Buying your first home is likely to be one of the larger purchases you’ll make in your life, so it’s not something you should take lightly. Not to mention, the decisions you make directly impact your family, especially when it comes to money. You want to make sure you’re buying the right home, in the right school district, and that you’re making a smart investment in the long run.
A lot goes into home buying, and on your first journey, you’ll need to take it step by step. Seek guidance from professionals and ask questions, so you know exactly what you’re paying for and prevent yourself from drowning in debt. Read on to find out what financial considerations you can’t overlook before buying your first home.
How Much Debt Do You Have?
The first step before buying a home is to assess how much outstanding debt you already have. Having credit card debt, student loans, or even medical expenses doesn’t mean you can’t buy a home, but it does have an impact on your eligibility to get approved for a mortgage.
One big determinant of your ability to get approved for a mortgage is your debt-to-income ratio (DTI). This number is the percentage of your gross monthly income that is spent on monthly debt payments like credit cards, student loans, car loans, and mortgage payments. The more obligations you have, the higher your DTI ratio will be, which ultimately lowers your credit score and leads lenders to perceive you as a risky borrower.
This is why it’s so important to reduce your existing debt as much as possible before applying for a mortgage. Instead of continuing with excessive spending patterns, break the cycle with some new helpful habits that give you more freedom to pay off loans. Clearing out loans will not only ease your financial stress, but it will also improve your readiness to buy a home. With a bit of budgeting and dedication, you can conquer those loans and gain some peace of mind when entering a major investment like a mortgage.
What Is Your Credit Score?
Your credit score, similar to your debt-to-income ratio, is one of the most significant determinants of your fitness for a mortgage. Studies show that the minimum credit score of qualified homebuyers is 500 for federal loans and 620 or higher for loans with stricter requirements. Your credit score is calculated based on your payment history, credit age, as well as several other factors.
It’s important for families to note that if your spouse has poor credit health, it does not affect yours. However, when applying for a mortgage, lenders look at both of your scores, which will affect your likelihood of getting approved. Another important takeaway is that it can take years to build up a healthy credit score, so you’ll want to start tending to your credit score several years before purchasing a home. Make sufficient payments on time, pay down existing debt, and utilize popular budgeting apps to keep all your bills straight. Doing so will raise your score and better your chances of acquiring a loan.
What Costs Are Associated With Entering a Mortgage?
First of all, when you enter a mortgage, you’re committing to a monthly payment based on the specific terms of the loan-your payment factors in principal, interest, property taxes, homeowners’ insurance, and HOA fees. Once you’ve built up equity in your home, you can use that to become eligible for home equity loans or cash-out refinancing. These types of loans give you access to cash that you can use to put toward home improvements, consolidate debt, or give your savings a boost. Of course, talk with your fiduciary financial advisor about whether or not this is the right move for you and your individual financial plan.
Beyond the mortgage payment itself, there are other associated fees as well. These include, but are not limited to: lender fees, appraisal fees, home inspections, title-filing, down payments, and closing costs. The hefty amount of expenses that come with buying your first home makes saving money prior to purchasing that much more critical. Do your research and make sure you know what you’re getting your family into before diving right in.
How Much Money Have You Saved For Buying Your First Home?
So, after learning about the importance of saving, just how much do you need to save? While every situation is different, there are a few statistics that can guide you in the right direction. For conventional loans, for example, it’s recommended to put 20% down on your home, but for those who are short on cash, you can still get approved for an FHA loan while putting down only 3.5%. To get a better idea, research the average cost of homes in your area and start crunching numbers.
On top of doing your own research, having a conversation with a mortgage expert can be extremely helpful, especially for first-time homebuyers. A specialist will be able to outline all available loan options and give you an idea of the amount of cash you’ll need to sign on the dotted line and move in. Re-examine your savings account and decide if you’ve developed a sufficient cushion, or if you and your family need a few more years of extra saving.
If you’re concerned about your lack of knowledge regarding home buying, you’re not alone. If you haven’t owned a home before, you can’t be expected to know every detail, which it’s why it’s recommended to lean on trusted professionals who can give you insider tips and recommendations. Or, you can talk to some friends or family members who have been through it before. Either way, the more you learn, the better off you will be. Make smart choices with your money and ensure purchasing your first home is the best decision you could possibly make.
Farther-FamilyVest is your fiduciary financial advisor in Destin, Florida.
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