- Before you embark on the dream of owning your own home, make sure there are no errors in your credit score or financial history.
- If you can’t come up with a 20 percent down payment, you can often still buy a home—but you’ll typically need mortgage insurance.
- Many new homebuyers underestimate how much they’ll pay in ongoing maintenance—budget $1 per square foot per year in addition to PITI.
Remember buying your first car? You had to deal with a down payment and loan terms. You had to think about insurance and repairs. It was very daunting. Well, buying a home is a lot more complex than buying a car is, so let’s break it down into three key steps: planning and preparing, buying, and maintaining.
1. Planning and preparing. Six months before you plan to buy, check your credit score for errors, unpaid and uncollected accounts. Check with your state for any programs for first-time homebuyers. There might be some money there for you. What type of home are you looking for? Single-family, condo or townhome? Consider the location: the school district for children, the surrounding neighborhoods and how far it is from work. Finally, there’s the matter of your budget: You will have to plan for monthly/annual payments known as PITI—mortgage principal, interest, property taxes and homeowners insurance. Remember, the mortgage interest deduction and real estate tax deduction might save you some money on your tax return. Then there are closing costs, home inspection, and possibly home association dues. You have to save up for the down payment. All of that should be budgeted and planned.
2. Buying the home. First, get prequalified and look at consulting with a financial professional to help you decide which type of loan will be best for you. For a conventional loan, you have to put at least 5 percent down, and if you don’t put at least 20 percent down, you must pay private mortgage insurance (PMI). Or you could look for a Federal Housing Administration (FHA) loan. This requires 3.5 percent down, plus PMI and a PMI upfront charge. The Veterans Administration has loans for active-duty members of the military and veterans—zero percent down and no PMI required. It’s the best deal out there. The USDA has loans for rural homes that qualify. Now, what are the terms? A 15-year mortgage, a 30-year level or adjustable, or 5- to 10-year ownership or less? If not, a 30-year mortgage gives you the best terms and lowest payments. Finally, you have to qualify. The loan originator is going to need two months of pay stubs, two years of tax returns, two months of financial institution statements, and you will have to prove where your down payment is coming from.
3. Maintaining your home. Now you own a home. Your American dream is fulfilled but you have to maintain it. Budget $1 per square foot per year for maintenance. You might have rehab and remodeling in older homes. Big-ticket replacement items.
So, you get your first home. It’s the American dream.
Until next time, enjoy. Gary