A long, long time ago, I posted a video about the complexities of buying a home. Unfortunately, since then, the video has disappeared ― but the information remains salient. Real estate is an enormous investment, and appropriately, it requires quite a bit of effort to obtain. If you are considering buying your first home, you absolutely must investigate your financial situation first and foremost ― only then can you move onto other steps for buying real estate.
Understand Your Credit Report
Though you might not realize it, you can see your credit report for free a few times per year. By law, the major credit agencies must provide you access to your own credit history, and ensure they aren’t making any mistakes (and to determine that no one else is abusing your credit) you should get in the habit of checking your credit report on a regular basis.
However, obtaining your credit report is easy; what most people struggle with understanding is the information contained therein. Usually, you should breeze past the personal information (assuming it’s correct) and scrutinize any public record information, which includes any existing legal issues that may impact your credit, as well as your creditor information, which will explain your history with credit accounts. If everything in these sections looks correct, you can move on to the next home-buying step.
Set an Appropriate Home Budget
Even though you will be paying for your home with a loan, you can’t afford just any mega mansion you want. You need to be able to pay about 20 percent of the home’s price as a down payment, and your monthly mortgage payment should be no more than about 30 percent of your income before taxes. Using these general rules, you should be able to set a budget that determines how many homes you can buy.
Learn About Different Home Loans and Lenders
Not all home loans are the same. In fact, if your credit is good, you have a multitude of choice when it comes to securing a loan for your impending purchase, and it behooves you to become informed. Here are some of the most common options explained:
Fixed-rate vs. adjustable-rate. Fixed-rate loans will always have the same interest rate, even if you choose a long-term financing option. Meanwhile, adjustable-rate loans can change every year or so, usually after a briefly fixed period.
Conventional vs. government-insured. Conventional loans are not guaranteed by the government, but government-insured loans, provided by the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), or the United States Department of Agriculture (USDA) are. These government agencies help low-income families secure real estate, and by taking advantage of special programs, like rural housing loans, you can pay less initially for a home.
Conforming vs. jumbo. Conforming loans adhere to guidelines that limit the size of the loan based on certain criteria, including your credit score and income. Conversely, a jumbo loan exceeds those limits, presenting a higher risk to lenders.
No matter which loan you choose, you should seriously consider getting pre-approved for your mortgage. This makes shopping and closing much easier because you already have certain loan size approved by your lender. Sellers also tend to favor buyers who can prove there won’t be any bumps in the road toward getting a loan should they accept your offer.
Consider Hiring a Real Estate Agent
It is possible to do all the legwork of house shopping by yourself, especially since there are now dozens of practical resources to help home buyers find houses for sale, negotiate prices, and understand closing contracts. However, real estate agents can provide you with the information you are unlikely to find on certain homes, such as the age of the roof or the quality of the pipes. Real estate agents are better connected to real estate news and therefore potentially able to provide you with newer options and better deals. Still, they do take a sizeable commission ― roughly 6 percent of your home’s cost ― so you might not think their services worthwhile.
The process of becoming a homeowner is long and arduous, but the resulting trials of home ownership can be even more-so. Before you fall in love with any home (particularly one you can’t afford), you should take the necessary steps toward understanding your financial situation and securing the necessary loans to acquire the real estate of your dreams. Then, you will be fit financially for a future of homeownership.
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