Buying a home can seem intimidating. It’s easy to become confused and overwhelmed by complicated terminology, bank procedures, and all the crazy advice out there. My husband and I just closed on our first home less than two weeks ago. While the process is fresh in my mind, I went ahead and assemble the most honest and recent advice for buying a home. This advice is realistic and applicable to almost everyone. Let’s get into it!
Your Credit Score is Important
Time and time again we hear “gurus,” tell us that our credit score does not matter when purchasing a house. This is false. Your credit score needs to be at least 640 for most loan types, but the higher your score, the better. Look over your credit score and see ways you can improve it. If your score isn’t great or as great as you’d like it, consider merging your student loans into one loan, paying down your credit card balances, or removing old or inaccurate information.
You Need Cash
We rarely consider the need for cash when speaking about purchasing a house. After picking the perfect house, you will still need to pay for your deposit, closing costs, inspection, and more. Also, consider the cost of moving, moving supplies, appliances, decorations, furniture, cleaning supplies, fresh groceries, turning on utilities, and more. As you work on your credit score, learn to decrease your expenses and save money.
You May Need a Down Payment
I heard so many myths about whether we should or shouldn’t need a down payment, but in the end, we did. However, it was substantially lower than the magical 20% they have taught us about. You are not required to place a 20% down payment on the house. Why do we hear so much about that darn 20% rule? Because 20% is how much you need to put down to avoid paying for mortgage insurance (MI). Usually, the cost of mortgage insurance is anywhere from 0.4% to 2.5% of the total loan amount. For example, if you purchase a home for $250,000 your MI could be from $1000 to $6250 a year.
Big Takeaway: The lower your down payment, the higher your monthly mortgage payment. You may also pay a higher interest rate if you have a lower down payment because you present more of a liability. With the current cost of houses, saving 20% may take way too long but you do not need 20% to get into a new home. Simply save as much of a down payment as you can and keep moving forward.
There’s No Perfect Time for Buying a Home
No matter what time you set out to buy a house, people will always say it’s a bad time. Right now housing prices are up and options can seem scarce. However, interest rates are down. Depending on your goals and needs, this may be a great time for you to look into buying a home.
You May Not Get Everything You Want
Between the higher costs of housing and limited inventory, you may not immediately get everything on your wishlist. This is a reality that you need to be ready to accept. Sit down and consider what is most important to you. What are your deal breakers? What are your must-haves? Also, remember that you do not have to live in the house you purchase forever. You may only live there for 3-5 years or until you can afford more. There is no shame in working your way up.
Buying a Home is Still Possible if You Have Student Loans
Your mortgage lender is more interested in your debt to income ratio than just the total amount of student loan debt you have. You calculate your DTI by dividing your monthly debt payments by your monthly gross income. The number is then expressed as a percentage and mortgage lenders use that to determine how much free money you have and if you can afford a mortgage loan. Your DTI should be around 40% or less. It is said that whether you are currently making student loan payments or not, about 1% of your total student loan amount will count towards your debt-to-income ratio. This means if you have $100,000 in student loan debt $1,000 will be counted towards your monthly DTI. This is something you should speak to your loan officer about. My husband and I consolidated our student loans, which boosted our credit score, and our loan officer helped us better under our DTI.
Fixer-Uppers Aren’t for Everyone
We’ve all gotten sucked into a binge session or two of our favorite fixer-upper show on HGTV. However, please remember that fixing up a home can be incredibly expensive and time-consuming. Be honest with yourself and the person you’re purchasing a home with about what you really want and can realistically do. While buying a home that is a fixer-upper can be tempting because of the lower price, remember that repairs can be extremely costly and unpredictable. If you still have an urge to buy a fixer-upper, consider buying a home that you can live in comfortably while making subtle upgrades.
Mortgage Isn’t Your Only Homeowning Expense
While a mortgage is your biggest expense to calculate, don’t forget HOA fees, insurance, taxes, utilities, and upkeep. Everything costs something and you will be footing the bill for everything. Just because you are pre-approved for a $200,000 loan does not mean that you should purchase a house for that amount. After purchasing, fixing/ upgrading, and furnishing a home, you still want to have some savings and wiggle room in your budget.
Buying a Home Will be Stressful but…
Yes! I said it. Purchasing a home will be stressful. The preparation process can be filled with discipline and moments of denying yourself comforts in order to get your finances in order. Then the pre-approval process can be nerve-wracking. After that, there’s the journey of searching for and viewing homes until you find the perfect place to bid on. While you’re praying that your bid doesn’t ignite a bidding war, you may begin to wonder if you’re truly ready for all of this! Finally, after your offer is accepted, you can begin the 30 to 45-day process of closing, which includes submitting and reviewing a crazy amount of paperwork.
This process can take weeks, months, or even years, but in the end, you will have a beautiful home that you can call yours. It’ll be your own piece of paradise and peace. The journey will be worth it. I hope this has helped you get started or learn more about the home buying process. Don’t forget to subscribe to stay updated on all that is going on here at heytherejae!