Buying your first home is one of the most exciting times in life. Embarking on the path to being a homeowner is your dream, and in your heart you’re ready for it. It’s a big deal, and buying a home for the first time can be one of the scariest most nerve-wracking experiences of your life. But it doesn’t have to be.
You wouldn’t be human if you weren’t just a little stressed out by embarking on such a monumental endeavor. But you can take a lot of the fear and anxiety out of the equation by doing two things: Get prepared financially to take on a mortgage, and choose your home wisely. Let’s talk.
Get Financially Prepared
Getting your finances in order is first and foremost. You have to know where you stand going into the process and I suggest not shopping around and falling in love with any particular property until you know exactly what you can afford (this will help you avoid a potential heartbreak). When you have your number, you can set your shopping expectations from there.
Here’s what you need to do:
Check Your Credit Score: Check your FICO scores from the three main credit reporting bureaus (Equifax, Experian, and Trans Union) to get a clear picture of where you stand. If your scores differ drastically, expect that lenders will use the median score. If you have two scores that are the same, lenders will use that score.
Credit score websites will give you a generic idea of what your score is but lenders use a slightly different model to calculate the score they will consider. Generally speaking, if your credit score is above 740 you’re in good shape. Below that, you can work on raising your score. If you’re below 720 and into the 600’s you won’t be looking at the best interest rates on your mortgage.
According to the Fair Credit Reporting Act (FCRA), you are entitled to a free credit report every 12 months from each of the three bureaus. You can find out how to get your free credit reports on the Federal Trade Commission website.
Calculate your Debt to Income Ratio: Typically, a debt to income ratio of 43% or less is required to obtain a Qualified Mortgage. To calculate your debt to income ratio add up all of your monthly debt payments and divide that by your gross monthly income. If you’re over 43%, or hovering around that number, pay down some credit cards and loans if you’re able.
Consider Your Down Payment: Ask yourself – What do I have in the bank and what am I able to put down on a home? Experts suggest that a down payment of 20% is ideal. This not only lowers your monthly mortgage payment to begin with, it may help you to avoid paying Private Mortgage Insurance (PMI) which can lower your monthly payment even more.
Consider cost of ownership: After calculating mortgage rates and monthly payments think about it will cost to own the home you’re looking at. What kind of home are you getting into? What are your projected maintenance costs on that home? What will your property tax be? Is there a homeowners association with dues? These things will obviously add to your cost of ownership so think it through and be realistic.
Choose Your Home Wisely
Once you’re financially prepared, it’s time to start the home selection process (the place where your dreams and reality find a happy medium). Being smart about your purchase transcends income brackets and housing markets. Here are a few things to be smart about:
Get an Inspection: Before you can seriously consider a property you have to know what you’re getting in to. Review the inspection report carefully if one exists. If not, have an inspection conducted by a licensed professional before entering into any serious negotiations with the buyer. This is where a lawyer would come in handy.
Get a Lawyer!: All New England states as well as several other states across the country have laws mandating a lawyer be present during the closing of real estate transactions. Even if your state doesn’t require it, having a lawyer oversee the transaction is never a bad idea especially when you’re making what will most likely be the largest purchase of your life.
Stay Open Minded While Shopping: Consider tolerating little imperfections in exchange for a lower purchase price. If the home has all of the features that are difficult to find (like location and size), maybe you can deal with the ugly tile in the bathroom for a bit. It will cost you less to make minor improvements to a home after the purchase, then what you spend on a higher purchase price for the house with the “perfect bathroom”. Think about it.
Get Insured: It’s your new castle and the biggest investment of your life, so when you close the deal on your new home (congratulations) make sure you have the right Homeowners Protection in place for it.
If you’re embarking on the home buying process for the first time, good luck. Be smart, take your time, and make good decisions. A mortgage is a big move and a long road, so make sure to set yourself up well for the journey ahead.
Sinclair Risk Management has experts standing by ready to help you protect your real estate investments. Get in touch with us for questions, support, or a no-obligation Homeowners Insurance quote anytime.
Personal Lines Account Executive