Financial News

Buy a home in 2018 with these 3 steps

2018-04-03T16:11:00

(BPT) – So you want to buy a home? Congratulations! Homeownership can be a wonderful accomplishment and milestone in your life. But be forewarned that it might not be easy. The process is complicated and often comes with a few hurdles.

However, if you follow the three steps below, you can make your goal a reality in 2018.

1. Understand your expenses and get preapproved

Making the transition from renting to buying a home can have a significant impact on your monthly budget. That’s why you need to get your finances prepared before you buy a home. Entering numbers into a mortgage calculator is sometimes helpful, but it can leave you with an overly optimistic picture.

A common rule of thumb is that your monthly mortgage payment should not exceed about 30 percent of your monthly income. Before you begin the process of buying a new home, review your monthly income and expenses and decide if this percentage works for your household.

If you decide to use a mortgage calculator, remember that principal and interest payments on your loan only make up part of the monthly cost. When calculating your future payments, don’t forget about property taxes, property insurance, and the possibility of mortgage insurance or a homeowners’ association fee, which can add to your costs. Be sure to allocate a certain amount toward repairs on the home as well.

Once you feel confident in your finances, you’ll need to start the process of getting preapproved for a mortgage. Getting preapproved for a loan allows you to act quickly once you’ve found the perfect home. In most cases, this can be done entirely by phone and online. But it may take a few days (or more) depending on the lender.

You’ll need to provide documents that show your income, debts, assets, credit history, employment status and employment history, among other factors.

2. Improve your credit score and debt-to-income ratio

To get approved for a mortgage, you will need to have a relatively good credit score and a debt-to-income ratio of 43 percent or lower. But what exactly does that mean and how can you find out if you’re qualified to buy a home?

To start with, you can get a copy of your credit report at AnnualCreditReport.com and obtain an estimate of your credit score from one of the many online providers of free credit scores. With these in hand, you can review your credit profile to make sure there are no surprises that could prevent you from being approved for a mortgage.

In most cases, a credit score of 740 or higher will allow you to not only qualify for a mortgage but also receive the best interest rates offered by lenders. If your score is in the 620 to 740 range, you’ll probably still qualify for a mortgage but won’t receive the best interest rates. If you’re applying for an FHA loan with 3.5 percent down, the minimum credit score is 580.

Is your credit score lower than you’d like? Don’t worry; just begin taking steps to improve it. If you are currently late on any payments, do your best to bring those accounts into good standing. At the same time, try to pay down balances on your revolving debt — specifically your credit cards. Ideally, you would not use any more than 30 percent of your available credit (across all revolving accounts) at any given time.

Your debt-to-income (DTI) ratio is equally important to your credit score and is closely related. It measures your monthly payments against your monthly earnings. If you have a car loan, a credit card or a personal loan, it will be included in your DTI. Most mortgage lenders want your DTI to be less than 43 percent before they will approve you for a loan. If you find that you’re above 43 percent then you should work on bringing the number down before you apply for a loan.

3. Get your down payment ready

While a 20 percent down payment is often considered to be the gold standard to buy a home, the truth is most people put down less than that. First-time homebuyers put down on average 6 percent, and second-time homebuyers put down 14 percent.

There are a number of methods to help you save for the down payment, but if you are having trouble, consider joining the Down Payment Movement. This project was started by a team of financial experts and bloggers who were inspired to help people save up for the down payment to buy a new home.

There are also down payment strengthening programs like the one from Unison. This HomeBuyer program will provide as much as 15 percent of a 20 percent down payment when you buy a home. Using this program could allow you to lock in a lower monthly payment while still getting the home you want. In some cases it can even help you obtain a lower interest rate on your mortgage.

Regardless of whether you put 5 percent, 10 percent or 20 percent down, it’s important to understand how your down payment will affect your monthly mortgage payments for the life of the loan. Be sure to do your research before deciding on a number.


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