Buying

Buying a House_ Do These Things First for

Buying a home is a big financial and life decision. You need to be well informed about what you are getting into, especially if you are a first time home buyer.

There is more to the home buying process than pursuing a listing and grabbing the house of your dreams. There are vital financial decisions to work through before you can even contact a real estate agent or start viewing listings.

Here are some things you should do before buying a house:

Save Something for a Down Payment

You don’t necessarily need a considerable amount of down payment to get pre-approved for a loan. However, while there are programs tailored for first-time homebuyers with low down payments, offering a substantial down payment is for your benefit. The lower the down payment you make, the higher the interest rate that will be charged on the loan.

Let’s say you got approved for an FHA loan with a down payment of just 3.5%. While the rate is quite low, there will also be other costs to think of apart from the purchase price of the home. For instance, FHA loans require that you pay two kinds of mortgage insurance premiums, an upfront MIP and an annual MIP.

Paying down 20% or, at the very least, 10% of the purchase price will spare you from having to pay private mortgage insurance. The larger down payment also decreases your monthly payments, making the mortgage less strenuous on your finances.

Workout Your Credit Score

One of the biggest roadblocks that many people hoping to get a loan face is having a poor credit score. Nobody wants to lend money to someone known for not honoring his or her debt obligations.

Ideally, your credit score should stand somewhere around 700 and more. If it’s lower than that, take a step back and start building it. Building the credit score will go a long way in saving you from being charged high interest rates, and being required to purchase private mortgage insurance.

Check the Interest Rates

The interest charged on the mortgage will affect your financial standing for a long time. Therefore, you can’t afford to ignore the rates. Remember, over the course of the loan, you would have likely paid tens of thousands on interest alone.

Shop around and compare the interest rates charged by multiple lenders. Try not to close a deal with the first lender you come across. Instead, compare the terms and interest charged by different lenders to know which one to apply for a mortgage from.

Reduce Your Debt-to-Income Ratio

Debt-to-income ratio, or DTI, is the sum of your monthly income divided by the total amount of monthly debt payments. A good debt-to-income ratio would be less than 40%, as it means that you keep the majority of your income.

Banks hardly ever lend borrowers with a DTI ratio higher than specific limits. At present, the limit is 43%.

When calculating your DTI ratio, factor in all expenses, including those that are not directly related to buying the house. Most people calculate the DTI wrongly because they only consider major monthly bills, like car and credit card payments, energy bills, insurance premiums, etc. However, occasional expenditures, like helping out the family, car fuel, grocery, and movie tickets, also count.

Work diligently to reduce your debt-to-income ratio. The last thing you want is to end up “home poor”, barely scraping by to pay for a home you’ll probably lose anyway.

Hire a Reputable Realtor

Work with local realtors as they have a firm grasp of the value of houses in the area you wish to settle. The agents understand the complexities of the local real estate market, such as a good and a wrong time to buy.

Realtors can evaluate the homes you are considering and advise you accordingly. They will also help you negotiate the best possible terms for purchasing the home. Experienced real estate agents are also knowledgeable about the neighborhood. Their insight could help you make an informed decision before committing.

Picture Yourself in the Home

Ready for the big step? Just one more thing: try and envision yourself in the prospective home. Before long, it will be out of somebody else’s hands and into yours. But as of yet, it’s not.

The question is, do you see yourself in that home long-term?

If the answer is “no” or “maybe”, then you shouldn’t be committing to the huge financial obligations of buying. You can still back out and find what you are really looking for.

If the answer is “yes”, congratulations on buying your first house!

When you have decided to buy a home, take your time, think objectively, and compare various potential homes before settling on the one to buy. Follow the tips above to ensure you end up with a great home that will not be strenuous to purchase through a mortgage.

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