Five Things To Do Before Becoming a First-Time Home Buyer
Buying a home is one of the biggest decisions in life. It may seem like something you don’t have to worry about because it’s not something you’re planning on doing anytime soon. But a more pressing matter is at hand way before you ever plan to buy: your credit score. The lower the score, the higher the interest rate, and the lowest scores may be denied altogether. Becoming savvy about your standing will prepare you for when the time comes. Be the friend that has all the answers, and start planning your path from renter to owner.
- Get an Outsider’s Perspective. Would you give yourself a loan? Getting to know how you look to lenders can give you insight to your next steps as a buyer. First, take a look at your credit score, and review the details. Oftentimes, buyers are unaware that they have been victims of identity theft, or that erroneous charges are impacting their scores. Awareness and correction of these issues have immediate and positive implications to your credit. There are numerous sites offering free credit reports to help you with this important first step.
- Build Your Credit. Get current on all payments and do your best to pay off any debts in their entirety. If, in the past, you have made late payments or have substantial debt it will impact your score, and this will take time to rebuild. The most beneficial move you can make is to learn from these mistakes and be patient—building your score takes time and diligence.
- Maintain Credit. Do not open new cards or make any large purchases you cannot pay off within the month. But do not close any existing credit accounts—you want to maintain as much available credit as possible, showing lenders you are responsible with the credit available to you is important. Your first priority is to pay off any outstanding balances on credit cards; your second is to save as much as you can for a down payment on your prospective home.
- Determine What You Can Afford. It’s in your best interest to have about 20% saved for the down payment of a home, with additional funds for closing costs. You may choose to purchase a home with much less to put down, and many buyers do just that. If you do, keep in mind that without at least 20% in equity you will be subject to mortgage insurance until you fulfill 20% equity (at which point you may refinance and suspend insurance payments) and factor this into what you can afford monthly. It’s also important to understand that owning a home is a luxury that comes with responsibility. Things can go wrong with houses, and they are usually costly. Make sure that you have room in the budget to save for unforeseen expenses.
- Get Preapproved. A realtor can put you in touch with lenders who will be able to preapprove you and give you an amount that you can count on for a loan. Your credit and annual salary are the key factors in deciding how much you are approved and at what rate. You can do this with various lenders and “credit shop,” but be aware that as your credit is checked, it is slightly impacted (“dinged”) each time a lender looks into your history.
Home ownership can be a very fulfilling and rewarding experience, especially when the right steps have been taken to ensure your financial well-being. Speak with an American Heritage representative today to get one step closer to home ownership.