Are you ready to own your own home? Looking to make an upgrade from giving money to a landlord to putting that same money into an investment for yourself? Do you want to take advantage of super low interest rates on mortgage loans?
You are not alone! However, if you’ve never owned a home before, there are a few basic steps to take to prepare for the financial commitment of becoming a first time homeowner.
We are currently preparing to buy our first home, and we’ve learned a few things about the first few steps to home ownership that are super helpful that we want to share.
If you are preparing to become a first time home buyer, we’ve got three tips for you to make sure you are prepared to make this large and exciting purchase.
How Much House Can You Afford
The first step to take when preparing to buy your first home is determine how much house you can afford. How do you figure out how much house you can afford? There’s a few steps you can take to get started.
- Figure Out Your Total Monthly Take Home Income If you and a spouse or partner are purchasing the house together, add both incomes together for your total income.
- Calculate Current Monthly Debt Payments If you have other debts like student loans, credit cards or car payments, find the total amount you pay on those each month. Take your total monthly debt payment and divide it by your total monthly income--this is your Debt-to-Income Ratio. An industry-wide standard is to keep your debt-to-income ratio under 30%. This number, along with a good credit score, will help you get approved for a traditional loan.
- Determine A Comfortable Monthly Mortgage Payment Along with your mortgage payment, you’ll also need to pay homeowners insurance, and potentially private mortgage insurance.
There are two rules of thumb to follow in regards to how much house you can afford: Keep housing costs under 28% of your gross income and keep all debt payments under 45% of your after-tax income. So even if you find a house that is under 28% of your gross monthly income, but your total debt is over 45% of your net income, you should work on paying down more debt before purchasing a home.
Check Your Credit Score
Your credit score can play a major role in determining whether or not you receive a traditional home loan, and the interest rate associated with that loan. You may be asking yourself, what is a good credit score?
There are a couple benchmarks to take note of: In most cases, a score of at least 620 is needed to secure a traditional loan, however your loan rates may be less than favorable, and you could end up paying quite a bit in interest payments.
As your credit score increases, the interest rate on your mortgage loan decreases. If you’re looking to increase your credit score, there’s some basic things you can do:
- Pay down your debts like student loans, car payments and credit cards
- Pay more than the minimum payment on debts
- Limit the number of new credit accounts or loans you open
- Don’t miss any payments that are due
Prepare Your Down Payment
Sometimes saving for a down payment on a home can be the most daunting part of a new homeowner’s journey. The rule of thumb has been traditionally to save at least 20 percent of your down payment to secure better interest rates from the bank. If you are looking to purchase a home for $200,000, you’d need to save at least $40,000 for a down payment.
Does that number feel intimidating? You’re not alone! Many people struggle to save enough for a down payment, let alone save for an emergency fund. If you’ve never saved before, I have recommendations on how to get started saving. I also have some tips on ways to cut costs to allow you to save more. These will help you get started on your path to savings and homeownership.
Look into Non-Traditional Home Loans
There are multiple programs available to help first time homebuyers, and different loan types that can help cover those initial costs.
Conventional Loans are your traditional, normal loans. You need to have at least a FICO score of 620 to qualify and if you don’t have 20 percent for a down payment, you’ll need to purchase mortgage insurance. These loans can be for any home and have very little restrictions on this loan.
Government Loans There are multiple loan options available to help those who may not be able to qualify for a traditional home loan. These non-traditional home loans include
- VA loans that are only available to those who have served in the military or their surviving spouses
- USDA loans that are available to homeowners looking to purchase homes in rural communities
- FHA loans are loans sponsored by the Federal Housing Administration and help those who have lower credit scores and not much saved for a down payment still find a way to purchase a home.
Explore First Time Homebuyer Programs
Many states off their patrons programs and grants to help first time homeowners secure a loan and purchase a home. These programs require participating in some learning programs, but once completed, the purchaser may be granted money that can be used for a down payment, closing cost assistance, or lower interest rates. Nerdwallet offers a list of resources by state to figure out what is needed where you live.
Homeownership is an exciting milestone in life, and we’re so excited to share our journey to purchasing our first home. If you want to learn more about financial security and wealth, read some of my other posts: