Getting ready to buy a home? Congratulations! Home ownership is a great way to boost your credit and get some equity under your belt. But there are a few things you should know before diving into what can be a long and complicated process.
1. Determine how much can you afford
First and foremost, figure out how much house you can buy. Look at your debt-to-income ratio, meaning the percentage of your gross monthly income used to pay debt. Most lenders cap this at around 40%, including all loans, mortgage, property taxes and insurance. Also, think about the future. Could you still pay that mortgage after losing a job?
2. Do your housing homework
Take a good look at the area where you intend to buy. How much have homes there sold for recently? And how does that compare to your price range? Consider hiring a buyer’s broker to make the housing hunt easier.
3. Amass a down payment
Depending on your loan, usually you’ll need at least 3.5% to 5% or more for a down payment. Put down less than 20% and you’ll need private mortgage insurance, which can substantially increase your monthly payment. Look at your savings and, if you need more, cut back on unnecessary expenses.
4. Determine closing costs
Down payment aside, you may need extra cash for closing costs unless the seller agrees to pay them. These cover things such as appraisal fees and title insurance, and they typically run from 2% to 5% of the purchase price.
5. Check your credit
If you don’t know your credit score, find out. It can and will be used to determine whether you qualify for financing. A score above 750, considered excellent by many lenders, can cut your interest rate by as much as 1 percentage point.
6. Fix any reporting mistakes
Up to 20% of credit reports contain errors, so make sure yours is free of mistakes. They could be costing you. Look for late payments that you made on time, or debts you don’t actually owe. You’re entitled to free reports annually from the major rating bureaus, Experian, TransUnion and Equifax.
7. Look for a lender
Once you have your finances in order, shop for a mortgage. Lenders such as Southeastern Credit Union will work with you to prequalify for a loan, so you’ll know just how much you can spend when you begin negotiating a price.
8. Determine your options
Many first-time buyers qualify for a Federal Housing Administration loan, which requires a down payment of just 3.5% and substitutes its own insurance for PMI. Fixed-rate mortgages offer stability, as your monthly payment remains the same for the loan’s term. Adjustable-rate mortgages often initially cost less per month, but once the rate can vary, your payment can change.
9. Learn about homebuyer programs
If your income is low enough, you may qualify for local or federal programs that offer low-cost alternative financing.
10. Know your rights
You have rights as a homebuyer: You can’t be denied financing or housing because of age, gender, religion, marital status, race or sexual orientation. Check out the Equal Credit Opportunity and Fair Housing acts for details.
Buying a home is the biggest investment most Americans will ever make, so it makes good sense to be prepared by taking these steps ahead of time.
Sarah Cooke, NerdWallet