Preparing to Purchase a Home
Preparing to Purchase a Home
For many people, buying a home will be the biggest money-decision they make in their lives. Some families save for years to feel fully prepared for the big leap while others dive into a 15 or 30-year mortgage without making a game plan. No matter if you’re in the market for a home now or sometime in the near future, there are a number of things can do to align yourself and your finances to get the most home at the best price.
Here is a list of things you can do the prepare for your home purchase:
Get Your Finances Under Control
The better your credit score, the lower your home loan interest rate and down payment. Typically, lenders are looking for an excellent score in the 700+ range – dropping into the 600’s makes you seem like a potential risk.
You will want to check your credit history and score through one of the three major credit reporting agencies (Equifax, Experian, and TransUnion). If you see negative-standing accounts, work to get those neutral or positive. This can be done by disputing them if there are errors. If negative entries are not errors, you have a few options. You can send in a ‘pay for delete’ offer to the creditor that owns the debt; you are basically negotiating that by giving them all (or a portion) of the debt, they will agree to remove the negative details from your record. Another option is to request a ‘goodwill deletion’ by pleading with the creditor to remove the negative detail because of your otherwise good standing. And your last option is to simply wait out the reporting limit, which is typically seven years.
There are a number of ways to gain and maintain a positive credit score. Pay all bills by the due date, even if it’s the minimum payment. Keep balances on credit cards and other revolving credit low. Don’t open and close credit frequently; you only want to open new accounts as needed, and you shouldn’t close them too quickly as length of credit history accounts for 10% of your score.
Less debt means you can make more of your money work for you. Reducing and eliminating debt lessens amounts of stress in all facets of life and helps to increase your credit score. There are a number of ways you can work to get rid of your debt. You can find ways to earn extra money that would be earmarked solely for paying debt down. You can also adopt one of a number of proven methods, like the “debt snowball,” “avalanche,” or “balance transfers.”
Creating “homeownership accounts” can work in your favor in various ways. The best way to allocate funds into one of these accounts is by choosing a budget plan that works best for your family and financial situation. Potential items you can include in the plan could be:
- Utilities: If you’re moving to a new area, the cost of water, electricity, gas, internet, etc. can be unknown. To avoid the potential surprise, research and build a fund specifically for these expenses.
- Home Maintenance: There are aspects of a home that age out, like appliances, roofs, HVAC systems, plumbing, etc. There are also regular actions a homeowner must take, like pest control, chimney sweeping, gutter clearing, and more. All of these add up, so it’s a good idea to have an established means of paying for it set up.
- Emergency: What about things that are completely unexpected, like a natural disaster, job loss, or fire? A good rule of thumb is to have anywhere from 3 to 6 months’ worth of living expenses.
- Remodel: Perhaps you’ve planned to retrofit and renovate your kitchen with the newest equipment and most modern fixtures. Before making the move to start the upgrade, it’s best to make sure you can afford it without putting yourself in a financial hole.
- HOA Fee: If you are required to pay a monthly Home Owners Association fee, don’t forget to include this in your budget, also.
- Property Taxes/Homeowners Insurance: Typically an expected, yearly contribution, these can still come as a large blow to personal finances. By saving a little bit each month throughout the year, the effect of paying such a large lump sum can be eased significantly.
Determine How Much House You Can Afford
A large preapproval amount does not mean it’s what you can (or should) actually borrow. To calculate how much you can actually afford, you need to determine your DTI or debt-to-income ratio (or use one of many online tools available that calculate it for you). A better credit score typically means you can qualify for a higher ratio, but it is generally a good idea that your housing expenses alone do not exceed 28% of your monthly income.
To lower your monthly loan payments, you should also consider how much of a down payment you can make. A VA loan has a 0% requirement for a down payment, while conventional loans require 3% down, and FHA loans require 3.5% down. However, an ideal down payment is considered 20% because it lowers lenders’ potential risk.
Coming in at roughly 2% to 5% of the home’s purchase price, closing costs should rate in the affordability determination. As a final responsibility of home-buying, there are a number of fees, referred to as closing costs, that a buyer must pay. This consists of fees for appraisal, credit report, origination, application, and underwriting, as well as title search, and title insurance; some cities and states can also charge additional fees, like a transfer or mortgage tax. It should be noted that while there is no closing cost for a VA loan, there is a funding fee of 1.4% to 3.6% of the loan amount.
If you still have years of PCSing ahead of you, you may decide to turn your home into a rental property. If that’s the case, keep in mind the 1% rule, which gives a rough estimation of value. If you can comfortably charge a monthly rent of 1% (or more) of the home’s purchase price, you have a good deal. This will allow you to earn money off the property or pay off your home loan quicker by easily doubling-up on payments.
Since every family’s financial situation is different, there are no cookie-cutter loans. It’s best to find a loan that meets your financial needs by shopping around for a mortgage lender that gives you the best and most personally-tailored option. Potential loans to investigate:
- VA Loan: Government-backed loans with competitive interest rates for military-affiliated families; does not require a down payment, but must be primary residence for specified term.
- FHA Loan: ‘Federal Housing Administration’ loan backed by the government; designed for lower income families, requiring a lesser minimum down payment and credit score
- USDA Loan: ‘US Department of Agriculture,’ government-backed loan for lower income families offered with below-market interest rates and requiring no down payment
- Conventional Loan: Not secured by the government, with higher interest rates and requiring a higher credit score to quality; can be a good option if you don’t meet other loans’ eligibility requirements.
- State-specific Loans: There are a number of states that offer first-time buyer assistance programs, helping with down payments, closing costs, interest rate reductions, and more. Check out this website for a list of states and their available programs.
- The VA Loan, A Military Benefit You Should Use
- What Do You Need to Know About VA Loans?
- Is a VA Loan Right for You?
- VA Loan: Can You Borrow More Than Your House is Worth?
- DIY Home Improvements to Increase Home Value
- No More VA Loan Limits In 2020
- Buying a Home Remotely
- Preparing to Purchase a Home