Buying your first home is exciting, but it can also be confusing and a little bit scary. On the one hand, your dreams of a home that’s all yours is becoming reality. On the other hand, it’s a big financial step, and making the wrong choice could cost you. Here are six steps you should take before you start visiting open houses.
Step 1: Check Your Credit Score
Your credit score has a direct impact on the mortgage interest rate you’ll qualify for. The higher your credit score, the lower your interest rate. A good credit score shows lenders that you don’t borrow more than you can manage and you pay your debts on time, which makes you less risky than borrowers with a lower score. If you want to save money in the long run, you need to make sure your score is in top shape before you apply for a mortgage.
If you’re not sure about your credit score, you can request one free credit report from each of the three credit bureaus — Equifax, Experian and TransUnion — every year. Just visit AnnualCreditReport.com or call 877-322-8228 and ask for copies of your report from all three nationwide bureaus.
When you receive your free credit reports, review each one closely for errors. You might find some mistakes, like erroneous late fees or account information that isn’t even yours. Spotting these errors early gives you the chance to contact the creditor and ask for a correction, so your credit score is accurate.
Step 2: Improve Your Credit Score
If your credit score is lower than you’d like it to be, don’t start cutting up all your credit cards. Before you take action, it’s a good idea to learn how to boost your credit score. Closing accounts may actually hurt your score because you’re reducing the amount of credit that’s available to you. You’ll also want to avoid applying for new credit cards for a year before you plan on applying for a mortgage. You can’t go wrong by simply paying off your outstanding balances and keeping your expenses low and steady.
Lenders want to see that you’re a dependable borrower and have a healthy mix of credit in your name. It may take a little time, but it is definitely possible to improve your score. If you’d like advice from an expert, contact us to learn more about the Money Makeover services we offer at any VyStar branch, or take a look at the free financial counseling services we offer through BALANCE.
Step 3: Get Your Paperwork Ready
Your lender will need to see some paperwork to fill out your loan application and verify your information. Before you meet with a lender, gather up your documents so you have all the details. Our Mortgage Application Checklist spells out everything you’ll need to share. In many cases, you’ll need the most recent copies from the last two years.
Step 4: See What You Can Afford
Trying to figure out exactly how much house you can afford can be a challenge. Your lender will tell you how much of a loan you qualify for, but you still want to make sure that you can afford the payments as well as your other expenses. Our mortgage qualifier calculator can help you crunch the numbers. You’ll need to consider the following costs:
• down payment
• monthly mortgage payment
• closing costs
• property taxes
• insurance
• repair or remodeling costs
This might also be a good time to create a budget if you don’t already have one. If you’re not sure where to start, our Budgeting Basics article can help. You can always get help from the Money Makeover experts at your local branch or our free financial counseling services.
Step 5: Start Saving
Start setting aside as much money as you can for your down payment. Depending on the type of loan you qualify for, down payments usually range from 3% to 20% of the home’s price. In some cases, your credit score will also affect the amount you’re required to put down.
You’ll also want to make sure you set aside at least a few months’ worth of mortgage payments. That shows your lender that you won’t be living paycheck-to-paycheck after you purchase your home. Plus, you’ll need that extra cushion in case the house needs any repairs after you’ve moved in.
Step 6: Research Neighborhoods and Prices
You’ll save time — and reduce frustration — if you do some research before you start looking at homes. Take a look online to see what’s available in your preferred neighborhoods and learn how homes are priced. Some sites will even let you compare the asking price to the actual sale price, so you can see if homes are typically selling for above or below the asking price.
As you look at the features and amenities of different properties, think about what you can’t live without and what you’re willing to sacrifice. Then, you can start developing a wish list you can share with your realtor when it’s time to go house hunting.