First Time Buying a Home? – Timing Is Everything
In all the excitement of buying a house, it’s easy to rush into the process, but slow...down…just...a …little. Moving too quickly could lead to disappointment. The simple truth is, it can take years of preparation to purchase a home, but here are the steps you can take now to get you closer to the dream.
Start Building Your Credit Today
Buying a home is an expensive proposition. The median home price in the U.S. comes in at $329,000, according to the Federal Reserve Bank of St. Louis. Given the high cost of homes, you’ll likely need to finance the purchase, and lenders will require a credit history before approving you for a mortgage loan.
Building a credit history can take three to five years, so it’s a good idea to start young and take sensible steps that can help you establish a credit profile.
How to Build Credit
For example, many college students are eligible for low-limit credit cards through their bank. If used for small, regular purchases and paid off each month or regularly over a twelve-month period, you can start building your credit long before you’re going to typically purchase your first home.
Getting a car loan is another way for you to build credit, and most responsible borrowers will qualify. By making regular, on-time payments, you’ll establish a credit history while enjoying the privilege of owning a car.
The idea here, is to engage in small lending transactions. By responsibly managing these debts, you’ll be building a positive credit history for future borrowing.
Understand Home Pricing and Financing
It is important to realize up front just how much it will cost you to buy in the area you hope to live and how much you can borrow to finance the home you have your eye on. This is often where the home buying process gets real for people as dreams and expectations bump up against the truth of how much they can truly afford to pay.
Figuring Out How Much House You Can Afford
Your mortgage lender will consider two calculations when determining how much you can actually afford to borrow for a home purchase. While both are based on debt-to-income ratios, the first takes into account your gross monthly income in relation to the predicted mortgage payment you will make. In general, the total cost of your payment shouldn’t exceed 28 to 30 percent of your total gross income, including the cost of property taxes and homeowner’s insurance.
Second, your lender will consider your gross income against your total debt, including outstanding credit cards, student loans, or other purchases you may have financed, such as an auto loan. Once your proposed house payment is factored in, your total debt should not exceed more than 45 percent of your gross income.
To simplify, if your monthly income is $4,000 and you pay a monthly auto loan of $500 and a payment of $100 on a student loan, that means that 15 percent of your gross pay is tied up in debt. As a result, your house payment cannot not exceed 30 percent of your income, or $1,200.
Often, a potential homeowner will select the home of his or her dreams, only to find out that they don’t qualify for the financing. That’s why it is important to talk to a lender and get a ballpark idea of how much how much you can finance before you start looking for homes in your area of choice. You may have to look elsewhere should prices there exceed the amount for which you can qualify.
It’s also important to consider creating a budget strategy as much as three to five years in advance, as this number will lead you to the next step in the home buying process—saving for a down payment.
Saving for Your Down Payment
Most mortgages will require a down payment. This amount varies depending on your credit and buyer status, and the type of loan for which you apply. For example, first-time buyers are often eligible for low down payment financing through government-backed programs, such as an FHA loan. However, the down payment for a conventional loan type can be a higher percentage of the total purchase price of the home.
How Long Does it Take to Save for a Down Payment?
Saving for the down payment could take one to three years, depending on how much you’ll need to put down and your budget. A good way to determine how long it will take, is to look at how much you can afford to put aside each month. Then, divide the total amount you’ll need for a down payment by this number.
Once you’ve accumulated several hundred dollars or more, you may want to speak to your bank about the different types of saving accounts available. Perhaps it will make sense to put some of your funds into a CD for example, where your money earns interest at a slightly higher rate but is untouchable for an established period of time. Even if it takes several years for your funds to grow, resist the temptation to dip into your future-home savings. The rewards will be worth the wait!
Success! It’s Time to Look for a Home to Buy
Once you’ve met your down payment requirements, it’s time to start shopping! Who should you call first…your realtor or your lender? To get off on the right foot, call your loan officer to discuss financing. They will understand the landscape of the current home market and pricing, and you can bring up any new developments to your financial outlook.
Your loan officer can then issue a prequalification or preapproval, which can be a major advantage when you find a home and want to make an offer. A “prequalification” means that your loan officer has reviewed your situation, crunched the numbers and thinks you look good to move ahead with offers. Keep in mind that on a prequalification, there hasn’t been an intensive evaluation of your credit and history. This higher level of scrutiny comes with a “preapproval,” which often carries more weight with sellers, particularly in highly-competitive markets.
The great news, with either a prequalification or a preapproval, you’ll learn exactly how much home you can afford. Once you’ve found a house in your price range, made an offer and been accepted, you’ll move into the loan origination process. On average, you can expect this to take 30 to 45 days from application/approval to closing, but timelines can vary.
During the loan application process, it’s very important to mind your budget and not take any actions that could adversely impact your financial standing.
Top 7 things NOT to do during the mortgage application process:
- Don’t buy or lease an automobile
- Don’t increase balances owed on credit cards
- Don’t move assets from one bank account to another
- Don’t attempt to consolidate bills before speaking with your lender
- Don’t change jobs (if possible)
- Don’t run your own credit report
- Don’t put away your important documents
Preparing to buy a home can take time. To be successful, make sure you start well in advance and seek the guidance of a mortgage loan officer. They are dedicated to guiding you through the process and will be there to answer your questions, every step of the journey. It may take several years, but the pay-off will be oh, so gratifying when you’re handed the keys to your very own home, sweet home.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.