Buying a house is a dream for some people, but without preparation, it can quickly turn into a nightmare. If you want to purchase a home I commend you and recommend that you give some thought about it first. Before you jump head first into home ownership, consider these few things before you buy your first house.
How’s Your Credit?
If I had a penny for every person who has ever applied for a loan who didn’t know their credit score, I would be rich by now. I never understood the reasoning for this.
Just like I would never use my debit card without knowing how much money I had in my account, I would never apply for credit without knowing my FICO score.
Your credit, but more importantly your FICO score, will show a lender how credit-worthy you are. If your credit score is 625 and the lowest they’ll go is 650, you will most likely be denied for a mortgage.
To them, you’re too much of a credit risk. In addition, knowing your credit score will not only let you know what you need to work on but will help you to shop around for great rates.
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So before you start looking on Zillow, check your credit first. Need to order your credit report and score? Go to AnnualCreditReport.com to view your credit score. Because of the Fair Credit Reporting Act, every person is entitled to a free credit report once per year from each of the major credit bureaus. Just make sure to order all three, because each of them reports differently.
If you see issues on your credit, the time to fix them is before a lender runs it.
Other Ways to Check Your Credit and Score
Are You Ready?
Just because you want to buy a house now doesn’t mean you’re ready to. Planning to move out of the area in the next two years? Then buying a home right now may not be the best thing to do. When buying a home, plan on living there for at least five years.
Unless you like losing money, you should look at purchasing a home as a long-term investment.
In the first few years into your mortgage, you are only paying on interest and it takes a while before you start paying towards your principal.
Unless your neighborhood sees a spike in prices, not enough time will pass for you to accumulate any equity.
I thought I would live in my house and sell it in three years to move to a bigger house. Less than a year later the market crashed and I was underwater (still was 8 years later).
As you assess your readiness to buy a house, check your finances. If you are living paycheck to paycheck and barely making ends meet, buying a house will put you in a very precarious situation. Part of the reason so many people defaulted on their mortgages was that most of them couldn’t afford them in the first place.
Can You Afford to Buy a House?
Ready to buy a home? If so, can you afford to? Many people think buying a home is cheaper than renting, but this isn’t always the case. Yes, you’re able to get a tax credit for mortgage interest as a homeowner, but you also face more expenses.
When you rent an apartment or a house, you call the landlord when something stops working or breaks. As a homeowner, it’s up to you to find – and pay – for someone to fix the problem.
Also when considering if you are ready to buy a house, consider if you can afford to buy a home. To do this, you will need to take in account your debt-to-income ratio. A lot of people only consider what they make and ignore what they owe.
More debt will not only lower your credit score, but it will also decrease the amount a lender is willing to loan to you. Start paying down bills before you start thinking of buying a house.
Let’s say you currently rent an apartment for $1,500 a month, you might think you can also afford a mortgage for that amount too. Right? Wrong. Unless you’re spending less than 28% of your salary on housing, you cannot afford to have a $1,500 mortgage.
In addition, if you live in a condo you’ll have condo fees on top of your mortgage as well as HOA fees if you live in a homeowners’ association. Add together your mortgage payment, utilities, fees, and repair costs, you may be in over your head.
How to Determine Your Debt-to-Income (DTI) Ratio
To determine your debt-to-income ratio, add up your expenses and divide it by your total income. For example: if your expenses equal up to $1500 and your monthly income is $5500, then divide…
1500/5500 = 0.28 or 28%…
…which is your debt-to-income or DTI.
All lenders have their own guidelines, but according to the Consumer Financial Protection Bureau, most can’t go over a 43% debt to income ratio when offering a qualified mortgage.
Follow these guidelines when determining what you can afford:
- Mortgage Payment – 28% of gross income (max)
- Total Housing Payment (Principal, Interest, Taxes and Insurance) – 32% of gross income (max)
- Total Debt Including Mortgage – 40% of gross income
Do You Have Enough Money Saved?
No matter how much money you have in your savings account right now, it’s probably not enough. Most people underestimate the amount of money they will need to have saved up when buying a home. They think that since they already pay rent, they can afford a mortgage.
Like I mentioned before, that thinking is wrong and will make you frustrated and unable to purchase a home.
When looking to buy a home, make sure you have enough money to put up 20% for a down payment. As a first time homebuyer, you may be able to put in as little as 10%, but lenders want to be sure that you have skin in the game too.
A gift from family is great, but don’t depend on it. Always aim for 20% of the home’s purchase price.
In addition to the down payment, some other costs you will need money for:
- Debts (lenders may require you to pay some completely off)
- Earnest Money Deposit
- Home Inspection
- Closing Costs
- Moving Fees
- Repairs and renovations
Make sure that you have enough money to carry you throughout the entire home buying process. When I purchased my home, I was shocked at all the money I had to put out before I ever signed on the dotted line.
I hope these tips were helpful in deciding if you’re ready to buy your first home. Get a few things in order before you pick up the phone to call a real estate agent. I know a few people who go into an agent’s office only to leave disappointed because they’re not quite prepared to become homeowners.
Your home will probably be one of the biggest purchases you’ll ever make in your lifetime. Going in blind will leave you devastated, resentful and worse – broke.