How do you know if you’re ready to buy a house or not? It’s a good question, but the reality is that there’s no one right answer. Whether you’re ready to buy a house or not depends heavily on your financial situation, the house you want to buy and even the type of mortgage you want to take out.
However, there are some steps everyone should take to prepare to buy a house. Once you’ve completed all these steps, you should be financially ready to start your house hunt.
Check Your Credit Score
This is quite possibly the most important thing you can to prepare for home buying. Having a good credit score will not only determine what kind of mortgage rate you can get, it will also determine whether you can get a mortgage at all.
Your first step should be to check your credit score on a free site such a Credit Karma. If you’re a First Alliance Credit Union member, though, you can also check your credit score for free just by logging into your online bank account or our mobile app. You’ll also want to reach out to the three credit reporting bureaus—Experian, Equifax and TransUnion—and get a copy of your credit report from each of them.
While a credit score of 620 or above should get you approved for a loan, you’ll ideally want to have a credit score of at least 700 to avoid paying a higher interest rate. If your credit score isn’t at that level, you’ll need to improve it before taking the next step.
Pay off Your Debts
If you have a lot of debt, you’ll want to get it paid off before you start house hunting. This will not only raise your credit score, it will also free up money that you can put towards your down payment and your mortgage.
There are a lot of strategies that you can use to pay off your debts. You could start by tackling the debt on which you owe the least, and once you’ve paid it off you can use the money you put towards that debt to pay off your next smallest debt. However, some financial experts have recommended paying off your largest debt first, which they argue will save you more money in terms of interest.
It’s worth pointing out that you can also take out a debt consolidation loan for the total amount of your debts. This has the benefit of reducing all your debt payments to a single monthly payment, and you’ll more than likely save money by getting a lower interest rate.
Find out How Much House you can Afford
Now that you’re in good financial health, it’s time to start thinking about how much house you can afford. In order to figure this out, you’ll first need a mortgage calculator (like the one on the First Alliance Credit Union resource page) to help you figure out what kind of monthly mortgage payment you’ll have based on how much money you expect to borrow. You’ll want to plug multiple numbers into the calculator so you can see how your mortgage payment will change based on how much you might borrow.
Once you’ve gotten a sense of the range of mortgage payments you might make, it’s time to look at your personal finances and think about how much you can reasonably afford to spend on a mortgage, not to mention the potential increase in utilities. In some cases, this will be easy, like if you’re making more money due to a new job or a promotion. Other people might want to see if they can find extra money in their budget to put towards a mortgage.
Set Aside Money for a Upfront Costs
After you’ve figured out how much mortgage you can afford, it’s time to start saving for all the upfront costs, including a down payment and the closing costs, which can include:
- Loan origination fees
- Title insurance fees
- PMI insurance
- Real estate administrative fees
- Pre-paid interest
- Mortgage recording fees
- Appraisal fees
Closing costs are usually between 2-4% of a house’s purchase price, but many of these fees depend not only on where you’re buying a house, but also what you and the seller will agree to. The good news is that saving for closing costs is a financial goal, and like all financial goals you can turn it into a S.M.A.R.T. goal, which will significantly increase the probability of you succeeding.
Get Preapproved for a Mortgage
When you’ve got your up-front money saved, you can supercharge your house-buying process by getting preapproved for a mortgage. Getting preapproved sounds like a big step, but all it means is that a lender will take a serious look at your finances and then give you a letter saying how much you can borrow from them. This lets sellers and real estate agents know that you’re serious about buying a house.
You should know that the serious look a lender takes at your finances will involve examining your past tax returns, as well as previous paycheck stubs, W-2 forms and a hard credit check from the three credit reporting bureaus that will lower your credit score by a couple points. Make sure you have all this information readily available for your lending advisor.
Find a Real Estate Agent
Finally, you’ll want to find a real estate agent. While you don’t need to work with an agent to buy a home, you’ll probably want to take advantage of an agent’s expertise in buying and selling real estate. They’ll be able to answer any questions you might have, and they’ll also be looking out for your best interests.
Selecting a good real estate agent is a lot like selecting other service providers. Talk with your friends and family for recommendations, especially those who have bought a new house recently, to start your search. You can also read online reviews of different sellers to help make a decision.
Get the House you Want With First Alliance Credit Union
Preparing to buy a house isn’t easy, but the payoff is well worth the effort. In addition to saving up the money for the down payment and closing costs, you’ll want to make sure you have a healthy credit score and have paid off all your debts. You’ll also want to have the right financial documents close at hand when you get preapproved for a mortgage.
Another good way to prepare to buy a home is by taking advantage of the services available for First Alliance Credit Union members. In addition to using our free downloadable mortgage calculator, you can also talk with a mortgage advisor about the mortgage process and even download a free S.M.A.R.T. goals packet to help you save for your down payment.