Buying your first home is an exciting milestone, but it can also be a stressful experience. A home is the largest purchase most people make in their lifetimes, so you have to be certain you’re financially prepared. When you’re confident that you’re financially ready to become a homeowner, you can approach the process with greater peace of mind.
Here are six steps to prepare to purchase your first home:
1. Increase Your Credit Score
A higher credit score will help you secure a lower interest rate on your mortgage, so boosting your credit should be one of your top priorities when preparing to buy a home. Make all debt payments on time, and check your credit report for any delinquent payments that you can dispute.
2. Pay Down Debt
Paying down your existing debt serves several purposes for future homeowners. It boosts your credit score, which helps you look more favorable to mortgage lenders. Additionally, it frees up your income, which will make a mortgage payment feel more manageable. Some financial advisors recommend paying off your debts with the highest interest rates first. Others suggest that you pay off your debts in order of smallest to largest.
3. Save for a Down Payment
The minimum down payment for an FHA loan, the most popular mortgage for first-time buyers, is 3.5% of the purchase price. However, putting more money down will reduce your monthly mortgage payment, and it may make your offer more competitive to sellers. Saving up a down payment can take years for first-time buyers, but patience is key. Keep careful track of your budget so you can put all extra funds toward the down payment, or consider finding an extra source of income to increase your savings.
4. Get Pre-approved
Pre-approval is incredibly helpful for first-time home buyers. It helps you and your real estate agent establish your budget, and it shows sellers that you’re serious about your offer. During the pre-approval process, lenders will scrutinize all aspects of your financial situation, including your income, debts, assets, and employment history. You should be prepared to provide documentation that confirms all of this information.
5. Make Sure Your Income Can Support a Mortgage
You might get pre-approved for a mortgage that you can’t actually afford. Before you buy a home, do a careful analysis of your finances to figure out how much you can reasonably pay toward a mortgage every month. The general recommendation is that your mortgage payment should be no more than 28% of your income. However, depending on your other monthly expenses, the ideal percentage for you may be different.
6. Don’t Make Big Changes Before Closing
Once you have an offer approved, you cannot make any significnat changes to your financial situation. Your lender will confirm that your financial circumstances are the same now as they were when you were pre-approved. Changing jobs, buying or selling a car, or opening a new credit card could result in your mortgage application being rejected. If you need to make any major financial moves, do them long before you apply for pre-approval and start making offers on homes.
It can take years to financially prepare for homeownership, but the pride and satisfaction you’ll feel when purchasing your first home is worth the effort. Keep careful track of your finances, pay down your debt, and save as much money as you can. Most importantly, you should always have a team of experts on your side. If you have any questions about buying your first home, consult with a trusted real estate agent.