Most homebuyers don’t realize how much goes into homeownership until they’re already househunting. From the initial down payment to monthly mortgage payments, there are a lot of financial factors to consider. And if you’re not prepared, the whole process can be overwhelming.
According to a recent study, nearly sixty percent of Americans say they would have trouble coming up with $1,000 to cover an emergency expense. If you’re in that same boat, now is the time to get your finances in order before shopping for a new home.
Here are a few tips to help you get started:
1. Know your credit score before you start househunting
Your credit score is one of the most critical factors in determining the result of your mortgage pre-approval application. If your score is on the lower end, you may still be able to get a loan, but you’ll likely pay a higher interest rate. Before you start house hunting, pull your credit report and check your score.
To do this, you can go to AnnualCreditReport.com or get a free credit report from one of the major credit reporting agencies, including TransUnion, Experian, or Equifax. These agencies will also give you your credit score for free. If it’s not in good shape, take some time to improve it. You can do this by paying your bills on time, maintaining a good credit history, and keeping your debt-to-income ratio low.
2. Save for a down payment
Traditionally, lenders require a down payment of 20% of the home’s purchase price. However, there are programs available that allow you to put down less. For example, FHA loans only require a 3.5% down payment, while VA loans don’t require any down payment at all.
Saving for a down payment can take time, so start as soon as possible. If you have a 401(k) or another retirement account, you may be able to borrow from it to come up with the funds. Just be sure to pay the loan back within five years, or you’ll have to pay taxes on the withdrawal.
If you cannot come up with a 20% down payment, don’t let that discourage you from buying a home. Just be aware that you’ll likely have to pay for private mortgage insurance (PMI), an added monthly cost.
3. Consider refinancing
If you currently have a mortgage, you may be able to lower your monthly payments and save money in interest through refinance mortgage loans. This is especially true if interest rates have dropped since you first got your loan.
Several refinancing loans are available, so talk to your lender about which makes the most sense. You may also want to shop around to see if you can get a better rate with another lender. Just be sure to factor in the refinancing costs, such as appraisal fees and closing costs. These can add up, so it’s essential to compare the total price of the loan, not just the interest rate.
4. Get pre-approved for a mortgage before househunting
Getting pre-approved for a mortgage loan is a good idea when you’re ready to start shopping for a home. This tells you how much you can borrow and gives you a better idea of what you can afford. Plus, it shows sellers that you’re serious about buying a home.
To get pre-approved, you’ll need to provide your lender with some financial information, such as your income, debts, and assets. Once pre-approved, you’ll receive a letter stating the maximum loan amount you’re qualified for. You can then use this as leverage when negotiating with sellers.
Some real estate agents may require you to get pre-approved before they work with you, so it’s best to do this before starting your house hunt.
5. Make a budget
Because a mortgage is a significant expense, you must ensure you can genuinely afford the payments. To do this, create a budget that includes your monthly income and expenses. Make sure to factor in your mortgage payment and things like taxes, insurance, and repairs.
If your budget is tight, you can do a few things to free up some cash. For example, you may be able to get a roommate or downsize to a smaller place. You may also be able to negotiate with your creditors to lower your interest rates or monthly payments. Some people also get a second job to help make ends meet.
The Takeaway: Prepare Your Finances So You Can Enjoy the Househunting Experience More Fully
Depending on your situation, you may need to make some sacrifices to afford your new home. But if you’re careful and strategic about it, you can make it work.
Purchasing a new home is a big financial decision. But if you take the time to save up, get pre-approved for a mortgage, and make a budget, you can make it happen. Before househunting, research and work with a trusted lender to get the best deal possible. If you do all this, you’ll be on your way to owning the home of your dreams.