5 Things to Do Before You Start Shopping for a Home
If you are planning to buy a home in the near future, and especially if you’re a first-time homebuyer, there are some important steps to take before you even begin looking at possible homes. These things aren’t as exciting as looking at properties, but they will make the whole process much easier if you do them well before hiring a real estate agent and shopping for a home.
1. Get a credit report
Taking out a mortgage to purchase a home is a major financial commitment, and lenders will look closely at your credit score and history. It’s important to get a credit report before you begin the process of buying a home. Your credit score will be a significant factor in determining the interest rate a lender will give you, so you need to know what it is. Getting a credit report will also let you see your credit history, and allow you to dispute any errors that might be hurting your score. You can also identify opportunities to improve your credit, like paying down the debts with the highest interest rates or monthly payments.
2. Put a hold on new credit activity
2. Put a hold on new credit activity
Lenders will run a credit inquiry anytime you apply for a new line of credit, such as a new credit card or car loan. These inquiries can temporarily lower your credit score, which will make getting a good interest rate on a mortgage harder, or affect the interest rate or loan terms after you’ve received a pre-approval from a lender. So avoid opening any new lines of credit until after you’ve closed on a new home.
3. Set a goal for down payment savings
The down payment on a first home may be the single largest payment you’ve ever made, so saving for it can take time. First-time home homebuyers can often put down less than the standard 20%, but even a smaller down payment of 3% or 5% will be a substantial amount of money if you’ll be buying a $200,000 – $300,000 home. And often putting down less than 20% means higher monthly payments, not only because the principle will be greater, but also because lenders will typically require private mortgage insurance with down payments of less than 20%. Ideally, your savings for a down payment should be separate from other savings, so you aren’t cutting into your emergency savings or money set aside for retirement.
4. Set a realistic limit on your budget
Before setting your sights on a dream home, it’s important to calculate how much you can safely afford. Use a monthly payment calculator or a home affordability calculator to figure out what monthly payments you can expect with given home prices. Then honestly assess what your income can support, minus other debts and monthly expenses. If you are used to paying rent, don’t automatically assume you can afford a monthly mortgage payment equivalent to your current rent. Homeownership comes with many expenses beyond mortgage payments, including property taxes, homeowners insurance, mortgage insurance, and unexpected costs such as repairs.
5. Look at down payment options
Coming up with money for a 20% down payment can be a major challenge for a first-time homebuyer, so if you find that prospect overwhelming, explore programs that exist to serve people like you. Federal Housing Administration (FHA) loans are often a good option if you can’t afford a higher down payment or qualify for a conventional mortgage, allowing down payments as low as 3.5% and easier qualification standards due to FHA backing. If you are a veteran or active-duty military, VA loans can be a great option, often requiring no down payment and lower interest rates. And of course, family can be a great option for funding a down payment, so don’t hesitate to ask if a family member might be willing to contribute with a gift or private loan.
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**DISCLAIMER: Please note that interest rates, APR’s, closing cost, and monthly payment examples on this page are for illustrative purposes so that borrowers can better understand how programs work. Consumers should note that mortgage rates, APR’s, and payments will likely vary from what is listed in the examples given. Mortgage rates change frequently and not all borrowers will be eligible. Additional restrictions may apply. Please call and speak with a 247 Home Loans mortgage representative for the most up-to-date information.
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