Homebuyer Homework

Donna Phelan/Intero Real Estate

We were in up Seattle this past weekend to visit my brother and sister in-law for a very exciting reason… they just bought their first home! We are so proud of them, and couldn’t wait to visit them in their new house. The whole family got together for a little housewarming celebration, and we had so much fun talking about all the memories our family is going to make in their new home.

While there are a lot of exciting parts to buying a home like decorating and designing to make it your own, today I want to talk about all the hard work that takes place before you set foot in your first open house.

Get Your Credit Right and Tight

Building good credit is so incredibly important as it determines how much debt you have access to and at what rates and terms. A 50 point difference in your credit score could cost you thousands of dollars over the life of your loan. The three credit reporting agencies (TransUnion, Equifax, and Experian) are required to provide you with your full credit report (not score!) annually, but my very favorite resource for monitoring your credit is Credit Karma. It’s a free service that gives you your TransUnion and Equifax VantageScore 3.0 (different than FICO, but a good guesstimate) and the nitty gritty on where you’re doing a good job managing your credit and where you can do better. They also have an awesome simulator tool that allows you see how different scenarios such as opening a new credit card or missing a payment might affect your credit. Your lender will be checking your credit score to ensure that if they lend you money you’ll pay them back, so make sure you’re educated on what they’ll find. I have so much more to say on credit, so look for a more in-depth post in the future on the secret sauce that makes up your credit scores.

Know What You Can Afford

A good rule of thumb is that no more than 36% of your pre-tax income should go towards your monthly debt payments, and ideally no more than 28% should be dedicated to your housing payment known as PITI (principal, interest, taxes, and insurance). The remaining 8% is reserved for other debt payments such as credit cards, student loans, car payments, etc. So if your pre-tax household income is $100,000 a year or $8,333 per month you wouldn’t want your home expenses to be greater than $2,333 per month. The national average for home insurance is $985 a year, and property taxes are typically 1-1.5% of the property value. Be sure to do your research on the rates in your area. The amount that you pay for principal and interest will depend on the type of loan that you choose. I’ll be doing a post on the different types of mortgage programs and their pros and cons next week so keep an eye out!

Save Save Save

Just being able to make your monthly loan payment isn’t enough. Another crucial component to buying a home is how much you’ve saved and what you can afford for a down payment. Most lenders will want you to have at least 20% of the purchase price to put towards a down payment. Before you start saving for your down payment, I think it’s important to have six months of living expenses saved (and your lender will too!). This is to give you some cushion and peace of mind that if you lost your job, had your hours decreased, got sick, etc.  you’d have savings to cover your mortgage, insurance, property taxes, etc. If you have a single-income household or your income is lumpy or commission based, consider saving up to a year’s worth of living expenses in your emergency or rainy day fund. Let’s assume that you’re spending $50,000 a year so you’ll want to have $25,000 in your emergency savings. That’s not all… there are also closing costs that you’ll have to pay for the home purchase, and you should plan on 0.5-1% of your purchase price.

Be a File Freak

Once you know your credit is up to snuff, how much you can afford, and have done the hard work of saving you’re almost ready to get house hunting! The last step is to get a pre-approval letter from a lender that is crucial for being a competitive buyer. This important letter indicates that the lender has reviewed your information and pre-approved you for a loan. A seller wants to know that if they accept your offer you’ll be able to come up with the funds, so having a lender essentially “vouch” for you gives them confidence. In order to get this letter your lender will require lots of documentation. They’ll typically ask for one month’s paystubs, two full years of tax returns, two months of bank statements, etc. so make sure you have all those items organized and ready to send out as you go through the process of selecting a lender.

Happy house hunting!!!

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