(Thespruce) – For many of us, it’s one of the biggest moves we make, both personally and financially. With a little know-how, you can make it happen now. It all starts with three simple steps: Get ready, get set, go!
- Get Ready
Do you have what it takes to be a homeowner? If you’re motivated, the energy and time required to purchase your first home will take care of themselves. But, the money? It may not be as much of a hurdle as you think. Once you set a budget and know what you need and can afford to borrow (and how to borrow it!) then you’re on the road to happy homeownership. Get ready with three simple steps:
Make Sure You’re Credit-Worthy
First, you’ll want to know your credit score. Your credit score plays a major role in determining how much you can borrow and the interest rate that you may qualify for on your mortgage. Before you apply for a mortgage, make sure that your credit reports are accurate and that your score is as high as possible. If you’re just starting out, a lack of credit history may be a challenge, along with high balances on your credit cards. Unsecured debt, like credit cards, should be paid off first. Car loans and student loans are generally less of a problem. If you’ve been paying those off on time every month, this can actually be a big advantage in establishing credit history. Your credit score can also impact the amount of down payment you’ll be required to make.
Set A Budget
Next, you’ll want to calculate roughly how much you can afford to borrow and pay each month on a mortgage. Create a budget based on your current income (even if you’re expecting an increase) as well as all of your current monthly expenses, including student loan payments, car payments and health insurance. Understand that your monthly mortgage payments will only be part of your monthly housing expenses. You’ll also need to estimate additional costs associated with your new home, including homeowners insurance, maintenance and utilities and property taxes. Until you find your new home, these will be estimates – but accounting for these first will help you set your price range more realistically.
Determine A Down Payment
Finally, consider your down payment. If possible, you’ll want to put down 20% of the total purchase price. However, there are more affordable options as low as 3.5%. Your lender can help you understand the options based on your financial situation and loan type. In terms of cash on hand, consider the closing costs and that you will typically pay the first year of your homeowners insurance a year in advance. Closing costs will generally include title insurance, title fees, recording fees, and loan origination fees. You’ll want to speak to a mortgage advisor early in your home buying to learn more about how much of a down payment you can afford.
- Get Set
Once you’ve got a sense of your budget and borrowing power, get set to make your next moves.
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Get a Mortgage Preapproval
Reaching out to a lender is the first step in applying for a mortgage. Once you’ve got your budgeting done, you’ll want to get preapproved for a mortgage. If you wait until you’ve found the home of your dreams to begin the process of applying for a mortgage, you could very easily lose the chance to buy it. Loan contingency is an issue. Don’t let it be yours. A mortgage preapproval will give you an idea of how much house you can afford, your interest rate and the types of loan programs you qualify for. A lender will only offer you the amount that you can afford to pay monthly toward your mortgage. This not only helps you set your price range, but also speeds up the mortgage application process so you can make an offer quickly and with confidence. Take time before you begin this process to gather all your financial documents (like tax returns) and begin tracking mortgage rates so you’ll know a good deal when you see it and be able to get the very best possible loan.