First Time Home Buyer? We all had to be there at one time in our lives. It’s exciting and nerve wracking at the same time!! I wanted to hit a few tips that will help you prepare for your future investment!
You’re not just buying a home but making an investment. A home will grow in equity, if properly maintained. With renting or leasing a home, you are actually helping the landlord’s investment. When you are a homeowner those monthly payments go towards your equity!
First step to purchasing your first home is saving for your down payment. Down payments typically run 3% – 20% of the sales price. If you do not put 20% down on your home, you will pay PMI aka Private Mortgage Insurance. The average cost of PMI, for a conventional home loan, ranges from 0.58% to 1.86% of the original loan amount per year, according to Genworth Mortgage Insurance, Ginnie Mae and the Urban Institute. If you put 20% down, you have the option if you would like to escrow your taxes and property insurance. Escrowing your insurance and taxes, basically means your payment will include these two items and the lender will pay them for you annually. If you do not put 20% down, you generally have to escrow your taxes and insurance. Pinterest has several manageable savings plans that you can research! You can save daily, weekly or monthly! Dave Ramsey is always a great resource for saving money as well! You have to be disciplined and not be tempted to dip into the savings account. Just remember you are purchasing an investment, it will be totally worth it!! Also keep in mind, you are going to have repairs and maintenance for your home. It is wise to start saving for those incidents too. So when your central heating and air unit stops working, you will have money socked away to pay for those repairs!
Let’s talk about your credit score. Do you know what your credit is at this moment? If not, there are a ton of free apps you can use. There are three credit bureaus: Experian, Transunion and Equifax. These three bureaus derive your FICO score. The FICO score is what lenders use as a tool to see if you manage your finances well, pay things on time, credit utilization, etc.
Visit www.annualcreditreport.com where you can receive all three credit bureaus credit reports and scores free of charge annually. Typically, lenders like to see around 640 + FICO score when lending money for a home. There are some instances, a lender could approve you with a less than average credit score, but that is a case by case scenario. Your realtor should be able to give great recommendations to you for mortgage lenders. If you’re credit score is less than par, there are several things you can do to be proactive:
Pay your bills on time, including all loans and credit cards.
Do not max out on those credit cards (best to keep within 29% utilization) What does utilization mean? Example: $500 credit card limit, you should never use the credit card for more than $145 (29%) and you need to keep that balance paid off every month.
Your history of credit plays a role in the FICO score as well. Do not close credit card accounts that are in good standing. Make a small charge of like $20 and pay off the balance every month. It will help improve your score tremoundlsy.There is a free app called Experian Boost, keep in mind, this app will only help your Experian Bureau credit score, not all three bureaus. It links to your bank account and reports when you are paying your auto insurance, rent payments, utilities payments on time.
Keep inquiries at a minimum. Each inquiry you make, when applying for a credit card, auto loan, mortgage, loans, etc. will lower your credit score. It typically takes two years for inquiries to be removed from your credit report.
Job history of over 2 years is ideal for lenders. What if you just graduated college and just been in your workplace for only 6 months? If you have a contract or letter from your employer stating your employment, this will be useful for your lender, coupled with a great credit score and down payment! If you are self-employed, you will have to have verifiable income on your tax returns. This can be hard for some self-employed because of the tax write-offs. The lender wants to see you are bringing enough home, grossly, to make the mortgage payments and to fit their debt to income ratio. The ideal debt to income ratio is 26%/36%. The front-end is the ratio is the amount of your income that goes towards your monthly debt before factoring in your monthly mortgage payments. Ideally, your front end should not exceed 26%. The back end DTI ratio is the amount of your income that goes towards your monthly debt obligations, including your estimated mortgage calculator. Ideally, the back end should not exceed 36%.
How do you calculate your debt to income ratio?
Take your total monthly debt payments, including all loans and credit cards.
Divide your total monthly debt payments by your gross income.
Multiply by 100 to get your debt to income ratio.
There are mortgage calculators online that are available, and you can research current interest rates. Be very cognizant of your online activity. You can get sucked right into applying for a mortgage and getting your credit score dinged several times, which will lower your FICO score.
You’ve done your work, built a good credit score, saved your down payment and have a great employment history! It’s time to find your first home!!! Sooooo exciting!!!!
Find a trusted mortgage lender. You need to visit with at least three lenders to see which one best suits your needs. Once you have a lender, ask them for a pre-approval letter. This will help you and your real estate agent searching for your home! Be careful, just because you may get approved for a large amount, doesn’t necessarily mean you can afford it. Know your budget! You do not want to look at homes you cannot afford. It will be disappointing and a waste of time for everyone. Keep an open mind when searching for a home within your budget, you may not get everything you dreamed of, but it’s a blank canvas. Make it your Picasso! Also check out my previous article about remodeling a home!!
Find a trusted Real Estate Agent! You may need to talk to a few agents to find a good fit for you and that’s ok!! This is a huge investment and you want to feel comfortable throughout the entire process! If you do not have a mortgage lender in mind, ask your agent for suggestions!
Once you find that perfect home sweet home, you will need homeowner’s insurance. Visit with at least three insurance agents and compare rates and benefits. Sometimes you can discount your auto insurance with your homeowners insurance! Shop around.
Lastly, be educated! I know it’s a lot to take in for the first time but the internet is a plethora of knowledge. Be on top of your game!! You got this!!!
I have a YouTube video that goes more into detail about being a first time home buyer and more tips! Scan the QR Code for link to my YouTube Video!
Don’t forget to hit the subscribe button. Happy Home Buying!!