Being a first time home-buyer can be both thrilling and nerve wracking at the same time. Owning a home is a huge commitment, and a more expensive one than some home-buyers realize. For example, your monthly housing expenses can go from $1,300 a month to $2,200 as a homeowner. Before you even begin to shop for your dream home, you need to have a plan set in place. Make sure you know exactly what you’re getting into so you can decide if you’re financially and personally ready for such a huge commitment. Doing a little financial homework before hand can help resolve any stress you may be having. Follow these five steps to help make the buying process go a bit more smoothly.
Check Your Credit
A home-buyers credit score is one of the most important factors when it comes to qualifying for a loan. There are a lot of websites where you can check your credit for free and it would be in your best interest to see where your credit stands before applying for any loans. Make sure to review the reports thoroughly for any mistakes, collection accounts, or unpaid accounts. Paying your bills on time each month doesn’t always mean your credit is perfect. The amount of credit you are using is relative to your available credit limit; aka, your credit utilization ratio. Note to self: the lower the utilization rate, the higher your score will be.
Applying for mortgages can become quite messy. Typically, mortgage lenders will request two most recent pay stubs, the previous two years W-2s, tax returns, and the past two months bank statements; EVERY SINGLE PAGE! They’ll even want the blank ones. It’s weird I know, but that is why it is so important to stay organized. Label everything and make sure to store your documents in an area you won’t forget. Buying a home can take a long time, but knowing exactly what you need and where to find it can save you time and stress.
Figure out a Down Payment
It takes a lot of effort to scrape together a down payment. There are also a lot of programs out there that can assist buyers with qualifying. Finally when you’re ready, speak with mortgage lenders as soon as you start the process. It can also help to seek out advice from friends, co-workers, and neighbors to see which lenders they enjoyed working with. Don’t be afraid to ask them questions about their process and any other steps first time home-buyers should take.
Ideally, you should know how much you can afford to spend even before the mortgage lenders tell you how much you qualify for. Calculating your debt-to-income ratio and factoring in your down payment, you should have a good idea of what you can afford, both upfront and monthly. The back-end ratio will show a portion of income that covers all monthly debt obligations. The lenders will prefer the back-end ratio to be 36 percent or less, but there are some borrowers that will get approved with a back-end ratio that is 45 percent or a little bit higher.
Look into Assets and Liability
This is something that hits home (no pun intended) for me and a lot of first time buyers. You may not owe much money and your payments may be up to date, but how do you spend your money? Do you have piles of money left over each month, or are you living on a check to check basis? Being a first time home-buyer, you should have a good idea of what is owed and what you’re bringing in. In addition to all this, buyers should also have an idea of how lenders will view their income and that will require you to become familiar with the basics of mortgage lending.
Listen, buying a home is a process, but think about the future and what that means. Following these few steps will help elevate stress and hopefully make the process run more smoothly. When all is said and done, you’ll finally be a home-owner!