In March, I became a homeowner! Time sure flies because it feels like just yesterday. Many of my close friends have recently purchased a house or are in the market to buy in the next 2 years or less. Although it can seem like an overwhelming process, it doesn’t have to be. I am here to help you out. Look for regular posts regarding the home buying process.
To start things off, check out these 5 steps to prepare for buying a home!
Pull your Credit Report
I read last week that “56% of Americans had no idea that their credit score was the most important factor for applying for a mortgage, car loan, and a new credit card.” Some people assume their salary or even savings is the number one factor. Of course, those things are important but your credit report is like your report card in grammar school. It is a listing of how you have handled credit in the past. Lenders want to know you can afford the home you want to buy through your salary, but they want to ensure that you will faithfully make on time payments as well.
If you’re considering purchasing a house in the next 2 years, it is time to pull your credit report. Head over to www.annualcreditreport.com to get a free copy of your credit report from the following 3 credit bureaus: Transunion, Experian, and Equifax. Personally, I raised my credit score 150 points a few years ago; however, it took over a year to see significant changes. That is why it is so important to pull your credit report before you need a car loan or mortgage.
Time Frame: 2+ years prior to purchasing
Pay Down Debt
Once you have pulled your credit report, you can see what information has landed there. Medical bills you didn’t realize you had? Old credit cards? Now, it is time to get to work on cleaning up your credit. Per the crash course in your credit report, one of the main components of your credit score is the credit utilization or the percentage of credit available compared to what is borrowed. The rule of thumb is to keep your credit card utilization below 30%. For example, if you have a credit card with a credit limit of $1000, you want to keep the amount borrowed at $300 or below.
Part of improving my credit score included paying off a debt in collections of over $11,000! That is why it is important to pull your credit report early so you can get to work on cleaning it up.
Time Frame: 1-2 years prior to purchasing
Save for a Down Payment
Traditionally, a down payment is 20% of the home purchase price. A down payment of 20% will afford you the best interest rate and help you avoid paying private mortgage insurance. I know, 20% sounds like a whole lot of money and it can be. That is why it is important to start saving well in advance for the down payment.
Recently, banks have been approving loans with much less than 20% – even 5% or less. However, the more you can save up now the better. Once again, if you are paying less than 20% you will likely have to pay private mortgage insurance. This is .5-1% of the entire loan amount that you are responsible for paying on an annual basis. On a $100,000 loan, you could be paying as much as $1,000 a year or an additional $83.33 per month just for private mortgage insurance.
Personally, in order to save for the down payment I stacked my tax return from multiple years, regular bonuses from my job, in addition to $300+ per month.
Time Frame: 1-2 years prior to purchasing
Review your Budget
A budget is the foundation for your financial success. Reviewing your budget can show you what you can afford in terms of a monthly payment, how much you are able to save each month and what needs to go towards paying down debt. If you haven’t reviewed your budget lately, make sure you are budgeting like a pro. It is also an important time to distinguish needs from wants. For example, you may have a weekly happy hour with friends. That weekly occasion may need to turn into monthly in order to save money for your down payment. Personally, I slashed multiple items from my budget to save more money.
Personally, I had a roommate for 2 years. Let me tell you, this helped with my budget tremendously. It felt nice to split rent, utilities, cable, etc.. with someone else. It also paid off financially!
Time Frame: 6-12 months prior to purchasing
Purchasing a home can be extremely expensive. Once you save for the down payment, you aren’t off the hook. There are quite a few required costs before owning the home as well as things you may want to purchase after you close. Check out some other costs associated:
- Earnest Money: also known as good faith deposit letting the home buyer know you are serious. Earnest money is typically 1-3% of the selling price.
- Home Inspection: a visual examination of the home that you want to buy. In most cases, a home inspection isn’t required but strongly recommended. A quality home inspection may be between $300-500.
- Closing Costs: fees paid at the closing of a real estate transaction. On average per Zillow, buyers pay an estimated $3700 in closing costs. Although closing costs do have to be paid, the seller may pay the buyers closing costs.
Then after the home is actually yours there are other things you may need that weren’t necessary when you were renting. For example, the largest purchases I have made for my house so far are a washer, dryer, and a lawn mower. Although I am a financially fit shopper and was able to get details on all three items, it was still a large cost. After the necessities are taken care of, don’t forget the fun stuff like decorating!
On top of that, you will still need an emergency fund in the event that your home needs repaired. Saving really never stops!
Time Frame: Ongoing!
If you have purchased a house before, what tips do you have for others? If you are interested in purchasing a home, what is holding you back? If your goal is to purchase a home in the next 2 years or less, what steps have you taken to prepare?
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