Ready to live the American dream of owning a home? Have friends and relatives been telling you how paying rent is a waste of money? It’s true that owning a home can help you build equity – and wealth. But rushing into home ownership unprepared could be a worse mistake than continuing to rent. Use these five tips to help you prepare to be a first-time homebuyer:
1. Start the homebuying process with a credit check. Maybe you pay your bills on time and have a decent credit score, but that may not be enough to help you qualify for a mortgage. Go to AnnualCreditReport.com to request your free credit report from the big 3 credit bureaus. Then look over it to make sure all the information is correct. Contact the individual credit bureaus to correct mistakes, from simple typos to wrong addresses and other misinformation, so the report will be as accurate as possible.
2. Pay down credit accounts. Lenders look at your debt to credit ratio. In other words, how much of your available credit are you using? If you have $8,000 available and are using $4,000, that’s 50 percent – too high for most lenders’ liking. Mortgage companies want to see a credit utilization rate closer to 20 percent. So take a few months to pay down existing debt such as credit cards and car loans before applying for your first mortgage.
3. Get your paperwork in order. The mortgage application isn’t the only piece of paper you’ll need as a first-time homebuyer. Typically, you’ll also need two years’ worth of tax returns and W-2 forms, as well as your last two pay stubs and two months’ worth of bank statements (including all pages, even the ones left blank).
4. Find out what the house you want will really cost. Your mortgage isn’t the only price you’ll pay as a first-time homebuyer. If you’ve chosen a particular house or a particular neighborhood, find out how high the property taxes are for that area, as well as what the homeowner’s insurance will cost. You can call an insurance agent for a quote. Also, factor in the cost of any repairs or other home improvements you’ll want to make to the house you’ve chosen (or are considering).
5. Calculate how much you need for a down payment and closing costs – and how to get it. If you have a down payment already saved up, that’s great! But many people don’t, especially if they are young couples or single people wanting to buy their first house. And the closing costs can be almost as formidable as the down payment. Ask friends and relatives to recommend a good mortgage broker who can help guide you through the homebuying process – and help you find any assistance loans or grants for first-time homebuyers that you may qualify for. Your realtor may be able to suggest some financing options, too – so don’t be afraid to ask. Fortunately, there are several special loans and programs for first-time homebuyers – such as these local homebuying programs you can learn about through the HUD website.
Buying your first home is a major event, and can be a smart investment. Just make sure to do it right and use these first-time homebuyer tips to be as prepared as possible.
Natalie Cooper provides consumers with personal finance advice ranging from budgeting to mortgages. She writes for Purechecks.com, a leading check printing company of designer personal and business checks.
Daily Properties Managing Editor