Years of dealing with difficult landlords and the frustrations of renting have taken their toll, and you’ve decided it’s finally time to buy a place of your own. Whether you’ve just started sifting through property listings or have already picked out the perfect two-bedroom bungalow, there are several steps you should take to prepare for purchasing your new home.
First, you need to make a new budget that covers not only your expected mortgage and monthly utilities, but also saving for a down payment – not to mention all the extra expenses involved in setting up and maintaining your own home. You’ll need to set aside money for property taxes, homeowner’s insurance, various other fees, and possibly Private Mortgage Insurance. Additionally, while furniture, fixtures, appliances and a fresh paint job will make your new house feel like a home, unless you budget properly you might find yourself living out of suitcases and half-unpacked boxes until you can afford to properly appoint each room. And don’t forget that unlike rental living, if something breaks the responsibility and cost of repairing or replacing it will likely fall on you (if you're buying a condo it will be shared with other owners).
While crafting your pre-home-purchase budget, think about how to avoid any large or high-interest buys that will increase your debt. You can also take this time to work on reducing your existing debt (especially credit card debt) as much as possible. Cutting down your debt means more money for a down payment on your new home, and what’s more, it could even improve your credit score – nabbing you better rates on your home loan and an easier pre-approval process. A credit score of 620 or so is about the minimum many lenders will consider for a pre-approval; 720 is a good score, and 760 or above is great. In addition to your credit score, factors like the amount of your down payment and the type of property you are seeking may affect your pre-approval as well. You can use the HUECU Mortgage Calculator to get an idea of what your monthly payments would be for a given loan amount. Check out HUECU’s mortgage resources.
Extra cash burning a hole in your pocket? Set it aside for your down payment. Twenty percent down is your goal, though depending on your credit and the current market you may be able to get away with 10% down or even less. However, aim to put down as much as possible up front, which will save you money in the long run.
As you prepare to buy a home, consider whether a fixed-rate or adjustable-rate mortgage makes the most sense for your specific situation. Both types of mortgages have pros and cons. Fixed-rate mortgages are easier to budget for, because your monthly payment stays the same over the life of the loan. Adjustable-rate mortgages may have lower payments at the start, but interest rates can rise dramatically and unexpectedly,. The HUECU Fixed-rate vs. Variable calculators can help you to decide.
If you’re looking to buy within the next 12 months, contact a lender for a pre-approval, which you can show to realtors and sellers. This can be used to create steps that will improve your credit score and help trim your debt levels so that you are in great shape when the time is right. This is where your budgeting skills and diligence in managing your credit will pay dividends! A trusted loan officer will be able to help you understand the ins and outs of the process and answer any questions. If your purchase is more than a year out, you’re better off getting a pre-qualification instead, which you can use as a rough guide until you know you’re ready to buy.
Once you have a loan officer and a pre-approval it’s time to consider the rest of your home-buying team. You’ll need a realtor to find properties and interact with sellers, an attorney to handle to contracts and closing fees, and a qualified inspector to identify any issues with the prospective property. You can find trustworthy attorneys, inspectors, and realtors online or through word of mouth, and HUECU members can contact the credit union for their recommendations as well.
Once your budget is set, your savings are growing, and your team is assembled, you’re ready to go out and find yourself the perfect home!
Check out other articles in our Home Buying Series: