If you’re thinking about taking the leap and buying a home, congratulations! It’s a big step, and home ownership is an important financial goal for many Americans. However, the home buying process can be confusing and stressful at times. Our credit counseling advice is to take the time to educate yourself about it. We can help you by providing a road map to so you can navigate this complicated process!
How to Start Home Buying Process
Before you even apply for a mortgage, you have a lot of work to do! The home buying process starts with your savings efforts. The more you can save for a down payment, the better. Ideally, you should save about 20% for a down payment so that you avoid having to pay PMI (private mortgage insurance). Additionally, if your credit score is below a 740, you may want to take some time to work on that. Lenders will give better interest rates to consumers with higher credit scores.
Of course, your credit score isn’t the only part of your financial picture that a lender will consider. Before buying a home, you should ensure you have a debt-to-income ratio of no higher than 35%. If a significant portion of your money is being eaten up every month by credit card debt, student loan payments, and car payments, you are probably not ready to buy a home just yet. Spend some time paying down your existing debt first so your debt load is not a red flag to lenders.
Take a First Time Home Buyers Course
When you have enough money saved, your credit score is well within the “good” range, and you have paid off most of your existing debt, you’re ready to move onto the next step of the home buying process. Taking a first time home buyers course can help you get approved for a better interest rate with certain lenders. ACCC offers a first time home buyers course online that qualifies for most national and local loan products. Check with your lender prior to completing the course. First time home buyers courses are usually good for about two years, so even if you don’t buy a home immediately after you take it, you can still use it.
Pre-Qualification vs Pre-Approval
Next, you will need to get pre-qualified for a mortgage. This gives you an idea of how big of a loan you are qualified for, and involves giving your lender your overall financial picture. They’ll look at your income, assets, and debt to determine how much you can expect to receive. This can usually be done over the phone and there is typically no cost. The next step is pre-approval. While the two terms sound similar, they are actually two different processes. Getting pre-approved is more involved, and you will have to actually fill out a mortgage application and possibly pay a fee. The lender will do a full credit check and look more closely at your finances. When you get pre-approved, your lender will tell you exactly how much you are approved for and what the interest rate is.
Contact a Realtor and Find Your New Home
Now comes the exciting part of the home buying process: finding your home! You will need to contact a realtor to help you through the remainder of the process. Once you find the home of your dreams with the help of your realtor, it’s time to make an offer! Once your offer is accepted, you will have to make the initial deposit, usually of $1,000. You will also need to get the home inspected. Don’t skip that step! You can and should negotiate or walk away if there is anything major wrong with the home. Of course, if the inspection goes well and you’re sure you want the house, it’s time to apply for your mortgage.
Finally, you’re ready to close on your new home! Be prepared for the closing costs. This can cost anywhere from 2-5% of the price of your home.
Other Considerations During the Home Buying Process
Before you decide for sure on a home, there are a few things you should consider before and during the home buying process. Location is a major factor. How far away is it from your work? Is it in a good school district if you have kids or are planning to have kids? Additionally, think about if you want an older or a newer home. While an older, less updated home may be less expensive, appliances are expensive to replace. Check the washer and dryer, stove, oven, water heater, and other appliances to see if they will need to be replaced.
Also remember, when you are a homeowner, you are the one responsible for fixing and maintaining everything, and that can add up. Are you ready to be financially responsible for fixing walls, water damage, flooring, etc.? If not, you may want to work on establishing a solid emergency fund first so that you aren’t caught off guard by all the unexpected upkeep of a home. Without an emergency fund, some of these fixes could easily lead to a significant amount of credit card debt.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.