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How to Financially Prepare to Buy a Home: Seven simple steps to take this year.

in Buying a House

Buying a home can be one of the top financial investments you make in your lifetime. Homeownership can provide you the opportunity to build equity, take advantage of tax deductions, enjoy a more stable living situation, and more.

Additionally, you have more control over your monthly housing payment when you own a home (e.g. no more steep rent increases!) Not to mention, being a homeowner allows for greater flexibility to make changes and upgrades to your home. It’s a chance to finally make your living space yours.

However, buying a home is a big financial endeavor. In fact, it’s the most expensive purchase that many consumers will ever make in their lifetime. There are significant costs to plan for, so it’s worth taking the time to put together a plan for your homebuying journey.

Seven (7) Steps to Prepare for Buying a House

Before you step foot in your first open house, it will be to your benefit to have your finances in order ahead of time. When you’re financially prepared to buy a home in advance, you’ll be able to submit a winning offer as soon as you find the home of your dreams.

Furthermore, creating a plan to save up for your first home can streamline your savings efforts. You should determine exactly how much you need to save, when you can have it saved by, and what decisions you’ll need to make as you move along in your journey. Finally, being financially prepared means that when you do submit an offer, you’re not going above your intended budget.

If you’re ready to learn how to financially prepare to buy a home, we’re here to help. Follow these seven steps to begin improving your financial situation today and ensure you’re financially ready to buy your dream home.

1. Review Your Credit History & Improve Your Credit Score

Your credit history plays an important role in your ability to qualify for a mortgage loan. And if your history includes a less-than-stellar track record, you’ll want to immediately take steps to improve your credit score. This can take time and effort, which is why we recommend reviewing your credit history as soon as you are in the market to buy a home.

To review your credit history, you can request copies of your credit reports from each of the three credit reporting agencies: TransUnion®, Equifax®, and Experian®. Your credit reports should all disclose similar information, although they may not be exactly the same. (This is because some creditors don’t report to all three credit bureaus.)

Despite any differences, the information should all be accurate. If you spot incorrect information or don’t recognize one or more of the credit accounts on your report, notify the credit reporting agency of these errors immediately. In some cases, they may simply be mistakes. In others, you may be a victim of identity theft.

Once you’ve reviewed your credit reports, develop a plan to improve your credit rating if necessary. Ensure you make all loan payments on time. Do your best to pay off large balances so that your credit usage is about 30% or less of your credit availability.

(Bonus Tip: As you pay off your debts and your debt-to-income ratio decreases, you’ll likely qualify for a higher mortgage loan!)

2. Research the Total Cost of Homeownership

As a renter, your costs are generally predictable. Besides the cost of your rent and utilities, the only other living expense you likely have is a renter’s insurance policy (which is usually a fraction of the cost of a home insurance policy). And sometimes, renting can be less expensive than owning a home. So, what costs do you take on as a homeowner?

Upfront costs of homeownership

If you intend to buy a new home, you’ll need to save for:

  • The down payment
  • Closing costs
  • Inspection fees

Contrary to popular belief, you are not always required to save 20% for a down payment. While there are some benefits to doing so — such as avoiding private mortgage insurance (PMI) — you can put as little as 3% down on some conventional loans (including those offered by Lafayette Federal). For many people, a lower down payment is a more viable option than a higher down payment, so make sure you figure out what works best for you.

Closing costs are fees paid to your lender in exchange for originating your loan. These fees cover your appraisal, title insurance, origination fee, and your lender fee. While closing costs vary, they generally run somewhere between 2% and 5% of the home price. Additionally, as a buyer, you’ll have to pay for the home inspection (if an inspection is part of your contract). You’ll typically pay for the inspection before closing.

Ongoing costs of homeownership

Once you’ve purchased the home, your ongoing costs are likely going to go up as well. As a homeowner, you’ll need to be able to afford:

  • Your monthly mortgage payment (principal and interest)
  • Private mortgage insurance (if applicable)
  • Property taxes
  • Homeowner’s insurance
  • HOA fees (if applicable)
  • Utilities, maintenance, and repair costs

Many mortgage loans bundle PMI, property taxes, and homeowner’s insurance into your monthly mortgage payment. The money for those costs is held in an escrow account on your behalf, which the mortgage company uses to pay each of these expenses annually.

However, HOA fees, utilities, maintenance, and repair costs will not be included in your monthly mortgage payment. You’ll need to budget and pay these costs separately. On average, homebuyers spend just under $10,000 per year on maintenance, repairs, and home improvements. This amount may be even higher in your first year of homeownership as you update and improve the space to make the house your home.

Other costs of homeownership

Finally, you’ll need to save up for moving costs and decorating costs. Moving costs average between $800 to $2,500 in the U.S. for local moves (long-distance moves may cost as much as $5,700). These costs aren’t insignificant, so they should always be included in your homebuying budget.

Upgrading from an apartment to your first home may require you to buy extra furniture and decor for the increased living space. Some additional furniture you should budget for may include extra beds and nightstands for guest rooms, larger couches, and office furniture.

3. Establish Your Budget and Start Saving

Now that you have a good understanding of the total costs of homeownership, you’re ready to establish your budget. How much house you can afford depends on several factors, including your annual income, your debt-to-income ratio, and the amount you plan to put down.

