Buying a home is an exciting step, and there are many benefits to owning a home. But, the road to home ownership can also be somewhat overwhelming. Certainly, there is a lot to consider as you begin the process, but a little planning and effort up front can result in a more manageable and pleasant experience. If you are considering buying a home, here are some preliminary steps to consider before you begin house hunting.
How is Your Credit?
Lenders use your credit score to help determine how much they will lend and at what rate. Start by checking your credit score and reviewing your financial information for any errors or unpaid collections. You can get a free copy of your credit report once a year from each of the three major credit reporting bureaus (Equifax, Experian and TransUnion) at www.annualcreditreport.com. Your credit score is not part of the free report, but it is available through the same bureaus for a small fee.
It’s a good idea to do this early on. If you find any mistakes, such as balances that shouldn’t be listed or unpaid collections, you will need to dispute these with the credit reporting bureau and get them corrected, which can take some time. Payment history is a significant factor in your score, so make sure you are making timely payments on any current balances. Additionally, your amount of debt will also have an impact. The amount of credit you are using compared to your available credit will be a large determining factor in your score and loan approval.
How Much Can You Afford?
Before you start your home search, you’ll want to know how much house you can afford. Be realistic and determine a payment you can comfortably manage. This is important because, along with your mortgage payment, you need to consider many other expenses, such as taxes, insurance, maintenance and repairs.
Depending on what type of loan you have, a general rule of thumb is to keep housing expenses below 28 to 31 percent of your gross income. Typically, this includes taxes and insurance. Even with this guideline, make sure you compare your take-home pay to your expenses to determine your individual financial situation. Check out our Mortgage Loan Payment calculator to find the amount that is right for you.
What Costs Will I Need to Cover?
Once you have an idea of what you can afford, plan to budget for a down payment and closing costs. The down payment is the money you put down on the loan and deducted from the total amount of the mortgage. Depending on the loan type, a down payment can be as low as 3 percent, although PMI (Private Mortgage Insurance) is required on loans with down payments less than 20 percent of the loan.
Closing costs are typically 2 percent to 5 percent of the loan amount. These costs include any loan origination fees, appraisals, title searches, surveys, taxes, credit report charge and deed recording fees. You may be able to lower closing fees by comparing prices on some expenses, like homeowners insurance and the home inspection. Sometimes, the seller will pay for a portion of your closing costs, which can also help.
What is a Pre-Approval?
A pre-approval is simply the process of determining if you qualify for a loan and how much the lender is willing to lend. You will complete a mortgage application and the lender will verify income and check your credit. It helps because you know how much you can buy before you start looking. Also, getting pre-approved is proof to the seller that you can obtain the funds and lets them know you are a serious buyer.
Should I Use an Agent?
Although you can search for homes on your own, there are many benefits to using a knowledgeable real estate agent to walk you through the process. A buyer’s agent can give you beneficial information on homes and neighborhoods. They already understand the process, can provide you with comparable prices to help you determine an offer and will negotiate on your behalf. A buyer’s agent is compensated from the commission paid by the seller, so it doesn’t cost you anything for this guidance.