Buying Your First Home: When Are You REALLY Ready?
January 9 2019 Posted by Colleen Macdonnell, AMP
Purchasing your first home is the dream of a lifetime and a massive investment toward your future. The process is full of hopes and aspirations but is also a huge commitment to take on. For those who are embarking on the journey of home ownership, there can be several causes for celebration and setbacks along the way. Before you decide to start looking for your first home, you should make sure you are ready to take on the challenge.
Credit Score Reality Check
Do you know your credit score? Your credit score is the most critical factor to consider when beginning the journey along the path to home ownership. A credit score is a three-digit number assigned to your credit worthiness by the three credit bureaus, Equifax, Experian, and Trans Union. Your score may be different among the three bureaus and is impacted both positively and negatively by your bill payment history, the amount of money you owe, and how often you apply for credit. Most mortgage lenders will not provide you with a loan if your credit score is less than 620, and you will not get a good interest rate for any number under 650.
Actively monitor your credit score using a smartphone app, and check your credit report often for errors. You are entitled to one free credit report from each bureau annually and can purchase more if you want to check it out more times throughout the year. Be on the lookout for any errors that can have a negative impact on your credit score and dispute them as necessary. It is important to also keep in mind that it takes up to 30 days to challenge an error, and you will not be able to apply for any new credit during the dispute process.
Find a Mortgage Broker Quickly
Your mortgage broker will be a vital asset along the journey to home ownership. Do not let a poor credit score keep you from contacting potential mortgage brokers! A good mortgage broker wants your future business and can help out with vital tips and tools to get your credit score in a good position for a loan deal.
Once you have found a mortgage broker, he or she will most likely take an initial look at your credit history to see where your credit stands. If your credit report is not mortgage ready, he or she can provide you with tools and information to work on bringing your score up. For unusually low ratings, it can take up to a year or more for your score to raise to mortgage loan acceptance levels; don't give up as this process is more like a marathon than a sprint. Listen to your mortgage broker carefully and take the necessary steps to improve your score. Your mortgage broker will then check in on your progress every few months.
Look at Some Houses
While you are in the process of getting your credit score to loan approval standards, research and find a real estate agent you click with and start building a relationship with that person. To keep the momentum going and to start establishing what kind of home you want, take a few home tours and visit some open houses. There is nothing like the excitement of visiting a few prospective homes to keep your eye upon the end prize and keep you progressing in the right direction toward the end goal. Take a notepad with you so you can make notes about the homes you visit.
Save, Save, Save
The path to home ownership is a stringent test of frugality. This time in your life, you want to stop spending and save every penny you can. Even if you have a down payment tucked away, there will be many expenses that pop up along the way, and you want to be ready for anything. Your mortgage broker may ask you to pay off a bill as part of the conditional approval, you may have to pay for home inspections, and there is also the possibility that the seller could ask you to pay for closing costs as part of accepting your purchase offer for the home.
Along with saving is the rule that you should not purchase any big-ticket items before you get moved into your new home. A last-minute purchase of furniture, an appliance, or a vehicle can make your mortgage deal fall through in an instant.
Conditional Approvals and Pre-Qualification Letters
At some point along the way, your mortgage broker will send you a pre-qualification or conditional approval letter, which shows you have met the requirements of obtaining a home loan. It also shows a seller that you are a serious buyer. When you receive this letter, you can bask in the glory for a moment or two and then starting looking for the house you will eventually call home.
Study Your Potential New Home
Once you have found a home you wish to make an offer on, take some time to do your research so you know what you are getting yourself into. How old is the home? Is there any asbestos or lead paint to worry about? Has the house had extensive repairs due to natural disasters? Is it in a natural disaster-prone area? What is the crime rate in the neighborhood? How are the schools? The list goes on and on, and getting answers to the questions can save you a lot of money and headaches in the long run.
Buy What You Can Afford
Just because you are pre-qualified for a specific loan amount does not mean you have to buy a home up to that exact price. It is perfectly reasonable and prudent to consider your pre-qualification amount as merely the maximum of what you can spend. Before signing an offer, negotiate to the lowest best price and review your finances, especially if you need to buy furnishings and pay extra money for utilities eventually. The primary financial rule is that your home payments should not cost more than 40% of your household net income.
Signing the Contracts
The final step of purchasing your first home is finalizing the mountain of paperwork and signing the contracts. The home closing process takes 30 to 45 days, and is filled with its own anxiety and stress. Be sure to ask any questions you may have to your real estate agent, mortgage broker, or escrow officer during the process if there is something you do not understand. It is also not a bad idea to have your attorney look at any and all documents before you sign. Once your paperwork is signed, it gets submitted to your mortgage service for final approval and you should get the green light to move into your new home within a week.
Purchasing your first home is a big deal, and it is essential that you are ready to take on the responsibility before you sign on the dotted line and receive the keys. For some, the road to home ownership will be long, with some speed bumps along the way, but all of the speed bumps will get you one step closer to the ultimate dream. Take some time to make sure all of your affairs are in order and that you have some money tucked away to cover whatever unexpected expenses come your way.