Every day, I find myself daydreaming about becoming a homeowner. Posted up in my crappy rental, I envision reading in my airy sunroom, cooking in my stainless steel kitchen, and growing a luscious garden out back. But it’s come to the point where dreaming isn’t enough.
If you too are ready to turn your dreams of homeownership into a reality, the best place to start is establishing how much you can afford.
Step 1. Consider ALL Costs Associated with Ownership
You’ll need to save for a lot more than just a down payment. The list below details all the potential costs that come with buying a home.
- Your down payment, which is required by lenders and is usually up to 20% of your mortgage.
- Cash reserves of 2-6 months’ worth of mortgage payments are often required by lenders.
- Home inspection costs, which average around $315.
- Closing costs (aside from your down payment and private mortgage insurance), including taxes, title expenses, Homeowner’s Insurance and more miscellaneous fees. In total, most experts recommend budgeting 2-5% of your total purchase price.
- An emergency fund for repairs that arise throughout your homeownership.
- Monthly or annual dues such as Homeowners Association Fees.
- Property taxes, which vary from neighborhood to neighborhood and can increase over time.
- Private mortgage insurance, which is only necessary when you put less than 20% down. It’s typically included with your monthly mortgage payment.
- Commuting costs for your new route to and from work.
- Savings for home improvements, decorations, furniture and miscellaneous moving and maintenance costs (reminder: this is NOT your emergency fund).
After taking these costs into account, you can pinpoint how much per month you are comfortable with allocating towards a monthly mortgage payment. A general rule of thumb is that monthly homeownership payments should not exceed 30% of your gross monthly income.
In due time you will be reaching out to a mortgage lender to learn about the mortgage options at your disposal. But first, it’s important to ensure your credit is in order.
Step 2. Strengthen Your Credit Score
A credit score is a 3-digit number that represents the creditworthiness of an individual. It’s based on your payment history, amounts owed, length of credit history, new credit and types of credit used. A credit score of 700 or higher (on a scale of 300 to 850) is generally considered good.
Lenders look at credit scores to evaluate the potential risk of lending money to an individual. In most cases, the higher your credit score, the higher your chances of getting approved for a loan. Having a good credit score can also help you save on interest rates.
Take steps to strengthen (or maintain) your credit score. If you have any debt or use a credit card, ensure you are making payments in full and on time. Avoid opening or closing new lines of credit and making large credit card purchases immediately before applying for a mortgage.
Step 3. Obtain a Preapproval Letter
A preapproval letter is a written commitment from a lender to a potential borrower. It will come in handy as you shop for homes.
You might be thinking, “Woah there, all I wanted was to shop for houses. I do not want to be calling up a mortgage lender.” I will echo what I said previously: if you are serious about buying a home, you need to know your price range. The best way to narrow your home search is to know exactly how big of a loan you can obtain – the preapproval letter will determine this.
So why should you get preapproved for a mortgage before you look at houses? Lots of reasons!
- It gives you insight into your financial history so when you’re ready to buy, you won’t be blind-sided by potential credit problems.
- It gives you a very real understanding of all of the costs associated with buying a home. It’s more than just the down payment!
- If you decide to put an offer down, being preapproved can give you a leg up in a multiple-offer situation.
- It generally leads to a quicker closing, since your mortgage lender will have already started some of the leg work.
- It lets agents and sellers know you are a serious buyer.
The last point here is no joke. When you start working with an agent, being preapproved for a mortgage will get you the attention and service you deserve from your real estate agent.
Step 4. Find an Agent
Real estate agents are an integral part of a buyer’s success. An agent will schedule tours of homes that fit your criteria. They’ll also advise you on offer negotiations and help you overcome the potential setbacks associated with home inspections and appraisals.
If you’re in need of a great agent you can trust, we can help. We have top-rated agents in all 50 states who are prescreened, vetted and are experts in your local community.
Now You’re Ready to Find Your Perfect Home
After laying out your budget and discovering how much you can borrow, you are able to narrow your home search to houses within your price range. Once you find a real estate agent, he or she can help you to narrow in on homes that meet your specific criteria. And when you’re ready to make an offer, you’ll have your preapproval letter handy. Sooner than you know it, you’ll be kicking your feet up in a place you can call your own.