Congratulations! You’ve paid your dues (and your rent) in the rental market, and are now considering home-ownership. And why not? According to Tony Via, Asst. Finance Professor at Kent State University, mortgage payments are an investment in the future. As the remaining balance on a mortgage is reduced, home equity increases, padding your own retirement account. Moreover, unlike rent, with a fixed-rate mortgage, your mortgage payment will never go up, and you can deduct mortgage interest and eligible expenses for certain energy-efficient improvements on your taxes.
Before you start shopping however, do your due-diligence to be a strong contender, and to make your home-purchasing experience a smooth and successful one.
1. Save for a Down-Payment - The amount of money you put down when purchasing a house can have a big impact on your mortgage rate. As a general rule, if you can come up with 20% or more for a down-payment, you’ll lessen the risk for the lender and qualify for lower rate mortgage loans. Don’t worry though, there are options if that kind of down-payment is out of your reach:
a. VA Loan – Veterans Administration loans don't require a down payment or mortgage insurance, and are backed by the federal government.
b. FHA Loan - The Federal Housing Administration insures loans, and requires only a 3.5% down payment. However, buyer's credit is important to meeting these requirements
c. Fannie Mae and Freddie Mac - These federal programs offer loans for 3% down. They either own the loan or guarantee it.
2. Clean up your credit – Like your down payment, having a good credit score can reflect in your mortgage interest rate. Check for errors on your credit reports (free at AnnualCreditReport.com) and get your FICO score; many credit cards offer it for free, or you can purchase one for $19.95 at Myfico.com. For the best loan rates, you’ll need a score of 740 or better, says Bankrate chief financial analyst Greg McBride.
3. Get Pre-Approved – Having a pre-approval letter from your mortgage lender is required for most home offers today. It means that they’ve checked your credit and verified your income and assets.
4. Set a budget – It’s tempting to want to order steak when you can only afford a cheeseburger, but determine your budget—and stick to it. Be sure to factor in moving expenses and any upgrades you’ll need to make to the house.
5. Set a realistic timetable – Give yourself enough time to find the right home and go through the escrow process. If you leave it to the last minute and you’re current lease about to expire, you’re not in a good negotiating position and chances are you’ll end up paying more for your home.
6. Pick a neighborhood – Drive through neighborhoods to find several that match your budget, style, demographic, and proximity to work or schools, and talk to local residents to see what their likes and dislikes are about the area.
7. Partner with an agent – Although the internet is a powerful tool for finding and exploring properties, there’s no substitute for a good buyer’s agent. They have access to a network of other agents, listings that might not be on the market, and can help navigate you through financing, inspections, and price negotiations.
8. Factor in utilities or HOA’s – Bigger house? Bigger bills. Going from an apartment to a home can be an eye-opener when the utility bills come, especially if you add a pool. Ask your realtor about homeowner association or Mello Roos fees too, which will also increase your monthly expense.
9. Consider Resale – Chances are, if this is your first home, it won’t be your last. It may be the perfect place for you to hang your hat, but will it be for others too, when the time comes to sell?
Now you’re ready to start shopping! Armed with the right tools, you’ll not only streamline the home-buying process, but can avoid costly pitfalls, and make the overall experience a positive one.