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Purchasing your first home is a major milestone and not a decision to be taken lightly. It’s a huge financial commitment that can take months of preparation—searching for the right home, making an offer, going through the mortgage application process and closing on the home. Then you have the actual business of home ownership, which is a whole different story.
If you’re a first-time home buyer, you’ve probably asked yourself, “am I ready to be a homeowner?” Don’t worry—homeownership is a big step and the Credit.com editorial team is here to help. Check out these questions and answers to understand whether you might be ready.
Financial stability is one of the most important contributing factors to successful homeownership. Buying a home is one of the biggest financial decisions you’ll make. You need a steady source of income that can easily cover your mortgage payment—experts recommend that your home cost no more than 20 to 30% of your monthly income.
You’ll also want to minimize any debtor financial obligations that can reduce your ability to afford a mortgage. Finally, you’ll need income or savings to afford home repairs, furniture, homeowners’ insurance and other assorted expenses.
If you’re already emptying your bank account to pay your rent, you may need to reduce your expenses or increase your income and savings before you’re ready to buy. “You shouldn’t spend to your limit and end up with a new home and nothing in the bank,” Chris Taylor, a real estate broker with Advantage Real Estate, says. “You need to have a plan and a comfortable buffer so that if the unexpected happens, you have the money to make repairs.”
Many home sales require some sort of down payment. Depending on loan type, down payments can range from 5% to 20% of the cost of your home. So, for a $200,000 home, the down payment requirement could range between $10,000 and $40,000. In some cases, homeowners may qualify for low or no down payment loans, such as FHA loans.
Still, down payments can increase the odds of getting approved for a loan and help you secure better interest rates, according to Randy Hopper, senior vice president of Mortgage Lending at Navy Federal Credit Union. “It is, therefore, critically important to factor into your budget the source of your down payment.”
Many lenders, agencies and nonprofits provide assistance programs and financing options that can help potential homeowners come up with their down payment. Be sure to shop around and research the available options. And when it comes time to settle on a price? Remember that negotiating the price down can help reduce how much down payment you may need.
Strong credit is essential to securing a mortgage. A good credit score can help you secure a better interest rate, which can save you thousands over the life of a loan. The better your credit score, the better your odds of landing your dream home with a reasonable interest rate.
Building or improving your credit takes time, and it’s best to start well before you begin touring houses. “Make 100% of your payments on time,” Hopper said. “You should avoid opening too many accounts at once. And always check each of your credit reports for errors.”
House hunters are often primarily focused on the type of home they want. But consider that you’ll be making a long-term commitment to both your home and the geographic region. Pay attention to the home values in the neighborhood, the quality of schools, recreation options and any other priorities you might have. Building value in your home and putting down roots requires years of commitment, so make sure you’re ready and that you know exactly what homes you can afford.
“There are costs associated with acquiring your loan, closing on the sale and then moving in—and this is not to mention the physical items you’ll most likely end up purchasing,” Hopper said. “On average, it can take about five years to break even on these costs, so I recommend thinking ahead and asking yourself if you will still be in the home beyond five years.”
You don’t have to be an expert handyman to own a home. But if you can’t operate a plunger, you may not be ready. Homes need maintenance and TLC to retain their function and value, and if you can’t handle repairs, you’ll at least need to be able to afford someone who can.
“Calling a plumber on a Saturday night is going to be costly,” Taylor said. “If you have the ability to watch a few YouTube videos and figure out minor repairs, you’re in good shape. It’s also important to know when you’re in over your head and need to consult an expert.”
Technically, if you have a mortgage, you are in the process of buying your home from the bank. That means the bank has some ownership rights in your home. For example, they can require you keep homeowner’s insurance on your property, and some mortgage companies even have rules that require you to use bank-approved contractors to handle repairs when insurance claims are made on those policies. However, as far as daily use and management of the home goes, you are the owner as long as the title is listed in your name—even if it’s held by the bank in lien while you pay the mortgage.
The bottom line is that you need to have strong credit, some money in savings and a good understanding of your mortgage options for the highest chance at success in buying a home. Not sure where your credit is at? You can see two of your credit scores for free on Credit.com.
If you find that things aren’t in the best shape, you can focus on repairing your credit yourself or turn to a professional credit repair expert for help. Either way, if you can wait to apply for a loan until your credit is in decent shape, you’ll likely experience a less stressful and less costly mortgage process.
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