Have you found yourself dreaming of having Christmas in your own home next year? Do you have the dream of home ownership for 2018? Here are some steps you need to take in order to prepare to buy a home by the end of 2018.
1) Check Your Credit Score – You can go to the free website creditkarma.com or use the free app. Credit Karma will give you updates on two of your three credit scores, credit history, and suggestions on how to improve your score.
You can also go to annualcreditreport.com and request free annual credit reports from all three credit reporting bureaus: TransUnion, Equifax and Experian. For a small fee, you can also get your credit score.
Check the reports thoroughly for any errors that need correcting and any negative information.
A higher credit score makes it easier to qualify for the lowest interest rates, which in turn lowers your mortgage payment. Did you know that higher credit scores also affect your auto insurance rates?
2) Save Money – The average down payment rates for home buyers in various programs are 3%, 3.5%, 5%, 10% and 20%. There are criteria and benefits for each of these rates and programs, but that’s a different, more detailed blog post. You will also need about 3% for closing costs, although sometimes you can get the Seller to help with the costs. You will also need readily available funds for your Earnest Money Deposit, the Home Inspection and your Appraisal. Although there are down payment assistance programs, Seller Concessions and real estate rebates and credits at close of escrow so your costs may be lower, it is still a good idea to have all of these fees saved so you have home buying options.
One suggested saving strategy is to save the difference between your rent and what you estimate your mortgage payment will be—or more. It helps contribute to your cash reserves to buy a home, and you’ll need to prove to a lender that you can afford housing payments that may be higher than what you are currently paying in rent.
Dave Ramsey suggests you are also out of debt, you have 3-6 months of expenses in your emergency fund, plus enough cash for a 10–20% down payment on a 15-year fixed mortgage. He also suggests that you pay cash up front or your mortgage payment is no more than 25% of your monthly take-home pay.
A standard rule for lenders is that your monthly housing payment (principal, interest, taxes and insurance) should not take up more than 28% of your income before taxes. This debt-to-income ratio is called the “housing ratio” or “front-end ratio.”
3) Earn Extra Money – If you’re low on cash, as most first-time buyers are, consider taking drastic steps to cut spending. Or try some ways to increase your income, such as selling some of your stuff or taking a part-time job.
4) Start Scouting Neighborhoods – Unless you already know where you want to live, take the time to visit a variety of potential neighborhoods. You’ll want to scout out neighborhoods that meet your needs in terms of school districts, public transportation options, and distance from home to work and traffic challenges you might face, as well as seeing what amenities your neighborhood might provide. Exploring different locations will help you narrow your priorities.
One app you can use to see houses listed in your area or other neighborhoods throughout the US is Home Scouting. You can use the website or download the app. Use the VIP code “CaraCz” for a free subscription.
Once you have made significant progress on those first four steps, it will be time to talk to a Lender and gather more information and start with the next steps. (See next week’s blog post for that additional information).
Home ownership is a beautiful thing. Let me help you bring your dream to fruition.