Purchasing your first home is one of the biggest financial decisions you and your family will make over your lifetime. The idea of buying your first place can be both an exciting and nerve-wracking one.
As many families quickly learn it’s not as simple as touring an open house, deciding to buy and then letting your realtor work out the details. We’ve prepared these tips to help you stay in check, on budget and in balance:
Where do I start?
Financial counselors suggest starting with your credit report. “Now is the time to go through all three credit bureau reports for both you and your spouse, and find out where you stand,” says Marcy Musselman, Financial Counselor with Foresters Everyday Money.1
“You don’t want to wait until you’re already in the purchase process to find out there’s a credit problem for either of you, since it can take 30-60 days to correct even a simple error on your credit report.” Generally, credit scores above 640 are the minimum needed to qualify for traditional mortgages.
“Both borrowers will need even higher scores if you are hoping for a low down payment option,” Marcy explains.
Prequalified vs Preapproved
At a minimum, get prequalified for a mortgage loan before you begin home-shopping. Prequalification is the initial step in the mortgage process. You supply a bank or lender with your overall financial picture, including your debt, income and assets.
After evaluating this information, a lender can give you an idea of the mortgage amount for which you qualify. Even better, obtaining a preapproval will put you at the top of the list with sellers if you find a home where multiple buyers are making offers.
Even without a competitive bidding situation, a preapproval will ensure that you are shopping for homes you can afford and that the financing is already worked out – saving lots of time, headaches and hassle.
Start saving now
For most loans you will need a 20% down payment to avoid mortgage insurance premium (MIP) surcharges or private mortgage insurance (PMI), which drives up the cost of the loan and monthly payments.
Even if you are fortunate enough to have a low or no down payment option, you will still need funds for closing costs, reserves and to demonstrate to the lender that you can handle financial situations (such as an increase in property taxes), that may arise once you obtain your loan.
Plan on approximately 2% – 5% of the purchase price for closing costs in addition to any down payment you will be making. Attend a homebuyer seminar in your area. They have information on local down payment assistance and other incentives you may qualify for.
Although it may seem overwhelming at first, buying your first home can be a smooth and (almost) stress free experience with just a little bit of preplanning.
1. In the United States and Canada, Everyday Money is provided by ask AFS
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