Did you make a resolution to become a homeowner this year?
When you make the decision to purchase a home, it’s the first in a long line of other decisions to be made throughout the process. At the beginning, it helps to clearly define what is best for your unique situation. Highlighting what may be a deal breaker from the beginning can help save you time and even money in the long run. Typically the old saying “location, location, location” reigns supreme, but here are some other things to consider:
How big is your family? Will you have any other family or extended family members living with you?
Which neighborhoods are you willing to consider? Do you need to be close to work, family, amenities, etc?
Are schools a factor?
Do you prefer a single-family home, a multi-family home, a home with an in-law apartment, or a condo?
Are you willing to be a landlord and have tenants that can help pay the mortgage?
Based on your current income and assets, what kind of home can you afford?
What is your current credit score?
In a perfect world, you’d find your dream home, in your neighborhood of choice, at a price you can afford – however, realistically most people will have to make some compromises. It may help to make a list of all the features you want from your home and then assign them a priority. Do you need 3 bedrooms? More than 1 bath? A garage? Outdoor space? Write down everything you want and then decide what is a deal breaker and what you are willing to compromise on. For instance, determine whether the house or the neighborhood matters more to you, or whether you’re willing to make a longer commute in order to own a home with more land. Use this as a guide when you start to look at houses.
It’s important to know what your current credit score is and what is reporting to your credit report. By law, you can get a free credit report from Annualcreditreport.com once per year. You can also contact the three national credit reporting agencies – Equifax www.equifax.com, Experian www.experian.com and TransUnion www.transunion.com – and request a copy from each. The three agencies are independent of each other and the information may differ on all three reports. In addition, you may not know which agency your lender will use to check your credit, so it’s best to verify that all three have correct information about your credit history. If there are any red flags, or incorrect, inconsistent or derogatory information, it’s best to know ahead of time and correct it before going into the homebuying process.
Determine what you can afford and are willing to pay
Your lender will take into account your income, debt, down payment amount, and credit score, among other things. Lenders set limits on your DTI (debt to income ratio), which means that your monthly costs cannot exceed a percentage of your income. However, this may be different from what you are comfortable with actually paying. Determine what makes the most sense for your monthly budget based on all of your income and expenses, and then work backwards from there. You can also use our online calculator (www.scmtg.net/calculator) to get an idea of what your payment might be.
Save for a Down Payment
Most mortgages require a down payment, and although there are programs that require little to no down payment, it’s still a good practice to begin saving right away. An ideal down payment is 20% or more. It’s also a good idea to keep those funds separate from any other funds so that you are not tempted to spend them before they are needed. We also suggest putting aside some liquid cash for any moving expenses or out-of-pocket expenses that may come up throughout the process.
Here are some ways to save for a down payment:
Create a “down payment fund.” Create a separate savings account and auto-transfer a fixed amount into it weekly or monthly. Commit to not tapping into this money for anything other than the down payment.
Lower your commitments. An easy way to save some money is prepare your lunches and coffee at home to avoid overpaying for the conveniences. But you can also shop around for lower prices on your monthly bills. If you can cut down things like insurances and memberships, you can put that extra money into your down payment fund.
Get rid of high interest debt. If you have high interest credit card debt, pay the highest interest off first. If you have a high interest car loan, consider refinancing it.
Everyone once in a while you might get a “windfall” – like an income tax refund, birthday/holiday gift, work bonus or large commission. Stash that money in your down payment fund and get to your goal faster!
Sell your stuff. Decluttering is a great thing to do before moving anyway, so start the process early by gathering up anything you don’t use and turn it into cash! Hold a yard sale or sell things online – think eBay, Facebook marketplace, or apps like Let It Go and PoshMark.
Borrow from a relative. Some loan programs allow for 100% gift funds to be used when purchasing a new home. Bonus if you can get no interest loan from a generous family member.
Borrow from your investments. Some 401k plans offer no-penalty withdrawals. You could also sell some of your current investments to put into the new home.
Side hustle! Consider a second job or side hustle and put all of your earnings from that into your down payment fund.
Grants and Assistance. It’s worth it to do a quick search to see if there are any home buyer assistance programs available to you. There are more than 2,400 of these type of programs in the United States and they offer down payment help in the form of grants, low interest or deferred loans, forgivable loans, help with closing costs, and more.
Get Pre-Approved for a mortgage
Once you determine what you can comfortably afford, call one of our licensed and experienced loan officers to get pre-approved for the right loan product. We will discuss your current and future financial situation and goals, review some documentation, pull your credit report and determine what you will qualify for. This will give you a good idea of where to start in your home search. Having a pre-approval is a great starting point for home searches – it will give you an idea of what you can afford
Consider working with a REALTOR®/Real Estate Agent
Consider using a REALTOR® or Real Estate Agent to assist you as a buyer’s agent in your home search. Although both must be licensed to sell real estate and complete continuing education courses annually, there are some differences. A REALTOR® is affiliated with the National Association of REALTORS® (NAR) and the local REALTOR® Board. They must adhere to NAR’s 17-article Code of Ethics and it’s various Standards of Practice, which is strictly enforced by the local board. Whichever you choose, the agent will have access to the most up-to-date information on the market and is often an expert in negotiation. You will work closely with your agent, so make sure to choose someone who is experienced and that you can trust and get along with. You may even interview several candidates until you find the best one for you. The right agent should be highly skilled, motivated, and knowledgeable about the area while keeping your best interests first. They are there to help you make the best decision possible and get you into the best home possible.
TIP: You do not pay a buyer’s agent. Once they find you a home, they are offered a “co-broker” compensation that is already set by the seller’s agent. You don’t pay anything out of pocket for their services. If you need a great agent, we can recommend one that we work with!
Buying a home can be a long process, but saving ahead of time and learning as much as you can about the process gives you a great advantage. Saving for a down payment may seem scary, but there are many ways you can save up a good amount of funds. When you feel you have enough saved and you’re ready to begin your home search, lean on the experts in the field, like your Loan Officer and Realtor, to help you through the process with ease.
Are you a #HappyHomeowner? We’d love to hear about it! Tell us on social media or email email@example.com.
South County Mortgage is a licensed mortgage brokerage providing better than bank service and better than bank rates to Rhode Island residents for over 20 years. Visit our website for more info, www.scmtg.net.