way from broke to a first-time homebuyer, keep reading.
Determine your budget
Before you begin dreaming of mini-mansions, you need to know how much house you can comfortably afford with your current income. The word “comfortably” is used purposely here because many real estate agents and mortgage lenders will show you homes at the upper end of your budget, which is great if you want to survive on rice and peanut butter each month.
Use one of the many free mortgage calculators online to determine how much house you can afford with your monthly housing budget. Again, try to stay on the low side of that number to make sure you have enough money left over each month to save for unexpected home maintenance and repairs.
How’s your credit?
Quick — what’s your credit score? If you can’t answer right away, it’s time to run a credit report and find out where you stand. If your credit score is on the low side, now is the time to develop a strategy to raise your score to get you into a home by qualifying for a mortgage with a decent interest rate.
If you have overdue bills, begin working with collections agencies to pay off those outstanding balances and get the “dings” removed from your credit report. Specifically, ask the representative for the balance you need to “pay to delete” the debt collection from your credit report and get it in writing.
Many younger buyers struggle with low credit score simply because they haven’t amassed enough credit. Consider asking a parent to add you as a registered user on one of their cards to help you build credit; only do this if your parent has a solid credit score and history of on-time payments, or you could adversely affect your credit rating. You can also open a credit card with a small line of credit and use it each month to amass a history of revolving payments. Most of all, be patient, as building your credit takes time.
Save for your downpayment
If this is the first foray into your first time home buying education, you need to know that you don’t necessarily have to have twenty percent saved for a downpayment. When you use a mortgage calculator, you can also have it show you the amount you’ll need for a downpayment, but this amount will vary depending on your circumstances.
When you’re saving up for your first home, realize that your down payment percentages could be as high as 10 or 20 percent, or as low as 3.5 percent to zero down; it all depends on the type of loan you’re after. If you struggle to save, then a first time homebuyer or FHA loan may be the best option, only requiring 3.5 percent down to purchase. However, if you have no problem saving ten percent, a conventional loan may save you money in the long run. Talk with a mortgage lender to determine the types of loans you’re eligible for, and which one makes the most sense for your financial situation. Remember, this is the largest purchase you’ll make in your lifetime, so be sure to weigh all of your options.
Expect the unexpected
If you think everything’s smooth sailing once you sign the paperwork and move into your new home, you’re mistaken. There are several surprises you’ll encounter as a first time homebuyer, including taxes, homeowners association fees, insurance, and maintenance costs. Again, this is why you don’t want to max out your monthly housing budget with your mortgage payment, as things will invariably pop up.
It’s not uncommon for things to go wrong with your home shortly after purchasing, and you’ll quickly find out that even something as minor as having to have a plumber come out for a repair can be costly. So, just in case your furnace decides to quit, or your central air conditioning stops pushing cold air, you have funds set aside each month as a failsafe.
When you research your options, you’ll find that the road to homeownership is straighter than you’d originally imagined, and perhaps even a little shorter. Planning, patience, and persistence will take you from broke to first-time homebuyer.