Buying a Home: Simple Steps to Take Towards Homeownership
There's a lot that goes into buying a home beyond what anyone who's never bought a home before knows, and because of that, buying a first home can feel like being buried in a mountain of forms and paperwork. Despite how overwhelming the process may seem at first, long-term preparation can ease the process and make it that much more gradual, helping Millennials reap the benefits of buying a home. People can make their lives a much easier by taking a few small steps to prepare themselves and gather required information before applying for a mortgage. These tips are ideal for people who are hoping to buy a home within the next few years and get ahead with real estate.
Understand, Correct and Improve Credit
A person's credit is a complex set of reports discussing their history of use of credit. There are three credit reporting agencies: TransUnion, Experian, and Equifax. Each company maintains its own report on everyone with a credit history. A credit score is generated based on the information contained in each report. When considering a mortgage application, lenders will typically look at all three reports, plus credit scores, to decide if the applicant is creditworthy.
Minimum Credit Scores
Credit can determine whether someone gets a loan offer, but it can also affect the type of offer they receive. People with higher credit scores, a diversified credit history, and a record of responsible use of debt will typically receive better offers. The state of a person's credit isn't permanent, and can even change from month to month. Potential home buyers should request a copy of their credit reports and scores to get a sense for what kind of message their credit will send to future lenders. Although loans are technically available with a credit score as low as 500, borrowers typically need a score of at least 620 to qualify for most conventional loan programs.
Credit Report Inaccuracies
Accuracy on the credit report is almost as important as working to improve credit in general. Negative credit events, such as a debt that went to collection, are troublesome enough without inaccuracies. Each reporting agency has a process for consumers to dispute inaccuracies on the report, with a set time for the reporting entity to evaluate the request and make changes as needed. The most effective way to ensure the best credit record possible is to monitor the reports at least yearly for errors, avoiding unnecessary increases in debt, and be sparing in the use of revolving credit.
Research Local Real Estate Prices
In the process of transitioning from renter to owner, knowledge is power. Having a deep understanding of the local real estate market makes it far easier to know what to expect from lenders. The amount of a mortgage that people can qualify for depends on their income and monthly debt obligations. Lenders typically want a mortgage payment (including payments for principal, interest, property taxes, and insurance if needed) not to exceed 28 percent of a person's gross monthly income, with exceptions for those in high cost-of-living areas.
Monthly Mortgage Payments
In line with common home-buying misconceptions, this restriction can limit the kind of home that a person could buy. For example, if someone has a monthly income of $4,000, the maximum monthly mortgage payment they could have under a 28 percent debt-to-income limit is $1,120. For many people, the amount of home they want to buy and the mortgage they can get has a good degree of overlap. If there's a discrepancy between the two, due to high housing prices in the area or lower monthly income, people may have to make some concessions. For example, putting down a larger amount decreases the principal, lowering the monthly payment.
Affordable Housing Options
Ultimately, borrowers should seriously consider how much home they want in relation to what they feel they can pay, to confirm that the local real estate market will accommodate their needs. Owning a home requires a significant yearly investment in upkeep and improvements to preserve resale value, as well, though difficulty varies if buying a home as a married couple. In some cases, home buyers may decide to buy less than they can afford, to minimize their monthly payments and leave more money for other purposes.
Save Weekly Toward a Down Payment
Although there are mortgage programs that will accept a down payment as low as 3 percent, it can still take people months or years to save up enough to cover it plus closing costs. Incremental savings could go a long way toward building enough to shoulder that expense. Even saving $50 per week translates into $2,600 per year.
Being ready to buy a home is the culmination of years of preparation, but there are plenty of options for first-time homebuyers. Applying for a mortgage requires a good, accurate credit report, and the best offers come to those with respectable credit scores. People who have a firm understanding of what they will be expected to pay as a homeowner and have saved up enough to cover it will have an easier time managing the process.