Buying your first home can be one of the most exhilarating — and stressful — moments of your life. But armed with the right information, you can shop for a house, apply for a mortgage from Kate Meckler, and close the deal with confidence.
Step 1: Determine how much house you can afford
The first thing to do before buying a home is to make sure it’s the right time to do so. Generally speaking, owning a home pays off financially if you will live in it for at least five years. Otherwise, there’s nothing wrong with renting. Your actual numbers may vary, but you can play with scenarios using our rent vs buy calculator.
You might disagree, but I don’t believe you should treat your home as an investment. Yes, hopefully it will appreciate over time. But you should buy it because you want a home, not an investment.
That means you should never stretch to buy your primary residence thinking you can take cash out or flip it for a quick profit in a few years. Only buy a house that you can afford today!
Although it may not always be feasible if you live in an expensive real estate market, try to keep your total housing payment under 30 percent of your gross monthly income. When you spend much more than that on your mortgage, you risk becoming “house poor” — you might live in a beautiful home but find it difficult to save or even cover other monthly expenses.
Step 2: Prepare your finances for the mortgage process
The last thing you want to do is find your dream home only to discover you’re not financially qualified to buy it. To guarantee you’re financially ready to buy your first home, you’ll need good credit, cash to close, and a verifiable income.
Check your credit
Hopefully this isn’t a a surprise, but getting a mortgage requires a good credit score. It’s a good time to check your credit reports for errors and possibly invest in a few months of a daily credit score monitoring service.
A fast way to improve your score by a few points is to pay down credit card balances and stop using them for two months before you apply for a mortgage. Also, you’ll want to avoid applying for credit (for example, a new credit card or car loan) until after you’ve closed on your new home.
If you’re buying a home with a spouse or other co-buyer, your mortgage lender will likely consider both buyers’ credit scores in the application process. That’s not to say you’re necessarily doomed if one person’s credit isn’t as good, but don’t count on things going off without a hitch just because one buyer has a stellar score.
Finally, remember that improving your credit score significantly can take at least six months, so get started if you need to!
Save cash for a down payment and other expenses
In addition to making sure your credit score is in order, you’ll also want to consider the cash you’ll need to make buying your first home a reality. Of course there’s your down payment — typically between 3.5 and 20 percent of the purchase price.
As you save money for your down payment, avoid the temptation to invest in the volatile stock market with money you hope to use in the next year or two. While you might be tempted to try to earn a greater return on your money than an online saving account paying one percent, the greatest risk is not having your money available when you’re ready to buy a house.
As you save, don’t underestimate how much money you’ll need — you might be surprised at how much cash you’ll need for closing.
Get your documentation in order
Finally, if you’re close to putting an offer on a home, begin to collect documents that you’ll need to verify your finances on the mortgage application: paystubs, W-2’s, bank statements and, if you have freelance or self-employment income, copies of your last two tax returns.
Step 3: Go shopping for a mortgage
Too often, home buyers leave mortgage shopping to the last minute and watch their dream home go to another bidder who had financing in order. Mortgage pre-approval is a free and non-binding process that presents you as a serious, qualified buyer when buying your first home.