For many people, buying their first home is a dream that they plan and envision for many years. You may be more than ready to move out of your parents’ home, or move out of that tiny apartment that you and your significant other have shared the past few years. If you’re at that stage in your life, and ready to finally call a house your very own, I’d like to say congratulations, and good for you! There’s very little that’s more satisfying than walking through that front door for the very first time, and knowing that you now have complete domain over your own living space.
That being said, no matter how you look at it, there’s nothing trivial about buying your first home. It’s a huge commitment, not only financially, but in terms of the changes in your life. Prior to buying a home, you probably enjoyed a certain degree of help in managing your property, whether it was your landlord taking care of maintenance or pest issues, or living rent free in your parents’ house. When you purchase a home, all of that goes away. You do indeed gain the freedom and independence of owning your own space, but it comes with added responsibility.
Even if you have decided, for certain, that you’re ready to buy a home, you may not be completely aware of what you’re getting into. Aside from managing your own space, buying a home is the biggest financial commitment that many people will ever face. When it comes to your finances, there’s far more to consider than just the end price of the home. Below, I’ll cover some of the most critical things that you need to do, before you sign on the dotted line, and commit yourself to your first house.
Get Your Credit Score Up
Your credit score is going to play a major role in not only allowing you to buy the home you want, but in determining what your interest rates and loan terms will be. Before you even think about buying a home, make sure your credit score is as good as it can possibly be.
When you apply for a mortgage, the first thing any lender will do is pull your credit report. Not only will they check your score, but they’ll also look at your credit history and your DTI to see if the home you want, at its current market price, is even feasible for your circumstances. If you’ve got a history of missed or late payments, and only make a modest annual salary, a lender will be very hesitant to extend you a $500,000 home loan.
Even if your loan is approved, your credit score will be a big contributor to the interest rate you’ll receive. As a general rule, higher credit scores receive better interest rates. Interest rates not only allow lenders to make a profit with their business, but it’s also a way of safeguarding against loss. A lower credit score indicates that you’re not as responsible with your finances, and, to the lender, you pose a higher risk. They compensate by charging more to take a risk on you. The higher your score, the better off you’ll be.
Now, I’m not naive: you may not be able to achieve an outstanding credit score, anywhere from the 750 to 800 range, on a whim. Even if you’ve been fairly responsible with your credit, one late or missed payment can remain on your credit report for up to seven years, and it’s difficult to overcome that detractor. I’m not saying that your score has to be perfect, but it does need to be good. Before you settle on a house, check your credit score, and then see if you’re still ready to move forward.
Settle Your Debts Beforehand
Even with the best interest rates and loan terms available, houses are just flat out expensive; there’s no way around it. Typically, mortgages are set up for either 15 or 30-year repayment plans, and that’s a long time to be financially committed to something. It will be all the more difficult if you’ve got other debt dragging you down before you even move into your new home.
Before you start shopping for a house, settle as many of your other debts as possible. The big one to look at is credit card debt – these have some of the highest interest rates you’re going to find, and if you’re not paying off your balances in full each month, you’re just compounding an expense that does absolutely nothing to benefit you. Even if you need to consider taking out a personal loan to consolidate your debts, it will be worth it to start off on the right foot. You may not be able to pay of your car completely before you buy a house, or pay off your college loans, and that’s okay. Control your debt where you can.
Shop for the Best Realtors and Lenders
The two most important people you’re going to work with during your house search will be your realtor and your lender. Your realtor will help you search, make suggestions about buying a home, help you negotiate an offer to receive the home, and navigate the stacks of paperwork involved. Your lender, obviously, will be there to extend you money, and offer financial advice as you go along.
Be very careful when selecting both. Some realtors and lenders are just short of criminal, and will do and say almost anything to get you to sign the lease. Others are consummate professionals, who truly do have your best interests in mind, but they will charge a premium for that quality service. You’ll have to be realistic about your circumstances. Get recommendations from people you trust, look at Google reviews, and call the realtors and lenders directly to ask about their qualifications, track record of success, and terms for doing business with you.
With lenders, especially, look at different options, and ask them what sort of interest rate you can expect against the home you want, and your current credit score.
Save for a Down Payment, and the Associated Fees
One thing that you’re probably going to need to do, to both help secure your mortgage and get a better rate, is make a down payment. Many lenders won’t even work with you without one. It’s typically a low percentage of the home’s total value, between 10 and 20%, but when you’re looking at a $300K house, 15% is still $45K. That’s a lot of money. Aside from the end price of the home, you’re also going to have to secure homeowners insurance, pay for an inspection, and pay the processing, registration, and other fees for your loan, the titling for your house, and other expenses.
The total you’ll have to pay upfront can rack up very quickly, so to help you get the best deal possible, start saving now, and save wherever you can.