Buying your first home is an exciting journey. Even upgrading your home for you growing families. Or, downgrading your home for you empty nesters. It can mean having your own space and building equity for your future. But there are a lot of steps in between starting your journey and moving into a new home no matter what category you fall into. Navigating these steps can feel pretty overwhelming. That’s why we’re sharing the tips below. The 3 steps below can help guide you through this process.
- Decide if You’re Ready to Buy a Home
- Prepare for a Mortgage Application
- Consider your financing options
Decide if You’re Ready to Buy a Home
For most, buying a home means a commitment to live in one place for a few years and to put a huge percentage of their savings into the home. So, clearly, it’s important to know if you’re ready. Here are a few factors to keep in mind:
- Will you be staying in the home for 5 years? The appreciated value for a home can be anywhere from 1-5 percent per year, and that is what can help offset the transaction costs. The longer you stay in the home, the better the odds of making money for whenever you decide to sell it. If you use an online rent vs. buy calculator like this one, you will usually see that buying is only a better option after about 5 years. Check out RENTING VS BUYING: The Benefits of Owning Your Home
- Do you have enough income? While you’re probably used to coming up with a monthly rent payment for your current accommodations, having a monthly mortgage payment for 30 years can be a little more intimidating. To avoid getting in over your head, look at home prices in your area and run the numbers through a mortgage calculator like this one to see what the monthly payment would be.
- Do you have enough savings? One of the hardest things to do when preparing to buy a house is to save up enough money. Many people prefer to save up 20% of the home’s value for a down payment, because this brings down the monthly payment and helps you avoid paying private mortgage insurance (PMI). Check out 5 Tips to Become Financially Prepared to Buy a Home
Prepare for a Mortgage Application
It’s not easy to get approved for any loan, especially a mortgage. Since the lender is putting up a lot of money up front, they need to be confident that you’ll be able to pay your mortgage payment every month and you won’t default on the loan. Here are a few actions to help make it happen:
- Get your credit in shape: You typically need a credit score of 620 or higher to be approved for a conventional mortgage. And the better your score, the lower your interest rate will be. One of the most important steps in working on your credit score is making sure that you don’t have any late bills outstanding. Once you have a strong payment history, work on reducing your “credit utilization.” Have low/bad credit? Check out How to Buy a Home with Bad Credit
- Calculate your down payment and closing costs: When you apply for a mortgage, your lender or mortgage broker will ask you to show proof of sufficient down payment funds in your financial accounts (checking, savings, etc). Also, don’t forget that you may have to pay closing costs which can be anywhere from 2-5% of the home’s value. To ease the stress of all the numbers being thrown at you, carefully outline your budget and prepare for life as a new homeowner. Download a Free MonthlyBillTracker to easily track your expenses
- Calculate your debt-to-income ratio (DTI): Your DTI is one of the first things that a mortgage lender will calculate to make sure you can afford a mortgage. Luckily, calculating your DTI is easy. Knowing it ahead of time will make you better prepared once you start determining which types of financing best fit your situation. To calculate your DTI simply add up all your monthly debt payments and divide them by your total monthly income.
Consider your financing options
The most common way that people finance their first home purchase is by getting a mortgage loan. There are multiple types of mortgages out there, but the ones below are the most common for first-time home buyers.
- Federal Housing Administration (FHA) loan: An FHA loan can be a great option for lower-income or first-time home buyers. It can be easier to get approved for an FHA loan than other types of loans. If your credit score is 580 or higher, you can get approved with just a 3.5% down payment. If your credit score is 500-579, you can get approved with a 10% down payment.
- Department of Veterans Affairs (VA) loan: This program makes home loans available to veterans of the U.S. military. These loans are issued by private lenders, such as banks and mortgage companies, but the VA guarantees a portion of the loan so you can get better terms. Unlike many other programs, you do not need a down payment and there is no requirement to pay private mortgage insurance. You can find out the VA loan limits in your area here.
United States Department of Agriculture (USDA) loan: A USDA loan program allows you to buy a home with no down payment and a credit score of just 620 or above. The USDA loan program can provide significant help to many of the prospective homeowners. This program was created to help people in rural areas purchase a home that would be their primary residence. The loans can only be given for homes within eligible rural neighborhoods. To see if a home is eligible, you can search by the address on the United States Department of Agriculture website.
- AmCap Home Loans - Alternative for those with lower credit scores: What if you are not ready for a mortgage? Let’s say you want a little more time to improve your credit score and save up for a down payment so you can get approved on excellent terms in a few months or years? AmCap will work with you to find the best loan program to fit your budget and your needs. AmCap home loans and refinance experts provide a streamlined mortgage loan process that alleviates the stress of buying a home.
Who gets to decide whether or not you have the right to live the way you want and have the home of your dreams? Don't let landlords, creditors or the fluctuation of the market stop you. We think the decision is up to you. Homeownership is knocking. Get started today. 855-550-6550