4 Must-Do’s Before Buying a Home

Read the Article

Buying a first home is a huge step in everyone’s life. It’s an exciting (and lowkey scary!!) process that you may have mentally prepared for, but when it comes to finances: there’s a lot to consider – especially for Millennials!

Millennials are great at many things, like how to crush the self-employed game and master the side-hustle, but what about when it comes to homeownership? Many believe it’s just not in their reach. When you factor in student loans, figuring out credit for the first time, and learning about mortgage payments, buying a home just doesn’t seem realistic for this generation.

However, we’re calling false on this myth! There are ways to set yourself up for financial success and make the dream of owning the roof over your head a reality.

If you’re starting to feel the itch to buy instead of rent, put a pause on your internet searches for the best neighborhood, home style, or price, and take a minute to see if you’ve accomplished these four must-dos before putting down that deposit.

See Where You Truly Stand Financially

If you’re trying to decide if you’re financially ready to buy a home, start by checking on your finances. There are many facets of your financial profile that you need to asses to know if you’re ready to take the plunge. Turbo can give you a full, holistic picture of your true financial health, plus show how you appear to lenders. Lenders typically look at three key numbers when deciding your eligibility for a loan — your verified income, debt to income ratio, and credit score. It’s important to know all three of your numbers before you apply for a loan so you can find which areas you need to improve upon and what rates you actually qualify for.

When looking at your financial profile, the first number you should understand is your credit score. It’s the number that informs bankers and lenders of how reliable you are when it comes to repaying debt. This score is calculated from things like if you pay your credit card on time, your credit card utilization, how long you have been using credit, and your credit history. Your credit rating is a slightly different story. This number is an assessment of the risk you pose to debtors and is used to estimate if you’re a good candidate for a loan — your credit score is part of this assessment.

If your credit score is not in the place you hoped it would be, don’t stress! This does not mean that you cannot buy a home. However, it does mean you’ll pay more in interest rates and may need to make a larger down payment.

Know the Numbers (and Yours!)

Speaking of down payments, as a best practice, try having at least 20% of the purchase price saved up for a down payment. Having a large down payment can be an extremely smart move for several reasons. If you have a big enough payment, you can forgo buying private mortgage insurance. A larger down payment also means your monthly mortgage will be lower, giving your monthly budget some breathing room. According to a 2011 study from Reuters, mortgages with less than a 20% down payment were more than twice as likely to become delinquent compared to a higher down payment — and you definitely don’t want that! However, new research has found that delinquency rates are the lowest they have been since the 2008 financial crisis, but don’t let this stop you from building up your strongest down payment possible.

If you’re still saving up for a down payment, try to also pay down your outstanding debts. A reasonably sized mortgage can quickly become an unreasonable burden when you mix it with student loans, car loans, and credit card debt. Traditional lending guidelines suggest that your mortgage payment (including interest, tax, and insurance) and all your other debts should add up to 36% of your income or less. An outsized mortgage payment is going to add up sooner or later, and lenders aren’t often sympathetic or understanding if you get into a bind. They only care about your payments appearing on time month after month.

Find Out How Much Can You Afford

Once you figure out your monthly obligations and your credit information, you are ready to calculate how much you can afford for a home. This can be accomplished in several ways. One way is to contact a realtor and provide them with your income information, monthly obligations, and credit rating. They can then calculate out an approximate home loan amount that will give you a basis for shopping.

You can also do this online through many online mortgage affordability calculators. These let you plug your financial information into their calculators to determine how expensive of a house you can afford to purchase. Be sure to be as accurate as possible when inputting your numbers so you can see what you can really afford. Additionally, you may not know your interest rate yet so you may want to identify common interest rates in your state and county. At the very least, it is a good idea to consider a higher rate, such as 7.5%. In this case, overestimating is better in terms of being prepared instead of underestimating and having to make up the difference later on. When the calculator tells you your magic number, you will then have all the financial information you need to start your search.

Be Comfortable With The Next Steps

Buying a home is arguably one of the largest purchases you will ever make, so don’t rush into it before you’re certain you can afford it! As long as you know as much information as you can before going in, you will be less likely to buy a home at a cost that you can’t afford or on a plan that will cripple you in just a few years. For most folks, buying a home means they are committing to a financial payment plan that will last a few decades, so this is a decision that will be with you longer than those skinny leg jeans.

If your home-buying dream is still a little bit too in the future, check out Turbo’s customized tips to help you improve your numbers and get you to where you want to be.

Now you’re ready to start the hardest (but most fun!) part: finding the home of your dreams!