No matter how many times you’ve been through the homebuying process, it’s a big undertaking. And before you start picking out paint colors and browsing real estate listings, it’s crucial to get your financial ducks in a row. Let’s dive into the key steps to get you financially ready to buy your dream home.
Save for a down payment.
The amount of your down payment impacts your interest rate, whether you’ll pay private mortgage insurance (PMI), and how competitive you can be against other buyers when making an offer. In 2023, the median down payment for all buyers was 14%,* which comes to $42,000 for a median-priced, $300,000 home. But don’t be discouraged by that hefty sum, as there are loan options available with down payments as low as 3% (a more manageable $9,000), or even no down payment.
Keep in mind, if your down payment is less than 20% on a conventional loan, you’ll have to pay PMI. While you may be tempted to save up so you can avoid the monthly PMI fee, you should also consider trading off this short-term cost for the long-term benefit of starting to build equity. Depending on how long you’d need to save for a 20% down payment, PMI may be worth it for the right home.
Save for closing costs.
Closing costs, such as the appraisal, origination fees, and title insurance, are the fees that catch many buyers off guard. Typically, they equal about 2% to 5% of the home’s purchase price. For the $300,000 home mentioned above, that could get up to $15,000.
A tip to remember: Some closing costs can be rolled into your loan if you do not have the cash up front. You can also negotiate with the seller to pay them on your behalf.
Pay down debt and check your credit.
Beyond saving up cash, it’s essential to pay down excess debt and improve your debt-to-income (DTI) ratio, as this is a key factor in getting mortgage approval. To see your DTI percentage, divide the total of your monthly debt payments (rent or mortgage, car payment, minimum credit card dues) by your gross monthly income, then multiply that number by 100. Try not to exceed a 43% ratio.
Another crucial step is checking your credit score and credit report. Your score plays a big role in determining your loan terms, including your interest rate. Aim for a score of at least 620 to qualify for most conventional loans, and remember that the higher your score, the better your loan terms will be. If your credit score is low, a government-sponsored loan might be a good option.
Maintain steady employment.
Steady employment is vital when applying for a mortgage. Most lenders want to see a two-year work history. If possible, try to avoid changing jobs during the homebuying process or having gaps in employment. If you are planning a career change, talk with your lender first to understand any implications for your loan approval.
Plan for moving costs.
Don’t forget to budget for moving costs! These can vary widely depending on factors like distance, whether you hire professional movers or DIY, and how much new furniture your home will need. This could range from hundreds to thousands of dollars, so make sure to budget properly for the whole “getting you there” part.
Taking the time to prepare your finances will set you up for a successful homebuying experience. Before you get started, contact us to review your finances and determine how much house you can afford. This will help you identify the amount you’ll need for up-front costs and create a plan to reach your goals.
Why School District Matters When Buying a Home
Whether you currently have children or not, the school district where you purchase your home is an important factor. Homes in good school districts will likely always be desirable, which not only helps boost the home’s resale potential but also helps retain its value over the long-term. Consider researching school districts in your desired area before starting your home search.
*Source: National Association of Realtors® (NAR), Home Buyers and Sellers Generational Trends Report, 2023.