The homeownership rate increased by more than 2 percentage points last year, to 67.4%. And there are plenty of tenants keen to join the club, especially as mortgage interest rates have fallen to all-time lows during the coronavirus pandemic.
For first-time home buyers, the process of owning a home can be daunting. It’s a big purchase that comes with a host of responsibilities and costs. But it’s also a long-term investment that can help secure your financial future.
For some, it may take longer to achieve the American Dream – especially if you already have debt, live in an expensive neighborhood, or are just starting your career – while others may already have all the pieces in place. to buy a house. No matter how much you earn or how much you have in the bank, it’s always a good time to start thinking about buying a home.
Here we outline what you need to do to gain ownership in 2021 or beyond.
How to budget for home ownership
- How much can you afford?
- Create a list of needs vs. desires
- Where can you afford a house?
Every major purchase should begin with a carefully crafted budget, which should include your debt, income, and assets. You’ll also want to realistically assess the costs associated with home ownership. How much can you afford in total for monthly mortgage payments, home insurance, taxes and homeowners association fees (if applicable). Also, be sure to leave some wiggle room for unforeseen expenses.
This will give you a clearer picture of what you can afford and how much you have available for a down payment. Our online calculator can help you determine how much home you can afford.
Potential buyers who live in expensive areas might need to get creative when it comes to buying a home.
“One option might be to find a seller who is willing to pay ‘rent to own’. In this situation, you start by renting and at some point exercise a purchase option, ”says Chuck Czajka, founder of Macro Money Concepts. “You might also be able to find a seller who would be willing to give out a private mortgage. Finding an affordable home can mean a smaller home or even a condominium.
Restoring your credit
Get your credit in order because it has a direct effect on your interest rate.
Whether you have no credit, average credit, or bad credit, getting your FICO score in the best possible shape is a crucial step in buying a home. To qualify for a conventional mortgage, you must have a minimum FICO score of 620 to work with most lenders. There are other loans, such as FHA and VA loans, with more flexible or no credit score requirements, so you can still buy a home with a lower score.
However, the second reason to improve your credit score is that you will benefit from a better interest rate with a higher credit score. The lower your interest rate, the less interest you will pay each month and for the duration of your loan.
If you need help managing your money or finding ways to improve your credit, speak with a financial advisor.
“Find someone who not only has a good reputation, but also someone with whom you feel connected,” says Peter Boomer, Executive Vice President of PNC Bank. “Someone who is willing to build a relationship with you not only helps you figure out how much you can afford, but also someone who will help you figure out how much you want to afford. “
Save for a down payment
A down payment is one of the biggest barriers to home ownership for most first-time buyers. As home prices continue to rise, so does the cost of a down payment, especially if you want to avoid private mortgage insurance (PMI). The PMI is an additional charge on top of your regular monthly mortgage payment, typically – around 0.58 to 1.86 percent of your loan payment. Homeowners who have put less than 20% down payment must pay PMI if they have a conventional or FHA loan (VA loans do not have this requirement). The charge goes away once you have accumulated 20% equity in your property.
If you have saved less than 20% for a down payment, you should add the PMI to the list of housing costs when you calculate your budget.
Most first-time buyers have to tap into savings or investments to have enough money for a down payment. Family members can also contribute to your down payment, which usually requires a gift letter. A real estate agent can help you draft this document, just be sure to include all the necessary information such as the amount of money given to you, a statement that the money is a gift not a loan and where the money comes from (current account, etc.).
Once you know how much you can put aside, you can decide to postpone homeownership until you’ve saved more. For people with less than 20% who want to keep costs down in the long run, another option is to pay off your loan faster by making higher monthly payments than required. And, if your home is rising in value quickly, you can get a new appraisal to show that the balance has fallen below 80% of the home’s value, which can also eliminate the PMI requirement.
If you’re planning to buy in a year or two, the safest place to put down your money is in a high yield savings account.
Identify the best type of mortgage for you
It is important to determine what type of mortgage you want and what you qualify for. A real estate agent can help you identify loans and lenders that match your goals and your financial situation. Now is a good time to get recommendations from friends and colleagues.
If you have a FICO score below 620, you may not be able to get a conventional mortgage. But other options, such as FHA, VA, and USDA loans, may be available. However, these loans come with certain restrictions that conventional mortgages do not have.
For example, it is more difficult to get relief with an FHA loan. This is where you need to go back to your balance sheet and compare what you have with what you need and want. Different loans offer their own set of advantages and disadvantages, so it is important to research them carefully.
Those who want to pay off their loans sooner and get a lower interest rate can opt for a 15-year mortgage rather than the traditional 30-year mortgage. A shorter term means higher monthly payments, but a lower overall loan cost because you pay less interest over the life of the mortgage.
Homebuyers on a fixed budget are generally better off with a longer loan, and they can still make additional payments on their principal if their budget allows – without the continued obligation of larger monthly payments. If someone loses their job or an urgent expense arises, they can stop making additional payments and pay only the minimum required, until they can afford to increase their expenses again later.
“I advocate taking a 30-year mortgage over a 15-year mortgage, just because the monthly payments will be lower,” Czajka said. “This way, buyers can become their home. If they decide to pay off the house sooner, they can pay a bit more in principal as they get used to the new budget.
Get pre-approved for a mortgage
Before you start shopping for a home, find out how much mortgage you qualify for. The best way to do this is to get pre-approved.
You will do this by providing lenders with detailed information about your employment history, income, debts, assets, and credit profile. The lender will verify the information you provide, including performing a credit check.
If you are pre-approved, you will receive a loan estimate showing the amount you can borrow. A pre-approval letter is a great asset when shopping for a home because it lets sellers know that you are a serious and qualified buyer.
Before signing a home purchase contract
With your pre-approval letter in hand, you can start shopping. This is the exciting part of buying a home. You can imagine the parties you’ll throw by your new pool or the long soaks you’ll take in your oversized master bathroom.
But avoid letting yourself be guided solely by your emotions, warns Boomer. It’s important to take the time and research everything from the neighborhood to schools, especially if you have a family or plan to start one, even if it’s later. As more homeowners are staying in their homes longer, it’s wise to think about what you might want in a few years.
“Don’t be in such a rush to make a buying decision. Start by investigating the region in which you wish to live. If you are considering starting a family, check out schools in the area. Look at other homes nearby to see if the neighborhood expands and prices will rise, ”Boomer says. “The last thing you want to do is buy the biggest and best house in the neighborhood. Starting with a home that needs a little tidying up can pay off later when it’s time to modernize it. Buy a house for a lower price, fix it, and sell it later later.