Becoming a homeowner is a major decision, no matter if it is your first or forever home. Understanding the six key steps needed for any Real Estate purchase will prepare you for the home-buying journey and help provide more peace of mind during this months-long process.
Know Your Credit Score
The first step once you’ve decided to buy a home is to check your credit report to see where your credit stands and if anything needs to be addressed to improve it. Each year, federal law requires that the three major U.S. credit reporting agencies provide free credit reports to individuals. You can get your free credit report at www.annualcreditreport.com.
Credit reports are a very useful tool to determine your credit score, identify all your open lines of credit and view all your loan debt. To buy a home, you’ll want to ensure your Debt-to-Income Ratio (DTI) is under 43%. Having the right DTI is needed to be approved for a home loan.
Most home lenders will require you to have at least a credit score of 580. A credit score of 620 or higher may qualify you for a better interest rate, which will save you money over the life of the home loan. You can boost your credit score immediately with Experian Boost.
Organize Your Finances
Once you know your credit score and what’s needed to meet the Debt-to-Income Ratio requirement of lenders, it’s time to review your spending. An honest look at your monthly income versus expenses will help you identify areas to save money, consolidate or do without. Account for everything that your money goes to, including utilities, food, car payments and maintenance, student loan debt, clothing, childcare and kid’s activities, entertainment, retirement savings and any other areas.
Determine How Much Home You Can Afford
After organizing your finances and determining how much of your income can reasonably go toward your monthly mortgage payment, it’s time to calculate how much of a home you can afford. Travis Credit Union provides a free mortgage payment calculator that gives you an idea how much you can borrow based on the monthly payment you can afford.
Start Saving Early
Buying a home usually requires saving money for a down payment, closing costs, moving expenses, new household utilities, new furnishings and more. Other things to consider are the costs for home inspections, upgrades to your new home, homeowner’s association costs (if any) and related costs. Keep in mind it’s also good practice to have an emergency fund that can cover up to 6 months of living expenses, on top of all these other costs.
Find the Right Lender
Once you’ve established a strong savings, you’re ready for the next step – selecting a lender for your home loan, preferably one that is local and can save you money such as Travis Credit Union. Do your homework and shop around to compare loan programs, interest rates and fees. Keep in mind there are various home loan programs available to help certain groups of people, such as veterans, first-time homebuyers and more.
Once you’ve found a lender, get pre-approved for a home loan before you start house-hunting, especially in this competitive housing marketing. Having a pre-approval ready will show any seller that you are serious about buying a home and have already taken steps toward getting a mortgage.
Selecting a Realtor
After organizing your finances, saving money, and finding the right lender, you can finally start shopping for a home. Select a Real Estate agent who thoroughly understands your home requirements such as type of home design, location, and price range. A good agent should be able to advocate hard for your offer during negotiations with the seller.
Once your loan is in escrow, it’s a good reminder not to open any new lines of credit or apply for any loans (such as an auto loan) or credit cards during this time. Any major change to your credit report during escrow may increase your Debt-to-Income ratio and cause your home loan to be declined.
Also, the type of mortgage program you select will determine your down payment amount. If you put less than 20% of the cost of the home as a down payment, lenders will require you add Private Mortgage Insurance (PMI) to the mortgage to protect the loan. This will increase your monthly payment.
Bottom line – Financial Readiness
These six steps to buying a home all fall under the umbrella of financial readiness. Travis Credit Union has the tools and resources to improve your financial wellness and help you plan better and borrow better.
If you have any questions about the home-buying process, TCU’s friendly and professional mortgage loan experts can help. If you’re ready to get pre-approved, apply for a home loan from Travis today!