As a renter, you probably don’t anticipate throwing money at rent for the rest of your life. You probably want to own a home at some point, but how do you know when you are ready? How do you prepare? These are often the most asked questions from those that do not own a home yet.
Luckily, there are a few simple steps you can take to help make 2018 the year that you are ready to buy a home!
Know Your Credit Score as a Renter
It’s impossible to get approved for a mortgage without knowing your credit score. It’s the first thing most lenders look at before they approve or deny your application for a mortgage. Once you know your credit score, you can decide what your next step should be:
- If your credit is below 680, you’ll want to figure out why. Is it due to late payments, over-extending your credit, too many similar types of accounts, or is your credit too new? These are some of the most common reasons.
- If your credit score is above 680, you’ll want to keep it there. Keep paying your bills on time and refrain from applying for any new credit until you get your mortgage.
If your credit score needs some work, get to it. The changes won’t happen overnight, especially if your credit score is rather low. It could take six months to a year before you see real results, so make sure you take this step first.
You need money to buy a house and not just the lender’s money. You are going to need your own money too. How much you need depends on several factors:
- The purchase price of the home
- The mortgage program you choose
- The amount of equity you want in your home
Mortgage programs vary quite a bit. You can secure 100% financing with a USDA or VA loan. This means you don’t need a down payment. But, you may need money to cover your closing costs. If you don’t buy a home in a rural area (USDA loan) or are not a veteran of the military (VA loan), you’ll need some type of down payment.
The following are the most common down payment options:
- FHA loans – 3.5% down payment
- Conventional loans – Minimum 5% down payment, but need a 20% down payment to avoid paying Private Mortgage Insurance
Unless you are going to live in a rural area or are a veteran, you’ll need to start saving. It’s never too early to start, no matter how long you think it will be before you buy your own home. Even though it seems hard while you pay rent, there are some simple ways you can start saving:
- Bank all tax returns, raises, and bonuses
- Cut down on ‘extras,’ like manicures, coffee shop trips, and shopping sprees
- Save all $5 or $10 bills you have, rather than spending them, put them away; they quickly add up
- Grocery shop with coupons
- Cut down on eating out
These habits might not seem like they would help you buy a home, but every dollar counts. The sooner you start saving, the quicker the interest on your savings can begin compounding. Before you know it, the small investment you made can add up rather quickly.
Find a Mortgage Lender Before Buying a Home
Again, even before you think you will look for a home, you’ll want to find a lender. You’ll need that lender’s help before you start the act of shopping. The lender has the final say in what you can buy because they supply you with the loan!
When you start shopping for a lender, you’ll want to ask for a pre-qualification. This is nothing concrete – it’s not even a pre-approval. It’s just the lender’s estimate of how much loan you can afford. Once you have a few lenders that provide you with a pre-approval, you can decide which lender(s) you want to move forward with in the process.
Once you choose a few lenders, you’ll move to the pre-approval stage. However, you won’t do that until you are serious about searching for a home. In the meantime, you’ll have your ducks in a row because you’ll know which lender you want to try to secure an approval from when you are ready.
Secure the Pre-Approval
Once you have enough money saved and are confident your credit score is in better shape, it’s time to get that pre-approval.
This time, when you talk to the lender, they will pull your credit. They will also ask for proof of your income, assets, and liabilities. They will do a few calculations that determine how many debts you have compared to your gross monthly income (as they calculate it). They will also gauge your assets compared to your new loan. They’ll determine how much money you may need for closing costs and your down payment combined. They’ll then use the leftover assets (if any) as reserves, which is money you can use as a backup should your income falter.
Don’t get discouraged if you can secure a pre-approval from every lender. Each lender has their own requirements. Some are good with risk and others only like ‘A’ paper loans or loans for borrowers with absolutely no issues. If a lender turns you down, it’s acceptable to keep shopping until you find one that will issue that pre-approval letter that you need.
The final step with a lender is the pre-approval letter. This will state how much money you may borrow and what conditions exist. This is the letter you’ll use to help you get in sellers’ good graces as you shop for a home.
The final step, when you are ready, is to buy a home! If you do all of the hard work upfront, it will be a much easier process for you in the end.