Wed, Nov 14, 2018
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Tired of throwing your money away on rent every month?
If you’re anxious to buy your first home and move out of your small apartment, let me warn you that you have a long road ahead of you. Yes, there is a wealth of information online to guide you through the process.
However, along the way you will encounter complicated real estate lingo, stacks of paperwork and lots of people asking you for more money.
To make this easier for you, we’ve put together a step by step guide on how to buy a house. This guide includes a growing list of tools and resources that will help you answer any questions you have along the way.
Here are the steps we’ll cover below:
Rent vs Buy: Should you buy or continue to rent?
How much house can I afford?
Start Saving for a Down Payment
Check your credit score
Compare Mortgage Options
If I had a nickel for every time I’ve heard someone say “paying rent is like throwing money down the drain” I would have enough money to buy my entire neighborhood.
Yes, sometimes it can feel like paying rent is a waste of money. Why spend your money renting when you can put that hard-earned cash towards a buying a house?
After all, isn’t owning a home the best investment you can make? Well, unfortunately it’s not that simple.
According to an article in the Wall Street Journal, over the last three decades the value of the S&P; 500 has increased 11.1% compounded annually, while average home values have only increased 3.6% per year.
That being said, buying a home shouldn’t be thought of just as an investment - it is also a lifestyle decision. Homeownership can also give you the freedom to remodel, landscape and make your home match your personality - something you have no control over in an apartment.
Here are a few articles to help you decide whether it’s better to rent or buy:
Americans vs. Reality: Why Your Home is Not a Good Investment - The Motley Fool
Should You Invest in Stocks or Housing for the Long Term? - Pew Research
Robert Shiller Destroys The Idea Of Investing In A Home - Business Insider
Here’s the million dollar question: what size home can you afford?
Not only is this a question you’re going to have to ask and answer yourself, but your bank will want to know also. Before you even begin looking at homes you’ll have some math homework to do.
A few of the basic numbers you’ll need in front of you include your annual income before taxes, current monthly debt payments, your total down payment and current mortgage interest rates.
Using these numbers you can get a general idea of what you can afford to pay each month to buy a house. However, you shouldn’t focus just on your monthly mortgage payment when deciding how much house you can afford to buy. Instead you’ll need to calculate the total monthly cost of ownership including property taxes, HOA dues, utilities and maintenance costs.
For years financial experts have agreed that you should not exceed spending 30-percent of your monthly income on housing expenses. Today, there are many different opinions on this topic. Ultimately, this decision is up to your lender.
Want some more help budgeting for your new home? Read these articles first:
Map: The Salary You Need to Buy a Home in 27 U.S. Cities - The Washington Post
What Percentage of Your Salary Should Go for a Mortgage? - The Nest
Once you figure out how much house you can afford to buy, you’ll need to start saving for a down payment. Most home buyers aim to have 20% of their home value saved up by the time they are ready to buy a house.
As you’ll discover in the articles below, you don’t always need a 20% down payment, but most lenders prefer it. Not to mention, you’ll be required to pay Private Mortgage Insurance every month until your home equity exceeds 20 percent of your home value.
If you’re like the majority of Americans that only save 5% of their disposable income, it may take a while to save up enough for a large down payment.
Here are a few tips to help you save more in less time:
How to Save $20,000 for a Down Payment in Just 2 Years - Daily Finance
6 Reasons to Avoid Private Mortgage Insurance - Investopedia
You Don’t Need a 20% Down Payment to Buy a Home - The Mortgage Reports
You know how financial experts on TV keep saying that mortgage rates are at all time lows? Well the good news is that rates are still low. The bad news is that not everyone qualifies for these rock-bottom interest rates that you see online and on TV.
The secret to getting a low interest loan is having great credit history and a high credit score.
It used to be that you could only get your credit score by paying a yearly or monthly fee to the major credit bureaus. Today, there are many websites inclduding CreditKarma.com, Mint.com and even Discover Card that will give you your credit score comletely free.
How is it that they can give you a free credit score? To offset their costs they show ads on their website and offer you financial products which they make a commision on. There’s no pressure to buy anything and you get to see your credit score instantly. Not a bad deal, right?
Before you apply for a mortgage you’ll want to make sure your credit score is at the upper end of the spectrum. If it’s not perfect, that’s okay, but you’ll want to work on improving it as much as you can.
Steps you can take to improve your credit score include paying down credit cards, student loans and car loans.
It is important not to close your credit cards after you pay them off. Keep them open and continue to use them, but keep the balances down to a minimum. Your available credit - aka the combined credit limit on all of your credit cards - helps improve your credit score. The higher your available credit the better.
Need more help on where to find your credit score and tips to improve it? Check out these articles
Before you head to your local bank to see what size mortgage you qualify for, you need to know what your options are. More importantly, you need to make sure you aren’t being tricked into a high-interest loan by your loan officer.
Today there is an overwhelming amount of mortgage options available to homebuyers. First, you have to decide on a loan term: 5, 15, 30 or even 40 year mortgages.
Next, you’ll need to evaluate interest options including fixed, adjustable rate, balloon or interest only.
Finally, you’ll have to compare interest rates based on your credit score and whether you’ll be paying points up front to lower your rate.
Read these articles below before you step foot into a bank:
Pros and Cons: 30-Year Mortgage vs. 15-Year Mortgage - Get Rich Slowly
Check back soon for Part 2 of the Ultimate Guide to Buying a House…