Huge thank you to our friends at Re/Max Dynamic and Donyale Kramer for jumping into this podcast idea with us! 🙂
First Time Home Buyers Start the Process 3 Years Out
It is never too early to start planning. For most people, buying a home is the single largest financial investment they will make in their lifetime. Here is what to focus on at least 3 years before you plan on making a purchase:
Step 1: Save, save, and save some more!
There are several things to save for:
- Down payment – There are various types of loans which require you to put down anywhere from 0-20% down. However, the only way to avoid Private Mortgage Insurance (PMI) is to put down at least 20% or more. PMI is essentially a monthly premium you pay to the insurer on behalf of the mortgagor. The coverage will pay a portion of the balance due to the mortgage lender in the event you default on the home loan. In the end, the thing to remember is the more your put down, the lower your monthly mortgage payments will be. If you cannot afford to save 20% down do not fret. Most homebuyers are not able to reach that amount.
- Closing costs – Closing costs include the fees for the services and expenses required to finalize a mortgage. Average closing costs for the buyer run between about 2% and 5% of the loan amount. It is possible to negotiate for the seller to pay some or all of your closing costs depending on the situation. Your realtor can advise you on this.
- Inspections and appraisal – Prices for these services vary. You should plan on saving anywhere from $800 – $1200 for these combined.
From the above, this means you should save $25,000 for every $100,000 plus the inspection costs. This does not include your 3-6 month expenses nest egg!
Step 2: Clean up your credit
- Pull Your Credit Reports – FICO reports…not Credit Karma! Credit Karma provides VantageScore credit scores independently from credit bureaus. Although VantageScore’s system is accurate, it’s not the industry standard; the companies that will approve or deny loan applications are more likely to look at FICO scores. You can look into creditsesame.com to monitor as well. The credit bureaus are required to give you their report for free without affecting your credit score every 12 months.
- Go Through Your Credit Reports Line by Line
- Dispute Any Errors
- Try to Get Past-Due Accounts Off of Your Report
- Lower Your Credit Utilization Ratio – Try to keep it at 30% or less.
- Take Care of Any Outstanding Judgments or Loans
- Sign up with a reputable credit monitoring service
Step 3: Lower your Debt to Income Ratio (DTI)
The lower the debt to income ratio the better. So for example, if I make $50,000/year, but have a student loan payment of $350/month and a car payment of $300/month, my total debt monthly payments is $650. This would make my debt to income at 16%. Lenders like to see at DTI less than 35%. My total remaining monthly income for a house then would be about $3,500 to bring me to that 35% mark.
However, even when we purchase a house, we should be well below the 35% DTI ratio. This is why it is so important to continuously bring down debts so you can afford more debts at a better rate. The higher the debt to income ratio, the harder it is for you to get more debt at a reasonable rate.
Step 4: Save your most recent 2-3 years of Tax Returns
Lenders want your tax returns as another added level of protection against fraud or misrepresentation of income.
Two Years Out of Home Buying
Keep on saving
The more the better. Beyond the costs of purchasing the home, you should strive to put away 3-6 months of budgeted expenses. Home maintenance, repairs, and unforeseen events happen!
Keep credit on track
Check into your credit monitoring regularly.
Keep debt low
Remember the 30% debt utilization rule of thumb!
One Year Out
You should still monitoring your savings, debt, and credit scores. Once you’ve gotten this on track it should be smooth sailing!
Also at the one year mark, you should also begin interviewing Realtors, educating yourself on the home buying process, home ownership, and current market conditions.
3 to 6 Months Out
Pre-Approval & Visiting Homes
At this point, it is time to get serious! Interview lenders and get pre-approved so you know what your buying power is. And, as always, keep your credit clean and your debt down.
You can also start canvassing neighborhoods by doing drive by’s or even taking walks through neighborhoods that you are interested in. Try going through at different times of the day as well to give yourself a real sense of what it’s like.
Another helpful activity is to attend Open Houses at homes in your price range to get a real gauge on exactly what your money will buy for you. You can even take notes on your visits…after seeing a few houses they will all start to run together!
0 to 3 Months Out
The time has come to buy a home! You have prepared diligently, and you are at the threshold of your future! Check with your lender to see if your pre-approval needs to be updated. The importance of being pre-approved before you make an offer cannot be emphasized too much!
Go on showings with your realtor and make an offer!!
This blog was cowritten by: Donyale Kramer of Re/Max Dynamic.
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