Buying your first home is a big step and you have most likely been planning for awhile. Getting your finances in order is important so I created these financial tips for buying your first home as a way to help people be as ready as possible when the time comes to buy your first home.
Know Your Credit Score
When you want to buy your first home it is critical that you know your credit score and improve it as much as possible! Cleaning up and improving your credit score will increase your chances of getting approved and lock in the best interest rates possible!
Steps to Improve Your Credit Score
- Check your credit reports–This gives you a chance to see if there is anything hurting your credit. Check all three credit bureaus: Equifax, Experian, and TransUnion. While they are similar they might have slightly different information that you want to be aware of before applying for a mortgage. You can get a free credit report here!
- Dispute Inaccurate Information--Get rid of any inaccurate information by disputing it with the credit bureau.
- Pay Off Delinquent Accounts–Delinquent accounts include, late accounts, charge-offs, bills that are in collection, and judgement. Pay off any and all accounts that are currently delinquent BEFORE applying for a mortgage.
- Make Payments on time–You should always be establishing a pattern of timely payments before you try to get approved for a mortgage. If you haven’t been doing that, START NOW! But wait at least 6 months before applying for a mortgage if you have had delinquent accounts or late payments.
- Reduce your Debt-to-Income Ratio— Your monthly debt payment should be no higher than 12% of you total income. But the lower, the better.
- Check your FICO score–Your FICO score should be at least 720 to get a decent interest rate on a mortgage.
- Don’t take on any new debt–when buying a home you are taking on a HUGE amount of debt. BE sure that you stay below 12% of your income and do your best to not incur any additional debt.
“Take the time to list out all of your expenses on a monthly and yearly basis so that you know exactly how much money you have to work with.“
Save for a Down Payment
Saving for a down payment is tricky, especially when you are paying rent at the same time.
Having a down payment is beneficial in two ways. First, the bigger the down payment, the lower your monthly mortgage payment will be.
Second, lenders will typically look at the size of your down payment when deciding what interest rate they give you. Bigger down payment can equal a better interest rate.
So how much of a down payment do you need?
Well that depends, sometimes you can get away with as low as 5% down. However, if you plan to put down less than 20% you will need to pay Private Mortgage Insurance (PMI). This is a monthly insurance premium you will need to pay on top of your mortgage, homeowners insurance, property taxes etc. This mortgage calculator can help you estimate your mortgage, PMI, homeowners insurance etc.
Look at Your Overall Financial Picture
When looking at your finances keep in mind your income, debt, living expenses, child care costs etc. You don’t want to take on more debt if you are already up to your eyeballs in student loans, credit card debt and more.
Take the time to list out all of your expenses on a monthly and yearly basis so that you know exactly how much money you have to work with. This step can hurt but it’s critical so that you don’t get in over your head!
Have a Budget
In the last tip we talked about knowing your overall financial picture. Well, a budget gets into even more of the nitty-gritty. Figure out how much you spend each month on utilities, groceries, childcare, discretionary spending, student loans, car payments, etc and even places that you can cut costs.
You will be amazed at how much of your money just walks out of your bank account each month on things like restaurants and bar tabs. Get a handle on those extra expenditures if you are serious about buying a home in the near future.
I highly recommend creating a free budget on a website such as Everydollar.com. It’s free to use and helps you to really understand where your money goes each month. It will give you a clear picture about exactly how much you can afford to spend each month on a home.
Keep in Mind Extra Costs
There are many extra costs when it comes to buying a home. Traditionally, most prospective new buyers only consider the down payment and the monthly mortgage. Other costs include:
- Home inspection (usually $300-$500)
- Closing Costs (between 2% and 5% of the purchase price of the home)
- HOA fees
- Property tax
Your agent should be there helping you every single step of the way! As your realtor, I will help you with the home buying processes with everything from the home search, paperwork, escrow and up until the moment you have keys in hand! Contact me today so we can get started!