Buying a house is one of the biggest investments you’ll make over the course of your life. For a lot of people, it is the largest purchase they ever make. While owning your own home can be incredibly satisfying, before you dive in, it is good to be prepared so you can buy your home with peace of mind.
Before entering the world of home ownership, you’ll want to be prepared. Here’s a little checklist that will assist you in planning. Whether you are deployed at home or overseas or recently retired, your decision to buy a house is significant and must be something you prepare for ahead of time.
Here are six items to get right in your house purchase.
- Strengthen your credit score.
- Determine how much house you can afford. Both Bankrate and CNN offer calculators for this.
- Save money for your down payment and closing costs.
- Build a healthy savings account.
- Get pre-approved for your mortgage.
- Buy a house that you like.
Strengthen your credit score
Your credit score impacts your ability to get a loan for your mortgage payments. The higher your credit score, the lower your monthly payments will be. At 660 to 680, you are eligible for mortgage lending from most lenders. Below that score range, you will end up paying large fees or lenders will require a higher down payment.
Lenders will offer loans to borrowers who are prepared to put down larger payments if their credit scores are in the 580 range. However, the market standard is 640 to 660. Any score above that range helps lower your interest rate and saves you significant dollars over the long run.
If you have a score of 700 to 720, you will end up with a good deal. With a score of 750 or beyond, you will pretty much get the very best rates available in the market.
Knowing this, go in prepared. Improve your chances, lower your interest rate and size of monthly payments by improving your credit score. Get started by pulling up your credit report and checking for any errors. Be sure to have a consistent payment history. Also as a rule of thumb, stop applying for new credit a year before you apply for financing and wait till after you close on your home before applying for any new credit again.
Determine what you can afford
Buy a home that you can afford. Your home payment and associated costs should not exceed 30% of your monthly income. This will help you plan your budget. Use financial calculators to help you figure out how much you will pay for the house you want. Put aside enough money and build a nice nest egg before you buy.
Save for your down payment and closing costs
You will need to save enough money for a down payment that ranges between 3% and 20% of the home's price. You may be eligible for a FHA loan that requires a credit score of 580 or higher. As a military veteran, you are also eligible for a Veterans Affairs loan that does not require any down payment.
Remember closing costs and loan fees
Closing costs can add up. Be sure to plan for these additional fees. For example, for a $200,000 mortgage, your closing costs can range from $2,300 to $4,000. Put aside as much money as you can for your down payment and closing costs.
Build a healthy savings account
You have to have a savings account in place before you buy your home especially when you are borrowing money from a lender. Lenders want to see that you are not living paycheck to paycheck. Put aside three to five months worth of mortgage payments. This money will also be helpful to have if you have unexpected expenses such as repair issues like a new water heater or roof, that can quickly add up. As a general rule of thumb, you will spend 2.5% to 3% of your home's value annually on upkeep, repairs and maintenance. Hence if you are buying a $250,000 home, aim to save $520 to $625 per month.
Get pre-approved for a mortgage
Get pre-approved so that when you are ready to buy, you have already done a lot of the heavy lifting and you will be prepared to buy a home you like, knowing how much you will be approved for. The pre-approval process is also more extensive" than it was a few years ago. Your documentation around income and assets is essential. By getting your financing in place before you go house searching, you will know how much you can afford.
Buy a house you like
Finally, buy a house that you like and can live in for the next few years at least. Short term ownership can be expensive and also difficult because selling homes can take time. Step back and make sure you like the house before you buy.