Purchasing your first house may seem overwhelming. It’s a major purchase and for many people, potentially the largest monthly payment they’ve ever had (or ever will have). Not to mention owning a home comes with huge responsibilities, like upkeep and maintenance. If you’re thinking about buying a house, here are steps to take before you jump in.
Buying a house takes both time and money so you need to start planning early, likely years in advance, especially to save for a down payment. So don’t get your hopes up that you’re going to be able to plan and buy a house in just a few months.
According to NerdWallet, lenders prefer 20% down, but it can vary depending on your credit and the type of home you’re purchases. So start saving up as much as you can for the down payment, closing costs, furniture, and other moving expenses. There are benefits to a larger down payment, such as lower monthly payment and/or interest rate and more equity in your home right away.
Build Your Credit/Pay Off Debt
It’s important to have a credit score of 700 or above, which is considered good (in general). Good credit will be the difference maker in getting a prime mortgage with a lower interest rate. Pull your credit report for free from AnnualCreditReport.com from all 3 credit reporting agencies. Review and fix any errors, get caught up and stay current on all of your bills, and take care of any unpaid collection accounts. For more tips to improve your credit, check out How to Establish or Rebuild Your Credit and Raise Your Credit Score With These 6 Tips.
Paying down or paying off your debt will also help raise your score. Not to mention, getting rid of a monthly payment will make your mortgage payment more affordable.
Create a Budget
Compare your expenses with your net income. Make sure that your budget includes all of your expenses, even ones that aren’t monthly (annual or semi-annual expenses such as vehicle tabs/maintenance, school clothes, holiday shopping/other gifts, taxes, insurance, memberships, veterinary visits, etc). To help save more money, determine expenses that you can either reduce or cut. And just remember your end goal of buying your first house to help keep you motivated.
Determine What You Can Afford
Now that you’ve created a budget, make sure that it’s realistic. Remove your current housing expenses. That will help you figure out what you can afford for your mortgage payment, home insurance, and property taxes. And you should try to keep housing costs to a maximum of about 25-28% of your net income.
It’s also a good idea to practice “paying” your mortgage payment. When you know what you can afford, set aside the amount beyond what you’re already paying in rent/housing costs now. It will help you see if you can really afford a higher mortgage payment.
Take a First-Time Homebuyer’s Course
Homebuyer education provides you with helpful information so you can make the best decision for you and your family. Not to mention, by completing homebuyer education, you may qualify for special mortgages, down payment assistance, or other help that can make homeownership more affordable. In Minnesota, check out the MN Homeownership Center info on homebuyer education or visit HUD’s listing of homeownership/homebuyer programs for all states.
The biggest takeaway I hope you get from this is that it takes time to prepare for a home purchase.
The sooner you start planning and saving, the sooner you’ll achieve your dream of homeownership.
Author Elaina Johannessen is a Program Director with LSS Financial Counseling.