Current mortgage rates also impact how much you can afford. And because the mortgage rate you’re offered depends on your credit score, you’ll want to consider that as well. A mortgage lender will be able to help you determine how much you’ll likely qualify for based on these factors.

Once you have a general idea of your price range, it’s time to start saving. Make a plan to first save for the upfront costs of homeownership, including the down payment and closing costs. Once you know how much you can save each month, start putting that money in an interest-bearing savings account.

While you may not want to risk your down payment savings in the stock market, you might consider putting it in a certificate account that allows you to earn higher interest than a regular savings account. Note: this option is best for those who can hold out to purchase a home before the certificate term ends.

How to save money for a home while renting

Saving for a home while renting can feel daunting. To save money for a home while renting, you may need to get creative to free up more money in your budget. For example, living with a roommate temporarily is one way to get help with your rent while you save for a home.

Additionally, paying off other debts before you start saving can help you save money on interest. Once those debts are paid off, reallocate the money you were putting toward your debts into a savings account. You might be surprised by just how quickly your savings grow!

While saving for a home may not be easy while you’re renting, it’s certainly achievable with a little creative thinking. You may have to make some sacrifices, but hopefully, these sacrifices are all temporary while you work toward your goal of homeownership.

4. Research Loan Programs

When it comes to mortgage loans, start researching the various programs as you’re building up your savings. And while your lender will review your loan options with you, doing your research beforehand will help you prepare for that conversation.

When you do start shopping for homes, you might find your dream home and may need to act quickly. Determining your best loan program now means you won’t need to make a rushed decision when it’s crunch time.

To research loan programs, find out what’s most important to you in a mortgage. Do you want to be able to put down the lowest amount possible? Get the lowest monthly payment amount? Avoid private mortgage insurance? Pay off your loan as quickly as you can?

Certain loan types may be you’re a better fit for you and your financial goals. Being able to prioritize your goals will help your lender know which loan program is the best fit for you. To learn more about different loan programs, including fixed-rate mortgages and adjustable-rate mortgages, start here.

5. Find a Lender and Get Preapproved

Finding a good lender is a crucial part of financially preparing to buy a home. You want to ensure your lender provides you with good service and is available to answer questions when you need them. The lender you choose also determines the mortgage rate you’ll be offered, since lenders often offer different rates.

So when it comes to finding a lender, shopping around is a good thing. As you reach out to lenders, you can ask them to put together a pre-approval for you, also known as a Loan Approval Commitment. A Loan Approval Commitment is a commitment based on the maximum loan amount a mortgage lender will approve you for.

The lender calculates this amount by reviewing and verifying basic information you provide to them, including your credit score, your annual income, recent bank statements, and the amount of money you’re planning to put down. Once you have your Loan Approval Commitment, you’re in a good position to start looking at homes, as a Loan Approval Commitment lets sellers know that you’re a serious, qualified buyer.

If you’re not sure how much you qualify for, Lafayette Federal can assist you with getting a Loan Approval Commitment. Armed with a team of mortgage loan officers with numerous years of combined experience, we can work with you each step of the way. You can learn more about our mortgage process and how we help prospective homebuyers here.

6. Research Homes in Your Budget

Most homebuyers have to find a balance between finding homes that have everything they want while also staying within budget. Before you start researching, get clear on what you need and want in a home.

Start by making a list of everything you know you absolutely need. These are your non-negotiables. For instance, you might need a home that has at least three bedrooms for your children. Or you might need a two-car garage to support your husband’s handyman business. While you’re making this list, don’t forget to include smaller needs, such as linen closets and pantry space.

Next, make a list of your “nice-to-haves.” These are things that you want in an ideal home, but they won’t make or break your decision. Nice-to-have features might include double sinks in the master bathroom, walk-in closets, or a playroom for the kids. This list helps you and your real estate agent when searching available inventory.

Once you have your two lists, start researching homes in your budget. Doing this ahead of time will help you prepare for the homes your realtor will take you to see.

7. Have Your Earnest Money Ready

Earnest money is money you’ll put down as a good intention deposit once you’ve signed a contract on a home offer. This signals to the seller that you’re a serious buyer who fully intends to fulfill your commitment to purchase their home. So once you’re ready to start looking at homes, you need to make sure your earnest money is ready to go.

You’ll likely submit your earnest money check with your offer. An offer made without earnest money may not be accepted. However, rest assured that the seller doesn’t pocket the earnest money. Your earnest money is simply held in an escrow account until closing. At that point, it’s either returned to you or applied to your down payment and/or closing costs.

Start Your Homebuying Journal with Lafayette Federal

At Lafayette Federal, we’re committed to helping you find the right mortgage financing for the property you’re looking to buy, even if you’re limited with upfront funds. We can help you explore the different financing options that may be available to you.

As a member of Lafayette Federal, we offer up to 100% financing options. Additionally, you’ll enjoy our 30-day Close Guarantee with a $250 closing cost credit (up to $2,000) for each day it takes to close beyond 30 days. Also, you’ll get competitive rates, up to 100% financing options, nationwide financing, loans up to $3,000,000, and money-saving discounts.

Not a Lafayette Federal member yet? You can become a member by completing an online membership application.

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