The road toward home ownership for first-time buyers can be a pleasant journey filled with excitement and anticipation. Or, it can be frustrating trip wrought with bumps and detours. The difference in is the planning.
From getting your finances in line and building good credit to saving for a down payment and getting pre-approved for a loan, knowing the steps you must take today will help you make this major purchase and become a homeowner tomorrow.
Organize your financial house
The first step toward homeownership is to see where your money goes. Track your rent, utilities, credit cards, loans and other expenses. Don’t forget to add discretionary spending such as fast food, lottery tickets, dining out, movies, snacks and drinks. The clearer the financial picture, the more you’ll know what steps to take to save enough money for a down payment.
It’s a good idea to check your credit report and credit score so you’ll get an idea of what lenders will see. By law, you can obtain a free credit report each year from the three major credit reporting companies at www.annualcreditreport.com. Each agency issues a credit score based on your credit history. Credit scores range from 300 to 850, with a good score generally considered 720 or higher. Your score changes over time depending on several factors, including payment history, amount owed to creditors, length of credit history, new credit opened and the types of credit you currently use.
The Down Payment
Most lenders in today’s post-recession require a 20% down payment if you want to receive the best interest rates you’re qualified for. A down payment of less than 20% will mean you’ll have to purchase private mortgage insurance (PMI), which protects the lender if you default on the loan.
The more money you use for a down payment, the lower your monthly mortgage will be. Generally, your monthly mortgage payment (principle and interest, property taxes and home insurance) should not be more than 28% to 36% of your monthly gross income.
The cost breakdown
The amount you’ll spend in total for a home purchase depends on several factors, including location, market conditions, the condition of the home, interest rates and mortgage payments, the type of mortgage and your individual credit history. Along with the down payment, you’ll have to pay closing costs and set up a reserve fund in escrow that will be used to pay your property taxes and homeowner’s insurance. This fund may be handle by the lender or by yourself.
Closing costs and other expenditures
Closing costs are the upfront fees you must pay so that the transaction can legally be recorded and transferred to your name. These includes appraisal, title insurance, points, tax escrows and possibly attorney fees. Closing costs vary and may be five to seven percent of the purchase price. Once you’ve taken care of all those expenses, you’re likely have more. Depending on your situation, you’ll need to pay for items such as mover’s fees, utility connection charges and property taxes. Don’t forget to factor in other potential expenses such as appliances, redecoration, furniture, security systems and landscaping.
We can help
Becoming a homeowner means making a major purchase and a financial commitment. One of the best ways to prepare is to seek pre-approval from a reputable lender such as Travis Credit Union. Sellers typically view a pre-approved buyer’s offer more favorably than buyers who have yet to start the home loan process. Also, a pre-approval saves time so you can move quicker when you’re ready to make the purchase.
Our knowledgeable and friendly TCU mortgage loan consultants are waiting to review your financial situation and discuss your home buying options. Get started today! Call our Home Loan Center toll-free at (888) 698-0000.
Source: BALANCE Financial Fitness Program