If you’re like most renters, you probably don’t plan on renting for the rest of your life. We all want a piece of home to call our own, but that goal represents the end of a long road. In this article, we will not be talking about that road, as it would be too extensive of a subject. Instead, we are going to focus on the initial preparations that you must make before the journey begins.
Step One: Check Your Credit Score
Chances are, you will have to borrow money at some point in this process. Not many people are able to save enough hard capital to buy a good-quality home. Instead, you will probably have to make a down payment and owe a lender for the remainder. Since this process involves borrowing large amounts of money, your credit score is of the utmost importance.
It is very easy to check your credit score. There are three major credit reporting agencies (Experian, Equifax, and Transunion), and all three of them will provide you with a free credit report upon request.
To understand the meaning of these numbers, you just have to understand that credit scores range from 300 to 850, with higher scores being positive and lower scores being negative. It is required that you have a credit rating of at least 500 to ensure that your home loan is approved. There are ways that you can improve your credit, although these ways have limits.
Step Two: Start Saving
Even with a good credit score, you are going to need a significant amount of available money to make the transition from a home renter to a homeowner. For one thing, you will definitely need the money for a down payment on the house. As a general rule, the down payment will be about 20% of the purchase price.
Right away, you need to know one thing: Do not accept a deal which involves a down payment of less than 20%. A low down payment might seem like a good thing since you would seem to be saving money in the short-term. This would be the case, except that most lenders don’t want you to go below this threshold.
To keep most buyers from going below 20%, lenders will demand that you get private mortgage insurance to go with the loan. Of course, this requirement should only apply if the down payment is less than 20%. Private mortgage insurance amounts to an extra monthly payment, because of the fact that it is technically a different policy.
At this point, it would be very helpful to trim your household budget in any way that you can. Of course, there are many ways to save money, but you should focus on those that provide that will provide significant savings. Here’s a little trick you can do to save money on your electric and water bill: Each morning, make sure to take showers as soon as you wake up. Then, wash the dishes if necessary. Do anything else that requires hot water, and then turn off your water heater at the breaker.
Because the water heater is one of the biggest power hogs in your home, leaving it off for most of the day will make a significant difference in your electric bill and (to a lesser extent) your water bill. You just have to make sure that you turn the heater back on before going to bed. That way, it will be heated and ready to use by the time you wake up. There are many ways that you can reduce the impact of your water heater on the electric bill.
Step Three: Figure Out Your Price Range
Once you have trimmed your household budget as much as possible and started saving money, you need to figure out how much you will be able to spend. This will keep you from committing to a home that is outside your means.
You will need to figure out how much you are adding to your new-home funds each month. This will tell you approximately how quickly those funds will increase. Multiply that number by 12, and that’s how much you will be able to save in a year. Now, just determine how many years you are willing to save money before buying a home.
Once again, remember that a down payment is at least 20% of the total purchase price. For instance, let’s say you want to buy a house that is worth $200,000. That will be a down payment of approximately $40,000. Let’s also say that you are adding $300 per month to your new-home fund. At that rate, you will need a little more than 11 years to save enough money. That is too long, and so you can do one of several things:
- Figure out a way to increase your monthly savings
- Look for a cheaper home
- Go for a sub-20% down payment term (not recommended)
Step Four: Look For The Right Realtor
Now, there’s only one thing left to do: Find a trustworthy realtor and begin looking for a house. From this point forward, your realtor should be able to guide you through the process. Of course, you should always do your research and make sure that everything is honest and legit. You might begin by looking at some reviews of your local realtors and seeking out those with the best reputations.
When your new-home purchase is still years away, it is easy to put it out of your mind. However, chess games are won by the person who can stay at least two moves ahead of the game at all times. We think that it’s a good idea to apply this idea to this situation, as a little bit of preparation can go a long way indeed. If we have aided your preparations and made you a little more ready to become a homeowner, please fill out the contact form below.