If you’re ready to settle down, then buying a home is an excellent investment. Since buying a home is a significant investment you want to make sure that everything is in place financially, so you don’t encounter too many obstacles along the way.
As always consult with your financial advisors/professionals to walk through your specific situations and goals, but to get a start below are 5 financial tips to help you get ready as a first-time home buyer.
1. Pay off Debt
One of our top financial tips is to pay off, or significantly reduce, your personal debt. Lenders will take any debt you owe into account when they’re assessing your risk as a borrower. If you have a lot of personal debt, it can impact on how much they’ll lend you.
Personal debt includes things like:
- Money owed on credit cards
- Car loans
- Student loans
- Bank overdrafts
- Tax debt
Paying off personal debt will also help to improve your credit score, which we’ll look at next.
2. Check Your Credit Score
Before you apply for a mortgage, it’s important to check your credit score (aka FICO score) and also access a copy of your credit report. A high FICO score means you’ll qualify for lower mortgage rates, while the opposite is true for a low FICO score. Scores typically range from
300 to 850 and you want to be at least in the 600s. You will need to work with your trusted mortgage/loan professionals on working through your specific situation.
Credit reports offer lenders a window into how responsible you are with credit, such as:
- Your credit history - details of your past and current credit accounts
- Number of credit accounts - how many types of credit are in use
- Amounts owing - outstanding balances on loan accounts
- Credit report requests - how many times a lender has requested your report
- Financial issues - bankruptcies, defaults on credit cards/loan payments, overdue utility bills.
To request your credit score visit MyFico. It’s best to check the scores from all three bureaus: Experian, TransUnion, and Equifax. Each year you are entitled to request a free report from each bureau.
3. Save For a Down Payment (and Closing Costs)
After you’ve checked your credit score, see if you can actually afford a mortgage by jumping on a home loan calculator (most banks will have these on their websites). An essential part of the lending calculations will be how much down payment you can afford to pay.
You can find out more about saving for a down payment, but in general, the magic number is 20% of the purchase price.
If you haven’t managed to save that much, don’t worry, you may be able to get away with a 10% down payment, but you’ll probably have to pay private mortgage insurance (PMI) which can be up to 1% of the mortgage loan amount annually.
In most cases, it’s more financially beneficial to save up a decent down payment, so you’re not paying more fees than you have to.
There are mortgages available with a smaller down payment like FHA, but it is always best to work with your lender to determine the best fit for you.
4. Get mortgage pre-approval
Getting mortgage preapproval is a wise financial move for a first-time homebuyer. This way you know exactly how much you can spend before you actually start looking for a home.
If your figures look on the home loan calculator, make contact with a mortgage broker or lender to apply for mortgage preapproval. You may be able to do everything online, but you’ll still need to supply information to accompany the form, such as verification of income, bank statements, and identity.
The documentation they require typically includes:
- Past 2 - 4 payslips
- Last 2 years of tax returns
- 2-3 months of bank statements showing money for the down payment
- Previous 2 years W2’s
- Photo ID
You’ll also grant a lender or broker permission to pull your credit scores to make their evaluation, so getting your credit in good shape is doubly essential.
Once you know the range that you could be approved for with a mortgage, you can start to pay attention to the market in the area where you want to buy and make appointments with agents to view likely homes.
5. Set a New Budget
The last, but not least, of our financial tips for a first-time homebuyer is to create a new budget as if you were living in a new home and practice living on it. Factor in the fixed costs of owning a home like:
- mortgage payments
- property taxes
- home insurance
- utility bills
- repair and maintenance costs
and anything extra that you would pay for a home.
Knowing that you can afford your mortgage payments, as well as all the other costs associated with homeownership, will make it a lot easier when it comes time to take the big leap.