What to Do Before Buying a Home!
In 2015, there were over one million foreclosures in the United States, this is why it is important to know what to do before buying your first home.
Owning a home is something that most people aspire to at some point in their lives. While homeownership offers a ton of benefits, everything from lowering your taxes to building equity, it’s important to make sure you are ready before you sign on the dotted line.
Buying a home before you are ready financially can turn your American dream into a nightmare. In 2015, there were over one million foreclosures in the United States. Here are a few financial tips that you should consider before you start shopping for that dream home:
Emergency fund
Nobody wants to find themselves out of a job and without an income but the truth is that you never know what is going to happen and coming up short on your mortgage payment can be financially devastating.
Experts recommend that homebuyers have enough savings to cover at least six months of their living expenses. When calculating the amount you need to save be sure to include all of your living expenses, not just your mortgage payment. Car payment, utilities, insurance costs, taxes and all other living expenses should be factored into the total.
Calculate the amount you will need and then start saving. Padding your total by 10 percent is a great idea, which will ensure that you have enough money to cover any unforeseen expenses once you become a homeowner.
Get Your Down Payment in Order
Your emergency fund is not the only saving you need to do. While it is often possible to buy a house with less than a 20 percent down payment, especially if you are a first time home buyer, coming to the table with as much money as possible is always a great idea.
A 20 percent down payment lets you avoid private mortgage insurance (PMI), which usually runs about 0.5 percent to 1 percent of your loan amount. Lenders require PMI if you don’t have a 20 percent down payment. It helps them minimize their risk, but the cost of PMI falls to you. In most cases, PMI is rolled into your monthly mortgage payment.
While 1 percent doesn’t sound like much PMI can be a fairly big expense. If you have a 400,000 mortgage, PMI is going to cost you an additional $4,000 a year or $333.00 a month, which could easily cover a car payment.
Coming to the table with a 20 percent down payment will also strengthen your chances of being approved for a mortgage and may help you get a better interest rate. The more skin you have in the game, the happier your lender will be writing your mortgage.
Your Credit Score Matters
Your credit score will have a huge impact on both your ability to get a mortgage and the interest rate you are offered. If you have less than stellar credit, do everything you can to shore up your score before applying for a mortgage.
A higher interest rate can dramatically affect your monthly payment, in some cases pushing the cost of a mortgage out of range.
Federal law entitles everyone to a free credit report annually. Pull your credit report before applying for a loan and check it for errors. Mistakes are not uncommon when it comes to credit reports so examine your report carefully and notify the reporting agency of any errors that you discover.
Pay off any outstanding debts if possible and make sure all bills are paid on time. Improving your credit score can take time so be patient, but in the end, improving your score can literally save tens of thousands of dollars over the course of a loan.
Calculate All Your Costs
Before shopping for a house, set a realistic budget. Include all expenses, not just the cost of the mortgage. A 3-bedroom home will be more expensive to heat and cool then a studio apartment so be sure to include all expenses when setting a budget.
Just a few expenses you should be sure to include are:
Homeowners insurance: An absolute necessity and can be a significant expense. We can help you find the best deal on homeowners insurance, just enter your zip code to shop and compare up to 12 rates and coverage options.
Utilities: You will now be responsible for all utilities, which is often not the case when renting. Ask for copies of the utility bills for any houses that you are seriously considering so you can set a realistic budget.
Maintenance: Buying a home means that there is no longer a landlord to call whenever something goes wrong. It also means you will have to maintain the yard, shovel the snow and make any necessary repairs. Consider the cost of lawnmowers, snow removal equipment and any other items you may need. Factor in the cost yearly maintenance so your budget is as accurate as possible.
Once you have your financial house in order, get out there and start shopping for your dream home.