Buying a home is a big commitment, with tons of important decisions to make along the way. The information below can help you understand the key steps toward home ownership and avoid some of the most common mistakes made during the process.
1. Set a budget.
Before you start looking for your new home, you’ll need to have a good idea of how much you can comfortably afford. When setting a budget, keep in mind that your monthly mortgage payment is not the only expense to consider. Remember to take into account any credit card and installment loan payments, utilities, taxes and insurance. Calculate how much home you can afford.
2. Save for your down payment.
When you buy a home, lenders may require that you put money down. This is commonly known as a down payment. Down payments can vary based upon the type of mortgage and typically range from 3.5 to 20% of the home purchase price. Get more tips on saving for a down payment.
3. Boost your credit score.
The higher your credit score, the more mortgage options you are likely to be offered and the more likely you are to qualify for a lower interest rate. When you apply for your loan, a lender will typically look at your credit score from each of the three major credit agencies: Equifax, Experian and TransUnion. Often times, the decision will be based on the middle score. (If you are applying with another person, a lender will take the lower, middle score of the two.) To improve your score, you might try paying down credit card balances, avoid applying for new credit cards, and make a concerted effort to pay your bills on time. Learn more about how credit impacts your loan.
4. Choose the mortgage that’s right for you.
With so many types of mortgages available on the market, it can be difficult knowing which to choose. A responsible lender can talk you through your options in detail. A helpful place to start is to understand the differences between a fixed rate and adjustable rate mortgage.
5. Get pre-approved.
Pre-approval is a useful step to take before starting your search for a home. By sharing some information about your income and debt, a lender can provide you with a letter stating how much you’ll likely be able to afford to borrow. In a competitive home-purchase market, sellers prefer offers from pre-approved buyers.