5 Things to Know When Buying A House
Updated: Oct 23, 2020
Five things to know when buying a home:
Hey (future) Homeowner!
Buying a home is a major accomplishment. As you plan and save, I’m sharing a few tips to ensure your success.
Here are 5 Things to Know When Buying A Home
Your credit score matters. Manage your credit affectively because those three numbers play a large part in getting an approval from a mortgage lender. Ranging from 300 - 850, this number communicates your history of managing credit and paying your creditors. In the lending world, the higher the better. You can get your annual credit report for free from the three credit bureaus, Equifax, Experian and TransUnion. You can also utilize apps that will display your scores, give you tips about maintaining and boosting your credit scores, and offer the opportunity to dispute items on your report if needed. Most lenders want your score to be 620 or higher, so aim to keep your score in the high 600s.
Your debt matters. Just like with your credit score, your debt plays a large role in the approval process. For the lender, loaning you money to purchase your home is all about risk; they want to know that you are going to pay them back. To ensure they are making a safe bet with you, they will want to know how you’ve paid your creditors in the past to determine if you will pay them back in a timely manner. One of the ways they determine that is with your credit score, which we’ve already discussed. The other way to do that is to determine your debt to income ratio. They want to know how much of your money is already allocated to other creditors. To do this, they will use your monthly gross income (before taxes are taken out) and divid it by the total amount of debt you have. This will give them a percentage. This will tell the lender if the home purchase will result in you being “house poor” meaning all of your income is tied up in debt giving you little money to serve as a cushion.
Down Payments matter: Depending on the loan you use, a down payment is required. It can range from 3.5% - 20% of the purchase price of the home. Because of this requirement, it is imperative that you start saving money to satisfy the down payment required to purchase your home. Down payment money can be pulled from your personal bank accounts, your 401k, stocks and it can come from family and friends.
Common Loan Types
FHA - this is a government loan that allows for the smallest down payment, which means you won’t have to use as much of your funds for down payment as you would for other loans. The FHA loan requires 3.5% of the purchase price of a home. If the home you are interested in purchasing is $100,000 your down payment will be $3,500.
VA Loan - This loan is available for our veterans, thank you for your service. The VA loan offers 100% financing meaning you are able to purchase your home with $0 money down.
Conventional - Conventional loans are attractive because, with a 20% down payment, you will not have the monthly expense of mortgage insurance. This helps save money on your monthly payment. Using our $100,000 home as an example, a 20% down payment is $20,000.
Be sure to speak with a lender to determine the qualifications for each loan to determine which loan is the best fit for you.
5. Home inspections matter: A home inspection is useful for telling you the status of the home. The results of the inspection can influence your decision to purchase. If damage is revealed you can choose to walk away or ask the seller to address it. If there are no major areas of concerns you can move forward knowing you’re purchasing a home that is well constructed. To purchase a home inspection, you’ll contact a home inspector and pay them for their services. You can find an inspector on the internet or through a referral.
Want more home buying details? Get your Home Buying Guide + Planner today!