Owning a home is more than just a dream. It’s the epitome of hard work and strategy combined. As the dream becomes more tangible in our current economy, there are a couple of things to keep in mind before venturing into the market. The tips below can help homebuyers ensure a smooth experience. Though a few of these may be deemed simple, they’re often overlooked.
1. Determine how much money you can spend.
Before you go for a stroll around the market, sit down and answer this question: How much housing can I actually afford? Make sure your numbers cover all of your housing costs, including homeowners association (HOA) fees, insurance fees, taxes, extra budget for emergencies, etc. Before you find a dream home, find a dream number you’re comfortable with. To better understand fluctuating property taxes, check with your real estate agent for a close estimate.
2. Save for a down payment and all closing costs.
After you’ve figured out your numbers, it’s time to save for your dream home. It’s recommended to save at least 20% of the whole house price you decided on, which will actually benefit you by reducing your private mortgage insurance (PMI) costs. As far as closing costs go, a good target is to save 4% of the purchase price of your home. These fees may be used toward credit reports, attorney fees, homeowner’s insurance and other expenses.
3. Refrain from new credit activity.
During the process of seeking mortgage approval, refrain from applying for any offers that will affect your credit score and history. Remember to always make your payments on time; being late on any student loans, car payments or medical bills can lower your score significantly, which may impact the loan amount and interest rate you qualify for. Do not add any new balances to your credit cards, and do not close any unused accounts, as these actions may also have a negative impact on your score.
4. Take time to explore your mortgage options.
Mortgages consist of three elements: a loan type, a rate type and a term. Spend time researching the best options before you commit. Federal Housing Administration (FHA) loans are the easiest to qualify for, since they require a low down payment and credit score. If opting for conventional loans, avoid paying private mortgage insurance by having 20% or more of your down payment in hand. Veterans Affairs (VA) loans are designed for veterans, while jumbo loans are mortgages that exceed the conventional loan limit.
It’s also important to decide which rate type best benefits you: fixed, where the number will stay the same for the duration of your loan, or adjusting, where your rates are fixed for the first few years and then readjusted according to the market.
5. Get a pre-approval letter.
A pre-approval letter is a promise from the lender that shows you have been pre-screened to borrow a certain amount of money at a certain rate. It shows you’ve undergone a credit check and you’re actually eligible to purchase the property you want. The letter also serves as insurance that your loan will be released to you the moment you make a purchase and submit the required documents such as the contract, title information and income verification. Remember, pre-approval letters are usually valid for 60-90 days, so act fast once you get one.
By following these tips, you’ll be taking a step in the right direction toward your dream property. It’s important to be patient and analyze all of your options before making a commitment. But one thing is for sure — with the strengthening of the market, those acquiring property right now will see a return in the future.
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