This year you want a piece of the American Dream, a home with your name (and the bank’s) on it.
I’m assuming you’ve already done your due diligence on whether you should buy or rent. And maybe you’ve even researched areas and neighborhoods where you’d like to live.
But here are the 4 steps you need to take NOW if you want to buy a house this year:
Step 1: Know the costs of buying a house.
Sure, you did a buttload of research when you decided to become a homeowner.
But do you really know the costs of buying and owning a home?
You’ve probably played around with a mortgage calculator and you may know that if you are using the VA Home Loan Benefit, you won’t be required to make a down payment on a house. But there are a lot of other upfront costs involved in the home buying process.
You will need cash for an earnest money deposit to attach to your purchase offer (the amount varies depending on the locality, but it can go as high as 5% of the purchase price).
You will need to pay for a home inspection ($325 or more), and a portion of the closing costs, which also vary depending on local custom, but can include semi-mysterious things like an appraisal fee, wire transfer fee, document prep fee, underwriting and origination fees, title insurance and a recording fee.
Once you’re in your home, there are a bunch of other expenses including homeowners insurance, property taxes and utilities.
Does your prospective neighborhood have homeowners association fees? You may also want to look into a separate flood policy. If you don’t have a lawnmower, a ladder, and other basic maintenance equipment, you will need to acquire them. Depending on the age and condition of your home, a home warranty may make sense.
Step 2: Know your budget and how it’s going to change once you buy a house.
You already have a spending plan, right? If you’re like most folks, you actually have an idea of your income flow (how much money comes in each month, and what bills you have) but not a true spending plan.
Now is the time to create a working budget. That way you can see where you currently are and can also have a more realistic picture of what type of house payment you can afford (remembering that the costs mentioned above need to be included – it’s not *just* your mortgage payment that you should be concentrating on!)
Pro-tip: Once you have figured out the amount that you think you will be paying each month as a homeowner, I often suggest to people that they try to pretend for a few months like they are already a homeowner.
For instance, if you think that being a homeowner may cost you $300 more per month (remember that in your budget you should be assigning a monthly cost to homeowners insurance, taxes, HOA fees, plus 1/12 of the cost of that fancy riding lawnmower and edger), take that and put it into a separate savings account. If you feel pinched at the end of a few months, you may need to reassess the house buying process, re-examine your spending plan or look for a less expensive property.
Step 3: Save, save and save as much money as you can.
Many military buyers don’t put down any money at all on their new homes. But that doesn’t mean you shouldn’t save. Homeowners definitely need a rainy day fund to cover things like broken water heaters, leaky roofs and clogged drains.
Pro-tip: It is often suggested that homeowners keep 1% of the value of their home in an account to cover maintenance costs for a year.
So if your dream home is $200,000, you need an emergency fund of about $2,000.
To fund your account, find ways to cut back. Eat out less, switch to pre-paid cellular and do away with Netflix. Becoming a homeowner is a huge achievement, and that should help motivate you.
Step 4: Know your credit score and how that number impacts your interest rate.
Hopefully you have gotten your credit report recently and made sure that it is accurate. If haven’t looked at it lately, then you should head on over to annualcreditreport.com to do so. Many credit card companies and banks are providing free credit scores these days.
But being credit-savvy doesn’t end with just knowing your “number.”
First of all, make sure that the credit score you are looking at is a FICO score. This is the type of score that 90% of mortgage lenders use (the “free” scores you sometimes see on websites may be a Vantage or some other type of score). Lenders typically look at FICO scores from all 3 credit bureaus and they can be different.
The interest rate you get on your mortgage is going to depend on this score, so it makes sense to be credit-wise. For instance, if you know you are going to be applying for a mortgage, don’t do anything that is going to negatively impact your score. This would include opening new credit cards or taking out new installment loans. However, your credit is also impacted by credit history and your debt to credit ratio.
The longer your credit history, the better you look to mortgage underwriters. So if you know you will be applying for a loan soon, you should not close credit cards, especially older cards that you may have had for years. Closing cards can also impact your available credit.
The debt to credit ratio is how much of your available credit you are using at any given time.
So if you have a credit card with a $2,000 credit limit and you have charged a $1,000 laptop on that card, you have a debt to credit ratio of 50%. Your score will typically take a hit when you go over 30%. You may have the money in the bank to pay off that card when the statement comes, you may have every intention of paying that statement in full on its due date. But the FICO score algorithm doesn’t know that, so you will get dinged.
The way to manage this is if you know you will be applying for a mortgage soon, don’t keep balances on your credit cards. If you charge something, pay it off before applying for credit. You can also ask for higher credit limits on your cards to increase your available credit, but unless you do this well ahead of time, it can cause a temporary dip in your credit score.
Buying a house is a big decision. The process can be complicated and confusing. But with a little bit of research and prior preparation, you can achieve your real estate dream this year.