If you are thinking about buying your first home, you need to start planning now. It takes time and effort to find the perfect home and get the best rate on your mortgage. Here's what you need to do.
1. Create a Plan
Buying a home is a major investment, and it is likely one you will be locked into for several years. If you change your mind or find yourself needing to move, you could be out thousands of dollars in closing costs or have to sell your home at a discount. Make sure you have answers to the following questions.
- Is your job stable, and do you have the desire and opportunity to stay in the same location?
- Do you need extra bedrooms or yard space for kids or pets now or in the future?
- Do you have any unresolved credit problems?
- Are you living paycheck-to-paycheck, or do you have extra money to cover emergencies?
- Do you know where you want to be in five years?
2. Improve Your Credit Score
Your credit score directly impacts your interest rate, and over the course of a mortgage, a higher rate could cost you tens of thousands of dollars. Your first step is finding out what is on your credit report by visiting annualcreditreport.com.
FICO scores are the most common credit scores, and you can learn how they are calculated directly from FICO. The most important steps you need to take are:
- Not opening any new credit cards or loans until you have closed on your mortgage
- Bringing any past-due accounts current
- Paying down your credit card balances
3. Calculate What You Can Afford
While you want to get approved for a mortgage, that should not be your main goal. You should go in determined to comfortably afford a home. If you do that, a mortgage approval will come naturally.
When you compare your current rent to monthly mortgage costs, do not forget to add property tax and homeowners insurance payments. You will also need to set aside money to cover repairs and appliance replacements.
If you have an auto loan or credit card debt, don't forget to subtract those payments from your monthly cash flow. Be realistic about the rest of your budget as well. If you like to go out a lot and hate coupon-clipping, don't set a frugal budget unless you're really going to change your spending habits.
You can use our mortgage calculator to determine what mortgage payment you can afford and what down payment you'll need.
You should plan to save for three things: a down payment, unexpected repairs, and a general emergency fund.
Twenty percent is the ideal down payment because you will not have to pay for private mortgage insurance (PMI) if you put a minimum of 20 percent down. Many lenders want to see at least a 10 percent down payment, although federally backed mortgages are available with down payments as low as 3.5 percent. Remember a higher down payment means lower monthly payments and possibly a lower interest rate as well. You can also talk to a TDECU Mortgage Loan Officer about available no-money-down options.
You may need savings to cover unexpected expenses like a broken air conditioner or a leaky roof. Do not rely on a credit card or personal loan; you do not know if you will be approved or what interest rates will be when an emergency happens.
Your emergency fund should cover three to six months worth of living expenses in case you lose your job or fall ill. Include all mandatory expenses such as food and minimum payments on credit cards. When deciding how long your emergency fund should last, consider things like the stability of your industry and whether you have a spouse who also works.
5. Get Preapproved
If you are ready to shop for a home, get pre-approved for a mortgage. Even if you have calculated what you think you can afford, you want to make sure your credit union agrees with you so you can shop within the right price range.
Also consider if you find your dream home, there is a good chance it is someone else's dream home as well. If a buyer with cash or a preapproved mortgage makes an offer, the seller may not want to wait to see if you will be approved.
6. Make Sure You Will Be Happy in Your New Home
Shopping for a home can be exciting, and the real estate agent will tell you how great the home is, but don't get too caught up in the moment. When you are in a home for years, the little things that do not seem like a big deal during an open house can be major sources of irritation when you live with them every day.
Before you buy, make the drive to and from work during rush hour. Find out how easy it is to make a quick run to the grocery store when you forget something for dinner. Figure out where you want to go on weekends and make those drives as well. If you don't like the appliances or bathroom, find out what it will cost to renovate the home to your liking.
There are plenty of great homes out there, and it can take time to find the perfect fit. TDECU is here to help you through the entire home-buying process from planning to getting a mortgage to moving into your new home.