Buying a home can be a daunting prospect for first-timers. Here are a few relatively simple suggestions from Kansas City Credit Union that should make unlocking the door to first-time home ownership go a little smoother!
Get pre-approved for a mortgage
Getting pre-approved for a mortgage gives buyers a reliable sense of how much they can borrow. It’s different from full approval, and shoppers might want to set their actual purchase price lower than the amount quoted in the pre-approval process. It can be a little heady to see that number! It’s also helpful to know the approximate mortgage payment you would like to have. You can then use that to help determine a purchase price that’s most appropriate.
Have a substantial down payment
Many lenders will make loans with less than 20% of the purchase price as a down payment. Nevertheless, putting at least that much down is wise to avoid paying private mortgage insurance. Mortgage insurance is expensive, and even though the buyer pays it, it only protects the lender. Also, once the buyers equity in the house reaches 20%, mortgage insurance continues until the homeowner requests that it be stopped.
Don’t change jobs
A record of long-term, steady and reliable income is what lenders want to see. Ideally, a borrower would be at the same job for at least two years. Some lenders will accept two years of consistent work history in the same industry or position, though not necessarily at the same job in the same company.
Check your credit
Credit scores impact the ability to obtain a mortgage and determine the interest rate. Credit scores are easily available through bank or credit card accounts, or you can go to AnnualCreditReport.com. By law, you can get a free credit report annually from the three credit reporting agencies (CRAs), Equifax, Experian, and TransUnion. AnnualCreditReport.com is the only website authorized by the federal government to issue free, annual credit reports from the three CRAs. The starting credit score required by most lending institutions, and for the most favorable terms, is 620. If your score is lower, craft a plan to raise it.
Don’t close – or open! – credit card accounts
Credit history plays a crucial role in obtaining a mortgage. The longer the credit history, the better the chances of getting a loan! Two years is the amount of time that lenders generally like to see that a potential borrower has used credit cards responsibly, paying on time consistently and, better yet, paying balances off in full. Also, don’t get new credit cards within six months of applying for a mortgage. Applying for a credit card requires a credit check. A credit check lowers a credit score, albeit temporarily and only by a few points, but it’s still an irregularity that lenders don’t like to see.
Plan for closing costs
Closing costs are fees that a buyer pays to finalize a mortgage, and first-time buyers can easily be caught off guard. Closing costs are generally between 2% and 6% of the amount of the loan, so have that cash on hand. Also, most first-timers don’t know that some aspects of closing costs are negotiable. Sellers may be willing to share those costs, which can easily be several thousand dollars. Sharing this cost can give first-time homebuyers a little more liquidity to make that big move.
Home Sweet First-Time Home
Buying that first home can be confusing and even intimidating, but taking a few simple steps can make the prospect less so. Establishing real financial stability, and the satisfying sense of security that homeownership offers, are easily the most important moves one can make in investing in the future. Purchasing a home improves your overall financial literacy and creates a deeply satisfying sense of ownership in more ways than simply possessing the physical structure. Overall, you become invested in your home and your neighborhood!
