Tips for First-Time Homebuyers | Budgeting and Mortgage
Buying a home is a big step to financial success. That’s why it’s essential that you’re prepared. A successful home buying experience means getting the details right - and the number one is; are you financially ready? Here are some tips to help you get started.
Budget, Save, and Check Your Credit
Before we even get into the home search, you should ensure you’re financially prepared to become a homeowner. That means budgeting to make sure you can afford a home, saving for a downpayment and closing costs, and checking where you’re at with your credit.
Determining your budget gives you a total picture of your monthly expenses. With a budget in hand, you can not only save for a downpayment but decide how much home you can afford. To determine your budget, print out your bank statements from the last 6 to 12 months and use that to make a budget. Then add in your monthly mortgage payment and think - is that something you're comfortable spending every month? Is it something that you can afford?
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Your mortgage depends on your savings for a down payment and closing costs. For example, let’s say you have excellent credit and are only required to pay a 3% down payment. 3% on a $200,000 home would be $6,000 - which doesn’t even include closing costs. So when saving for your new home, make sure you have enough for a downpayment and closing costs.
If you only have enough savings for the down payment, you might still qualify for a mortgage, but you will need to ask the seller to cover your closing costs. And, if you already own a home, do you need to sell it to afford closing on the next one?
Consider your credit score a measure of your financial worthiness in lending. Mortgage companies use your credit score to determine which type of mortgage is best for you, your rate, and your down payment. Obviously, the higher the credit score, the more likely a lender is to work with you, but there are several conventional and government-backed mortgage loans that work for “less-than-ideal” credit.
Explore Your Mortgage Options
And speaking of types of mortgages, let’s explore your options. Essentially, there are four types of mortgages - conventional, FHA, VA, and USDA. The mortgage you qualify for depends on your credit score and down payment. But the one you choose depends on your unique situation.
Conventional Loan
Conventional loans are any home loan that isn’t governed-backed or guaranteed. They’re offered through private lenders such as banks or credit unions and work best for buyers with a higher credit score, low debt to income, and a down payment.
FHA Loan
If you have a lower credit score, a higher debt-to-income ratio, or don’t have much money for a down payment, you might consider an FHA loan, which the Federal Housing Administration insures. The minimum credit score for an FHA loan is usually 580. However, having a higher credit score may still help you qualify for a better FHA mortgage rate.
VA Loan
A government-backed VA loan might be an option for you if you’re a veteran, qualified servicemember, or spouse. There’s no industry-set minimum credit score to buy a house, but your lender may require a minimum credit score for a VA loan.
USDA Loan
You could look into a government-backed USDA loan if you plan to live in a qualified rural or suburban area and have an income below 115% of the area’s median income. Most lenders require a minimum credit score of 640 for USDA loans.
