The reasons for owning a home are as unique as you are. Maybe it’s because you’re ready to settle down and start a new chapter. Or perhaps you’re looking to build some equity and reduce your taxable income. But no matter the reason, it’s always important to enter the home buying process as prepared as possible. These steps can help you make informed decisions as you consider buying your first home.
1. Determine if home ownership is really for you
The costs and responsibilities involved in owning a home can be overwhelming if you’re not prepared for them. “Home ownership is a lifestyle, and it’s not for everyone,” says Laura Adams, personal finance expert and author of Money Girl’s Smart Moves to Grow Rich.
If you’re thinking of buying, ask yourself how comfortable you are with putting down roots. “Before you buy a house, you need to be sure you’ll be living in one place for at least five years,” Adams says. That’s about how much time it will take to recoup your purchase costs. Otherwise, depending on the market, you may be tied to your home or forced to rent it out if you want to move.
2. Shop for a mortgage before you shop for a home
“A lot of first-time homebuyers have their hearts broken because they fall in love with a house they can’t afford,” Adams says. Your mortgage lender can determine a home price that fits your budget. Ideally, your payments shouldn’t exceed 25 to 28 percent of your monthly gross income, but it’s important to factor in your total debt, too.
Thoroughly research all of the mortgage products available to you. When interest rates are low, a fixed-rate mortgage can be a stable and affordable option, especially for buyers who intend to stay in their homes for many years. But the average first-time homebuyer turns over his or her investment in ten years.1 If you plan to sell sooner rather than later, an adjustable-rate mortgage2 with a lower starting interest rate may make more sense. Either way, knowing your options up front will help you choose a property, price and mortgage product that fits your overall plan.
3. Save for a down payment
A down payment is an upfront cost when buying a home. The amount you need to put down will depend on a variety of things like the type of loan, the home’s location and your income. It’s never too early to start saving for a down payment, so it’s helpful to look at ways you can reduce your current expenses. “The majority of your money probably goes to housing costs, so that’s where you need to look,” Adams says. Reducing rental and living expenses by taking on a roommate or moving in with someone can help you save more money faster.
Making a budget can help keep your spending in check, and automating your savings guarantees that you pay yourself first. “Most employers can deposit a portion of your paycheck directly into a savings account for you,” Adams says.
4. Order your credit report
In order to qualify for a mortgage at a favorable interest rate, you need to demonstrate you have the income to make the loan payments and the inclination to do so. Your credit report is a record of your bill-paying history, and it shows a lender how responsible you’ve been about paying your debts. “The higher your credit score is, the lower your interest rate will be,” Adams says. Correcting any errors on your credit report and paying down your debts before you apply for a mortgage can help boost your credit score and get you a better rate.
Approach home buying with confidence by being financially and emotionally prepared by incorporating these suggestions as you make your house hunting plans. So when the right home comes along, you’ll be ready.