1. Something you should know, but probably don’t: Your credit score
Before house hunting for your organic vegetable garden, wrap-around deck, and stainless steel appliances, you need to make sure you have a credit score that will make the banks proud.
In general, the higher your credit score is, the lower your interest rate—which means more cash in your pocket.
It’s also smart to talk to some banks to get pre-qualified for a mortgage based on your credit score before you really start house hunting. This way, you’ll get an estimate of how much you can comfortably afford before diving in.
Luckily, there are lots of online resources for finding out what your credit score looks like.
2. There will be changes to your current budget
Think about your current monthly budget. Most people spend a hefty chunk of their income on basic living expenses, like food, insurance, gas, rent, utilities, and caring for any dependents or pets. Understand that once you have a monthly mortgage to pay, budgeting will become your best friend.
Your weekly trip to the movies, daily Starbucks, or weekend shopping splurges might become a little less important to you than paying your mortgage bill on time, so make sure you outline and address all of your current expenses accordingly.
How will you address and adjust to these changes, you ask? Decide on what the most important things in your lifestyle are, and what can be cut back. To help organize your finances, there are a handful of tools out there to help you keep track. Mint.com is a great (free) way to start.
Before you start house hunting, you’ll need to settle on a price range for your new home that makes sense for you based on your monthly spending to ensure you can meet your mortgage payments. Try our mortgage calculator to calculate your monthly mortgage payment to get a better idea of the sort of financial commitment you’re looking at.
3. Would it restrain other savings or life goals?
Of course, your main life goal is to become a homeowner, right? Why else would you house hunting? However, you should make sure to keep other goals in mind if they’re an important aspect of your future.
- Do you have a retirement fund/401k that you contribute to monthly?
- Are you saving up to pay for college tuition for your children?
- Do you see yourself moving to another city or state down the road?
These are all things to be aware of so you don’t overspend on your house, taking away from other important savings goals. Luckily, the internet’s vastness provides quite a few websites for you to explore if you’re looking for a way to track your goals.
4. There’s more than just the price tag
Here’s the part where you’re going to need some cash upfront, so make sure you account for this. Buying a home is never just the price tag you see in those glossy brochures!
- The down payment usually hovers between 5 percent and 20 percent of the price of the home.
- Closing costs are typically around 3 percent of your loan amount and include things like title insurance, appraisal and inspection fees, escrow deposit, and loan origination fees.
- Property taxes differ from town to town, and most mortgage companies will make you escrow your property taxes which add to your monthly payment.
- If you pay less than 20 percent for your down payment, your lender will require you to purchase mortgage insurance.
If you want to know about these costs in more detail, check out this article on Lifehacker—it lays all of these costs down (and more) in plain text.
5. Compare different mortgage options based on your needs
Before you even begin to fall in love with that adorable ranch on a cul-de-sac in your dream neighborhood, you really need to explore what kind of mortgages are available to you based on your budget.
The bank will help you determine what mortgages and interest rates you can afford, which will also help your agent immediately narrow down homes that are in your price range.
If you don’t have enough to put 20 percent down, you can look into a Federal Housing Administration (FHA) loan.
If you don’t repay your mortgage, the FHA guarantees that it will repay the bank. Lenders will allow you to take out a large amount with an FHA loan since they can ensure that it will be paid back by the government.
- Pros: You can get an FHA loan by putting as little as 3.5% down (in some cases, less), you can have a credit score as low as 500, and there are no income requirements. Also, an eligible donor can provide gift funds to cover 100% of your closing costs and down payment.
- Cons: FHA loans may not provide enough money if you need a large amount, there are fewer loan options, and you’re required to pay a mortgage insurance premium (both upfront and annual premiums) which will increase the cost of the mortgage.
If you do have enough money for a 20 percent down payment and don’t want to deal with the budget restrictions or pay the mortgage insurance premiums that come with a FHA loan… you’re better off going with a conventional loan.
- Pros: Conventional loans offer a lot more variety, can be used at all property types, are available at pretty much any bank, and you won’t be subject to pay the insurance premium you do with an FHA loan.
- Cons: You need to have a bigger down payment, a higher credit score, and there do tend to be higher mortgage rates.
