The start of spring gives many people the itch to start home shopping, but before you pull up Zillow to browse homes, you should consider a few money moves to make before buying your first home.
There are many different activities that take place during the home buying process. It’s complicated and stressful at times, so most people enlist the help of a real estate agent to walk them through the process.
A realtor can advise on all the different areas of the home buying process, but when it comes to the financial side of buying a home, you can’t leave it to chance.
The 2017 National Association of REALTORS Profile of Home Buyers and Sellers found that the median age of first time home-buyers last year was 32 and their median household income was $75,000. Further, it found that of those who financed their home, they generally put 10% down on closing.
Depending upon where you live, $75,000 can go a little or a long way. Here are some things to factor in as you prepare to buy your first home.
Check Your Credit Score, Avoid Credit Hits, And Get Pre-approved
This hopefully goes without saying, but most millennials will have to obtain a mortgage to buy a home, so your credit score will be a key factor in that. The better your credit score, the better the terms of your loan, such as your interest rate. Find out more about checking your credit score here.
Once you have checked your credit score, determine if you need to work on improving your credit score before getting pre-approved. Ways to improve your credit score include paying off outstanding debt, paying on time, and avoiding opening any new lines of credit. Once your credit score is where you want it, you should get pre-approved for a loan amount you have budgeted for, well before you start shopping for a home.
Depending upon who you ask, most sources say you shouldn’t spend more than 25-30% of your monthly before tax income on your mortgage. If you have factored your budget and determined how much you can spend, I’d recommend aiming for the 10-20% of your income range if at all possible. There are so many other costs that come up with a home, that you need breathing room.
After you have been pre-approved and start shopping for a home, avoid making any credit changes. Don’t open any new lines of credit and make sure you are staying current on all your payments, to avoid having issue with the mortgage issuer during the buying process.
Save A Healthy Down Payment And Emergency Fund
Establishing a strong emergency fund and saving for a 20% down payment are very difficult for most millennials. Never the less, it’s really important to do both.
The emergency fund is crucial when buying a home. So much can go wrong and cost you large sums of money at once. When we bought our first home, within three years we had to make a $9,000 foundation repair. A few years later we made a nearly $20,000 repair on that same foundation. Without an emergency fund, you can be forced to take out another loan.
The down payment is important, but I would argue less important than the emergency fund. If you can save 20%, that’s obviously the goal. If you put anything less than 20% down on your home purchase, most lenders will institute a mortgage insurance premium (PMI).
PMI can range from 0.3% to 1.5% of the original loan amount per year. It doesn’t sound like much, but I can assure you after a year or two of throwing hundreds of dollars at PMI (which doesn’t apply to your mortgage balance), you will have given second thought to the 20% down idea.
Estimate Repairs, Renovations, Taxes and Utilities
After you have narrowed down to a single home you will put an offer in on, take a moment to count the cost. First, are there obvious repairs that will need to happen before or shortly after you move in? Apart from brand new homes, most homes have something wrong that will need to be fixed.
Next, are you buying a “fixer-upper”? What will those renovation costs run, really? Are the renovations necessary to make the space livable, or can you live with the outdated wallpaper if you don’t have the money to fix it right this minute? Keep in mind fixer-uppers can be money pits if you aren’t handy, so tread lightly.
Last, make sure you check out what the taxes and utilities usually run for that home. Most millennials who move from a small apartment to even a moderate sized home are stunned by their energy and utility costs after moving. Don’t be surprised. Tax and utility information should be available to you via your realtor.
Hopefully you have enough to think about before buying your first home. You can see that there’s more to it than the fancy mortgage calculator you see on home search websites. Take your time and try to avoid making quick decisions in the buying process. Make sure you are setting yourself up for long term success by following these tips!
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