Since it’s the start of the home buying season, let’s flashback to Mary Ellen’s post about successful home ownership. Enjoy!
Purchasing a home is a one of the biggest choices you will ever make. While it may be acceptable to buy a purse or a pair of shoes on an impulse, buying a home requires a lot more thought. And it’s not only a huge financial choice….it’s also an emotional decision. I prepared a list of 4 steps that will help you be successful in home ownership.
Step One: Be realistic with the time frame.
Unless you’ve been working on most or all of the following, give yourself at least 2 years to prepare. Your rental lease may be up in 4 months and you’re tired of paying someone else’s mortgage, but rushing into things can cost you much, much more over time.
Step Two: Check your credit.
It takes time to improve credit or even to correct errors. Begin with all three of your free credit reports from the Annual Credit Reporting Service. They are available online at www.annualcreditreport.com, though I recommend mailing for the reports. It takes a couple of weeks, but I find the format easier to read and it is less paper and ink. Your reports from this federally mandated service will provide the most complete information…plus it’s truly free with no gimmicks to sign up for anything. You don’t necessarily need your score yet; you just need to know what’s on your report.
Note: The FICO score is not free. To track your progress you could consider paying for the score initially; then check it again at the halfway point and as you near your actual mortgage application. Monthly monitoring service is not really necessary. Learn more about the FICO scoring system (the scoring system used most by major lenders,) at www.myfico.com.
When you have your reports, dispute inaccurate information. Each credit reporting agency website has information on how to dispute. Have other issues like collections, late payments, or no credit? Resist paying a credit repair company to do what you can do yourself. Meeting with a LSS financial counselor can help you devise your plan of action. If you have credit card balances, we can also help you create a plan of attack to pay it off. Click HERE to get started on your free financial counseling session.
Your score will determine what rates you can get on a mortgage loan. The interest rate can mean the difference of a few hundred dollars a month in the mortgage payment, making owning a home more affordable. And, over the life of a 30 year loan, you will save tens of thousands of dollars in extra finance charges. It pays to start improving your score now.
Step Three: Educate yourself.
Take a first time home buyer’s class and consider taking it twice…now as you begin the preparation process and later when you are getting down to the wire. In Minnesota the Minnesota Homeownership Center is the best resource for finding classes, pre-purchase counseling services, and a wealth of valuable tips and information. To find providers in your state, visit HUD’s website. Meet with a financial counselor for a budget review—just how much of a payment can you really afford? What the lender will give you isn’t necessarily what you can afford.
Step Four: Act like you own the place.
- Start living with the budget of a homeowner. Do you know where you will need to make cuts?
- Look at listings or go to open houses to have an idea of the price range of homes in your desired area.
- Use one of the many online calculators to determine what you could expect as a monthly mortgage payment.
- Visit your county’s website for an idea of annual property taxes.
- Know the numbers: Get an idea of annual homeowner’s insurance expense. Divide the annual amounts by 12 and add to the mortgage payment. Add in additional utility expenses and savings for home maintenance and repair. Utilities will vary depending on a variety of factors, but you do have control of how much you spend.
- Saving for maintenance is critical, but how much? Again, it will depend on many factors: age of house, size, prior maintenance, condition of major appliances, location, etc. For this exercise let’s go with 1.5% of the purchase price. Not likely to be less no matter what. Here’s what your housing expense can look like:
$1000 mortgage payment ($200,000 home and good credit)
$300 taxes and insurance
$300 all utilities
$250 maintenance savings
That’s $1850 a month!
Let’s say you are currently paying $1000/mo in rent. That extra $850 can go into a savings account for the down payment and/or be used to pay down debt to make the future payment affordable.
Despite recent years, owning a home can still be a good investment. It is a long term investment – not just financially- but in many aspects, including:
- Children who move frequently suffer academically with each move, even if they don’t change schools. A permanent home can improve a child’s chances for success in life.
- Stable neighborhoods provide increased security for all.
- The wealth of a family home can be passed on to future generations. The home you buy in two years could help pay for a grandchild’s college education 40 years from now.
Ensure a good return on your investment by being prepared.
Author Mary Ellen Kaluza is a Certified Financial Counselor with LSS Financial Counseling.