How Do You Prepare to Buy A Home?
Home Buying Preparation: The Basics
Buying a home can be one of the biggest financial decisions you’ll ever make-- so how do you make sure you’re ready to make the leap? First, you need to make a plan: that means figuring out how to get your finances in order, examining your potential budget, and setting a timetable for home ownership. Keep in mind that home buying process can be a rough ride-- or easy sailing, and a lot of that depends on how much preparation you do.
Before Buying a Home, You May Need to Improve Your Credit Score
The higher your credit score, the more money you’ll save on your mortgage. That’s why building your credit is often a smart first step for future homeowners. While it’s easy to use your credit card like a bottomless trust fund, it’s definitely not a smart move-- unless you want to be paying sky-high interest rates on your home loan. Here’s what your credit score might mean in the home buying process:
<660- 680: Scores less than 660- 680 will often require borrowers to pay especially high interest rates, or, alternatively, may require a larger (20%+ down payment.)
700- 720: Scores between 700 and 720 will be able to get you a reasonable deal, but not the best on the market.
750+: Give yourself a pat on the back-- since your credit is great. A credit score of 750 or more will usually get you the juiciest deals on the market, with lower interest rates and small down payment requirements.
To improve your credit before buying a home, pay all your bills on time, pay off any outstanding credit card balances, and avoid taking out any new credit cards or loans for around a year before you want to buy a home.
If your credit score is particularly low (and it doesn’t look like you can bring it up fast enough), you may want to consider looking into an FHA loan, which has a minimum FICO credit score of 580. Alternatively (if you qualify), you may want to look into a VA loan or a USDA loan, which both have much more lenient credit requirements.
Figure Out Your Home Purchase Budget and Build Up Your Savings
While you might want a $10 million mansion in Hollywood or Manhattan, that doesn’t necessarily mean you can afford one-- and lenders know that. That’s why, in most cases, the cost of the home you can buy is limited by your monthly income. For example, lenders offering conventional loans typically don’t allow mortgage payments to exceed 28% of a borrower’s monthly income. FHA loans are somewhat more flexible, with a limit of 31% of a borrower’s monthly income. To determine what your monthly payments might look like, check out our mortgage calculator. Compare that against your monthly income, and you’ll get a good idea of your home purchase budget under a variety of different scenarios.
While it’s important to understand how much you can afford, it’s also important to have some money saved up. Unless your eligible for a VA loan (which requires zero down), you’ll have to make a downpayment, which can often be between 10-20% of the home’s price. Plus, you’ll have to pay closing costs-- which can also be expensive if you’re not prepared.
Get Pre-Approved and Start Looking For Your Dream Home
Getting pre-approved can be one of the smartest ways to speed up the home purchase process-- and it’s a good idea to get your pre-approval before you even start looking for a home. That way, sellers will know your serious, and when you see a great deal, you can jump on it immediately. Otherwise, you could be wasting your time, since other buyers who are pre-approved will have a huge leg up on you-- and could snatch your dream home away right before your eyes.
Finally, when you find the home you really want, buy it! While it’s important to be realistic, don’t settle for something you don’t like. Since the average homeowner has to stay in a home at least 7 years to see a financial profit, you might be there a while-- so it’s essential to buy a home that you and your family can truly enjoy.