When you’re a first-time buyer, you might be overwhelmed by not only the house-hunting process, but all the legal jargon involved in purchasing a home. With that said, we’ve put together a convenient guide so you can learn more about how to go about buying a home with the right knowledge and know-how.
Step 1: Pay off your debts
Besides your actual mortgage that you’ll pay each month, a home involves many other costs like maintenance and utility bills. Before you decide to buy a home, make sure that you pay off all the debts you can first. For example, your student loans or auto loans should both be paid off before adding on a mortgage to your debt load.
In fact, before you shop for a home at all, you need to take time to review your finances. If your credit score isn’t great, your home loan terms won’t be that great. You’ll likely be stuck with a high-interest rate because your lower credit score suggests you’re a higher-risk borrower. It’s smart to invest time working on your finances and raising your credit score before applying for a home loan. With a higher credit score, you can be approved for a bigger mortgage with more favorable terms.
In addition to traditional loans, you should also look into alternative loan options. For example, if you were in the military, you may want to investigate VA loan requirements to finance the purchase of your new home.
Step 2: Build an emergency fund
When you buy a house, you might not realize all the expenses that go into maintaining your home. Plus, homes can also require expensive repairs over time. To keep yourself from getting into a mountain of debt, you should consider building up an emergency fund. Build up a fund that can keep you and your family afloat for 3 to 6 months. This will give you peace-of-mind if any major repairs come your way.
Step 3: Save for a down payment
The more you can save for a down payment, the better. You should aim to save up for a down payment of 20% or more of a home’s total purchase price. If you are able to meet that savings target, you don’t have to pay for private mortgage insurance (PMI), which is what protects the lender if you default on your payments. PMI can add a serious amount onto your total loan amount, so it’s in your best interest to avoid it if you can.
Step 4: Don’t forget about closing costs
Besides your down payment, you’re also going to be required to pay in part for any closing costs. In most cases, closing costs represent 3%-4% of the total purchase price of the home. Your lender will give you the real number on the day you close the house. Homebuyers can expect to pay for things like home appraisal, home inspection, credit reports, attorney, and homeowner’s insurance.
Step 5: Get preapproved for a loan
When you have your savings in place and your credit score is high, you can start to talk to mortgage lenders to compare your different loan options. It’s smart to get preapproved for loans even though it’s an extra step because it shows you’re a serious buyer ready to make a purchase.
Step 6: Don’t get whisked away by dream homes out of your price range
One of the biggest pitfalls that new homebuyers make is looking at homes out of their price range. This is a bad idea for many reasons. First and foremost, it sets you up for disappointment. And, it also tempts you into overextending your finances to pay for a house that you truly can’t afford. Remember, it’s important to live within your means and find a house within your means, too. Keep your budget top of mind.
Takeaways: Your home is waiting
If you’re ready to buy a house, use this article as a basic guide. Once your financial foundation is strong, you can start a serious search for your dream home and start living the life you’ve always wanted.