Everything a first-time home buyer needs to know about how to prepare to buy a house.
As the Millennial generation gets older, many of us are looking to put our renting days behind us and finally join the fold of homeownership. Yep, that’s right Gen-Xers and Baby Boomers who may be reading this: the prodigal Millennials are beginning to come home. With home prices and property values continuing to rise with no signs of slowing, it’s not like we have much of a choice. The time is now to start entertaining the thought of buying a home while we can still afford to. We’ve already busted a few myths that seem to be keeping Millennials from buying homes. Now it’s time to take action. It’s not going to happen overnight though. There’s a lot of research and preparation that goes into buying a home before you even start house hunting. Lucky for you, I’ve come up with a definitive, step-by-step, Millennial’s guide on how to prepare to buy a house. Take notes.
It’s not going to happen overnight though. There’s a lot of research and preparation that goes into buying a home before you even start house hunting.
1. IMPROVE YOUR CREDIT
This one should be a no-brainer. It’s no secret that a higher credit score can get you better deals when you’re shopping for mortgages. The lower your credit score is, the more you’ll have to pay for fees or a down payment. Take some time to get your finances in order and take care of any outstanding debts you may have to get that credit score as high as possible. Don’t open any new credit accounts or make any big purchases. All your energy should go into erasing debt and being as financially stable as possible.
2. FIGURE OUT HOW MUCH HOME YOU CAN AFFORD
As a rule of thumb, most lenders will tell you not to look at homes that cost more than five times your annual household income if you plan on making the standard 20% down payment. These general rules are tricky though, because so much depends on your individual financial situation. Lucky for you, our mortgage calculator can do all that work for you. We even offer an online free rate quote that can get you an accurate estimate of your monthly mortgage payment in minutes. Once you get a good idea of how much home you can afford, finding your new home gets that much easier because you’ll know just what you’re looking for.
3. SAVE FOR A DOWN PAYMENT
Saving money when you could spend it is never fun, but if you’re serious about buying a home you’re going to have to get to it to afford your down payment. Depending on your credit history and loan terms, you’ll need to save 3%–20% of the house price for your down payment. It’s never too early to start saving for a down payment though. In fact, the sooner you start saving, the better. Another cash expense you’ll need to start saving for is closing costs. According to Bankrate, the average closing costs for a $200,000 mortgage is $2,084. Shoot for something close to that amount just to be safe, but it won’t hurt to research the average closing costs in your state to get a better idea of what you’ll need to save.
4. BUILD YOUR SAVINGS
Building up your general savings, not just for a home, is very important in the home buying process. Your lender will want to know that you’re financially responsible and that you’re not living check to check. If you have three to five months’ worth of mortgage payments set aside in your savings account, you’ll make yourself a much better loan candidate. A lot of lenders will give you more leeway on other criteria if they see you have a nice financial cushion in your savings. Not to mention, these savings can help pay for any maintenance or repairs that may be necessary. That means it’s time to cut back on superfluous spending and any big purchases that could set you back, credit-wise. Keep the end in mind.
Building up your general savings, not just for a home, is very important in the home buying process.
5. GET PRE-APPROVED AND PRE-QUALIFIED
Once you’ve got all your finances in order, there’s one more step before we get to the fun stuff. Getting pre-qualified for a mortgage is the best way to truly find out how much you can afford to spend on a home. It’s not a long process. All you really need is basic financial information such as your income and the amount of savings and investments you have. Your lender will review your information and tell you how much mortgage you’re eligible to get. This will give you a more accurate idea of what exactly you’ll be able to afford when you start house hunting.
6. BUY A HOME
Finally, the fun part. House hunting can be a lot of fun, but it can also be pretty frustrating at times. The market can be competitive, so it’s important not to get discouraged. Since the market is so competitive, don’t count on a quick purchase. Chances are the process will take some time, so you shouldn’t settle. Short-term homeownership can be really expensive, so it’s important that you find a home that’ll make you happy.