As your most expensive purchase to date, buying your first home can be an intimidating process. Between mortgage rates, hefty down payments (you have an extra $50k lying around, right?) and actually finding that perfect place to call home sweet home, it all makes you want to reconsider renting for life. Here’s some tried and true advice to help prepare you to take that big next step:
Determine a Budget
How much can you reasonably afford to pay towards your mortgage each month? Use your current rent payment as a guide to help determine what kind of payment is ideal for you and then work backward to determine what price range of home that equates to. Then, peruse online real estate listings in that price range in your desired area and find out if the options available will suit your needs. If so, your price range estimate is in line with both your real estate wishlist and what you can actually afford. If not, you need to get back to the drawing board to determine where you’re willing to make compromises. Perhaps you are willing to spend more each month to be in that great neighborhood downtown.
Boost & Protect Your Credit Score
If you want to get one of the best available mortgage rates, you need to have a top-notch credit score to match. In an interview with Bankrate.com, former FICO executive John Ulzheimer noted that to get the best rates, strive for a credit score of 750 or above, though you can still get a good deal with a score between 700 and 750. While you still may be able to secure a decent rate with a lower credit score than that, you will likely be required to make a larger down payment in order to secure that rate than someone with a higher score would.
Once you find out your score, review the results to ensure everything is accurate. It’s not uncommon for a settled debt to be mistakenly lingering or for identity theft to render your report inaccurate. Protect your credit from identity theft with a protection service that monitors your profile to prevent from becoming an unknowing victim of cybercrime. Boost a lower score by making on-time payments to settle debts. Stabilize your rating by not applying for any new lines of credit between one year before buying a home and your closing.
You may already have a little nest egg set aside, but once you’ve determined your budget, calculate the exact amount you’ll need for a down payment. Consult a real estate professional or use an online closing costs calculatorto help you calculate a ballpark figure for your closing costs so you can have cash on hand for those as well. Once you have an estimate of how much you’ll never to save for a downpayment and closing costs, develop a schedule for how much you need to save between now and when you plan to start house hunting.
Save Some More
Don’t stop stashing away extra cash just because you’ve hit your savings goal to cover a down payment and closing costs. Mortgage lenders want to see that you have a healthy savings cushion to protect their investment. For the best rate possible, stick to a tight budget so it’s obvious you aren’t living paycheck to paycheck (even if you currently are). Use a budgeting app like Mint or a more in-depth financial planning program from a guru like Dave Ramsey. Set a goal for how much to save from each paycheck or at the end of every month to help keep yourself on track. To lessen the temptation to spend, have the funds direct deposited into your savings account from your paycheck each pay period. You’ll be proud of this extra effort once you finally find your dream house. The extra cash on hand can be put to good use for home maintenance, improvements or emergency repairs.