Check Your Credit Score
Financing a home is a long-term commitment, with mortgage terms often extending up to 30 years. Refinancing your home can be costly, so you want to ensure your credit score is as high as possible before applying.
In the months leading up to buying your home, review your current credit score and report. Many websites and apps will provide your score for free. However, you’ll also want to examine your credit report for errors or potential fraud. You can download a free copy of your credit report at www.AnnualCreditReport.com.
Lenders typically price loans based on credit score tiers. That means that even minor improvements can reduce the cost of your home loan. To boost your score quickly, focus on making on-time payments and reducing unsecured debt, such as credit card balances.
Determine How Much You Can Afford
When looking for potential homes, you need to determine how much you can realistically afford to spend. Most people looking to transition from renter to homeowner start with their monthly budget. If they can afford to pay $1,500 a month on rent, a mortgage payment in that range would be ideal.
Their next step is to use an online mortgage calculator to determine a loan amount equal to their budget. However, online calculators can be misleading. Most only consider the principal and interest portion of your payment (the actual loan payment). Your monthly mortgage payment will also include escrowed items, such as property taxes and homeowner’s insurance.
To help determine how much your actual monthly payment will be, look at other homes recently sold in the area. Websites like www.zillow.com will list the property taxes and estimated insurance. Add these numbers and divide them by 12 to calculate an estimated monthly escrow amount.
Save for Your Down Payment & Closing Costs
One of the greatest barriers to homeownership is the upfront costs. First, you’ll have closing costs, including the appraisal, inspection, title insurance and transfer, attorney fees, and prepaid items like property taxes and insurance.
Typically closing costs range between 3% to 6% of the home’s sale price. For example, if you purchase a $300,000 home, you can expect the closing costs to be between $9,000 and $18,000.
If that isn’t enough, you’ll also have a down payment. The more you can put down, the less you need to borrow – and pay interest on. Depending on your home loan type, down payments can range between 3% to 20% of the sale price. Using the same $300,000 home, your down payment would be between $9,000 and $60,000.
Buying your first home can be challenging as many people need to save for years to cover these upfront costs. After you purchase your first home, subsequent homes become easier to finance because you’ll build equity in the property – which can then be used to offset these upfront costs.
Review Your Mortgage Options
There are various ways to finance a new home. For example, fixed-rate mortgages were popular during the historically low mortgage rates between 2010 and 2020. However, now that interest rates are rising, many find adjustable-rate mortgages (ARMs) more affordable. FHA (Federal Housing Administration) loans are often ideal for first-time homebuyers due to their lower down payment requirements.
The best way to determine which loan type will work best for you is to contact the credit union. Our home loan team will review your financial goals and needs. Then, they’ll recommend which financing option will best suit you.
Plan for Recurring Costs
Homeowners encounter many expenses that renters do not. For example, if an appliance breaks or your roof leaks, there is no landlord to call. Instead, these costs will fall on your lap. Many renters also forget they’ll be responsible for items like landscaping and pest control.
When creating your new-home budget, you’ll want to put money aside monthly into an emergency fund to help cover future home maintenance costs.
Obtain Your Pre-Approval
Once you have all your financial ducks in a row, it’s time to apply for your home loan. A pre-approval should not be confused with a pre-qualification.
- Pre-Qualification means that a lender reviewed your monthly income and current loans. Then, they estimated how much you would be approved to borrow for a home.
- Pre-Approval is when a lender thoroughly reviews all your financial documents and current expenses. Then, they approve for you to borrow a specific amount toward your new home.
Most sellers will only entertain offers and bids from potential buyers who are pre-approved. They want to ensure the buyer has the means to purchase the home.
NOTE: Just because you’re pre-approved for a specific amount doesn’t mean you should spend it all. For example, if you’re pre-approved for $350,000, start by looking at homes below that, such as $300,000. Many homes will have multiple bidders, and you need to be prepared to go higher if necessary. If you start at your maximum amount, you’ll be outbid quickly.
Hire an Excellent Real Estate Agent
It seems everyone today knows a real estate agent. While you might want to help your friend, you also want to ensure you get the best deal on your new home. Choosing the right real estate agent could mean savings thousands off your home’s price and even more in interest over the life of your loan.
Take time and thoroughly research real estate agents in your area. You’ll want to look for an individual who knows the neighborhoods you’re considering and has experience in various types of markets.