You’re doing well at work, you have some savings in the bank. Perhaps you’ve even recently become engaged or you’re just tired of renting. Whatever the reason, life is good and you feel like it’s time to consider building your equity by purchasing a home. Sans sugarcoating, buying a home is tricky business. There are many terms, numbers, formulas, and steps to the process that, at first, might seem foreign. The best thing you can do is start researching the process LONG before you ever get the ball rolling.
Let’s start with credit
If you’re in your mid-20s or early 30s, chances are you have a fair amount of credit history. Assuming that history is good and your score is relatively high, this will work in your favor when you apply for your housing loan. That being said, if you’re thinking of buying within the next two to three years, here are some things you can do to improve your score.
Pay down credit card debt to achieve a better debt-to-income ratio.
Put purchases on your credit card each month and pay them off, leaving a zero or very small balance. This builds your credit history.
Pay off auto loans to achieve a better debt-to-income ratio.
Check your credit history for errors and, if you find some, be sure to appeal them LONG before you apply for a housing loan. Credit-error appeal can be a lengthy process, so get started ASAP.
Make sure all of your accounts are in good standing, including credit cards, auto loans, medical bills, student loans, and utilities.
Do you really have to put 20% down?
Not always, but you will likely need 20% saved up if you want to avoid private mortgage insurance (PMI; more on this below) and want a better interest rate. Most banks are perfectly comfortable lending to first-time buyers who can’t put 20% down, because they will be covered by the dreaded mortgage insurance.
Private mortgage insurance (PMI) is typically required when the buyer is unable to put 20% down for their new home. This protects the lender should you, at some point, be unable to pay your mortgage and foreclose.
There are ways to avoid PMI without putting 20% down, so research all of your options before signing on for this additional expense. Also, it’s important and beneficial to know that your lender is required to cancel PMI when your loan-to-value ratio is 78%.
A word you’ll hear repeated a lot by friends who are buying a house is “escrow.” In basic terms, escrow is the middleman between you (the buyer) and the seller. Before closing on a home, funds remain in escrow until certain conditions have been met, such as repairs, inspections, and any other agreements made between the buyer and the seller. Once the conditions have been met, the funds are dispersed. After the home is purchased, escrow is also utilized to pay insurance and property taxes. That being said, this is an important facet of homeownership, so it behooves you to research the ins and outs before starting the process.
Paying property taxes
Perhaps you’re a first-generation homeowner (meaning your parents were never able to own their own home and you’re the first in your family to do so) and you’re confused about the responsibilities that change when you go from renting to buying. One major difference is that, in addition to paying for your mortgage each month, you will also owe property taxes.
Property taxes vary considerably by location. The general and very rough rule of thumb, however, is that the more attractive a place is to live (in other words, a place with lots of job opportunities, good schools, ample recreation, and beautiful scenery) will typically have higher property taxes than, say, more remote or less popular areas. As such, it’s very wise to research the average property taxes in your areas of interest. It’s also important to understand that property taxes typically increase every year, so looking at the tax trends in the area over the past 10 years is also a wise move.
Paying for things that break
Something else that changes dramatically when you move from renting to owning is the fact that you no longer have a maintenance staff ready to fix your leaky sink or replace that toilet handle that you snapped off. You’re also responsible for bigger purchases such as a new roof if the old one has reached its expiration date or, say, should a pipe burst underneath your kitchen sink and ruin the flooring. These repairs can add up, so making sure you have emergency funds set aside is important. Homeowners insurance can also help, so explore your options on that front as well.
HOAs (and how to not hate them)
Many people want to own their home not only to build equity but also to have more control over their environment. Wanna paint your bedroom purple with glitter accents—go for it! However, keep in mind that many homes are subject to homeowners associations (HOAs), and, when you buy a home attached to an HOA, you are subject to its rules.
Typically, HOA rules are in place to maintain the overall aesthetic of the area so that property values don’t decrease and the location remains attractive and safe. You might find rules dictating that lights must be installed outside to deter crime or regulations dictating how tall the trees in your yard can be. These are not particularly restrictive.
However, some HOAs are very restrictive, dictating what color your house can be, how many cars can be in front of your home, and, in some extreme cases, what kind of car you can park in front of your house. That being said, reading your HOA rules before purchasing your home is a must.
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