7 Things to Consider
Before Buying a Home
Buying a home is one of the most serious, and exciting, investments you’ll make. The freedom of painting your walls any color you choose, doing your own renovations and simply just living without a landlord hovering around is enough incentive for some people. However, there are more perks. Almost always, homes will appreciate in value which means a secure future and a great investment. But, like anything else, there are things to consider before you take the plunge and make such a big purchase.
Check Your Credit Score
Credit is one of the most important aspects of making a big purchase. Before you even start the home buying process, check your credit score. Many places will try to make you purchase your credit scores, but they can actually be viewed for free via Experian, TransUnion and Equifax. Make sure you are viewing your FICO score, as this is what most lenders will search for. Doing this first will give you plenty of time to work on your credit score if you need to.
You can obtain a conventional loan with a 620 credit score, but that may not be ideal. The higher your credit score, the lower the interest rate on the mortgage, which means the less money you’ll be spending over the life of the loan.
Decide How Much You Can Spend
Deciding how much you can comfortably spend on a home is wise to do before you even ask the bank for a pre-approval letter. It's possible to get pre-approved for a mortgage whose payment makes your total monthly debts 45% of your pre-tax income, but it’s not wise to spend this much. After you factor in other bills, plus savings for unexpected home expenses, you may not be left with much money.
Prepare ahead of time by budgeting and making calculations of how much you can spend. Lenders use something known as the 28/36 rule to determine how much of a mortgage you can afford. The "28" says that your mortgage payment, including taxes and insurance, shouldn't exceed 28% of your pre-tax income. The "36" means your entire debt load, including your mortgage payment, car payment, credit cards, student loans, and other monthly payments shouldn't exceed 36% of your pre-tax income.
Research Home Loan Options
There are several types of mortgages available, so you need to research which one would be right for you. Conventional loans are the most common, and they now only require as little as a 3% down payment. Remember that many loan issuers will require you to pay private mortgage insurance if you fail to provide a 20% down payment.
FHA loans are another option for those with a low credit score. You can obtain a 3.5% down loan with a score as low as 580, and a 10%-down loan with a score in the 500-579 range. However, there are some drawbacks. The home has to go through a rigorous inspection to be approved for an FHA loan. If any suggestions are made, they will need to be fixed before the purchase. In addition, unlike with conventional loans, you can't drop FHA mortgage insurance once your loan has been paid down to 80% of your home's value. The only way to get rid of FHA mortgage insurance is to sell the home or refinance.
Don’t Forget About Your Down Payment and Closing Costs
You want to remember that these will be two major payments you’ll have to be prepared for when you purchase your home. You’ll want to have at least 3% to 20% of the home’s sale price for a down payment. Also, plan on spending in the range of 1%-3% of the home's price for closing costs. Plus, most lenders want to see that you have enough money in your checking or savings account to cover your mortgage payments for a few months.
Gather Your Documentation For Paperwork
When you apply for a mortgage, you’ll need to be prepared to fill out paperwork and have documentation on hand. Plan on having income verification in the form of last years’ tax returns, your ID and proof of your financial condition in the form of account statements. Keep in mind that depending on your lender, they may ask for additional documentation.
Get a Pre-Approval Letter
A mortgage pre-approval is basically the same thing as applying for a mortgage, but before you go through the actual process. You’ll find out how much you can expect to get approved for. In order to get a pre-approval, your bank will run your credit, verify your income and employment and how much money you have in your accounts.
Find a House and Wait For Closing Day
After finding a home that you can’t part with, you’ll want to make an offer and get an inspection. The inspection is optional, but always recommended. The last thing you want to find out is that the electrical isn’t safe and could cause a fire, that the air conditioner is 30 years old or that there’s extensive termite damage. An inspector will walk you through every possible concern with the home that you likely may have missed. If the inspection doesn’t go well, you can opt out of purchasing the home.
When you close on a home, the process could take well over a month. A buyer and seller can agree to an earlier closing date in the contract, but if the lender can't get everything done during that time window, the closing date will be pushed back. It will close when the lender is ready to close. In addition, all the terms of the purchase contract must be met before close; then the seller deposits the deed and the buyer deposits the funds.
Buying a home is a big commitment that should be well planned for and thought out. If these seven tips are taken into consideration, you should have a smooth home buying process.