Homebuying: No Matter Your Age, Do Not Buy a House Until You Reach These Milestones
Anyone who’s bought a home knows that it can be a byzantine, often confusing process that can leave you wondering why you wanted to buy a house in the first place. In fact, a whopping 71% of home buyers who purchased their home after 2020 report some form of remorse, typically because their process was more expensive than they initially assumed.
If you’re thinking of dipping your toe into the housing market, the best way to avoid regret is to be prepared. Below are some milestones you should hit before pursuing your dream home.
Have an Emergency Fund
Life can throw you curveballs when you least expect it. Before you purchase a house, it’s important to establish a substantial emergency fund so you have the money you need to survive should you lose your job or encounter serious medical expenses. It only takes four consecutive months of missing payments to default on your mortgage. If you default your lender has the option to foreclose on your home – a situation no homeowner wants to be in.
Suze Orman, financial expert and former CNBC television host, suggests building an emergency fund of at least eight to twelve months of living expenses. This money should be liquid, accessible, and kept in a separate account so that you don’t spend it before you need it.
Improve Your Credit Score
We all know that having a bad credit score means you run the risk of getting denied a mortgage. Lenders don’t want to give money to people whom they can’t trust to pay them back on time. But according to Forbes, having good but not great credit can also cost you. Someone with a 680-699 score will pay a 0.399 percent higher mortgage rate than someone with a 760-850 score. Over the life of a mortgage, which is typically thirty years, this difference could add up to tens of thousands of dollars.
To improve your credit score, pay your bills on time, try to pay down outstanding debt and make sure you have a mix of credit (credit cards and installment loans) listed on your account. If you suffer from little or no credit, you’ll need at least two years of good credit history to qualify for a mortgage. Know that most conventional loans require a minimum credit score of 620, while government-backed loans are slightly more forgiving, with a credit score of around 580.
Test-Run a Budget
While being a homeowner has a whole host of upsides, it is going to be a bigger financial burden than renting. It’s not just your mortgage that may be higher, but you’ll also have insurance, property taxes and surprise maintenance to contend with. According to Suze Orman, it’s smart to test-run a budget that includes your estimated monthly mortgage plus 40%. She advised that if you test-run the budget for six months and can successfully handle it, then you know the home you want to buy is within your price range.
Save For a Downpayment
Yes, the rumors are true, you’ll want to save 20% of the total cost of the house for a downpayment. That means if you’re looking to buy a house for $300,000, you’ll want to have $60,000 saved for a downpayment. This money should be separate from your emergency or retirement fund.
If you put down less than 20%, your lender will tack on Private Mortgage Insurance, which is 1 to 2 percent of your mortgage. While that might not seem like a lot now, it can definitely add up over the life of your mortgage.
Get Pre-Approved For a Mortgage
It’s important to get approved for a mortgage before you find your dream home, or you might lose out on snagging it to a buyer who’s already been pre-approved. Getting pre-approved requires submitting a series of documents to your potential lender. This includes proof of income, identification, debt-to-income ratio, verification of employment, credit history, proof of assets, W-2s, bank statements, pay stubs and your social security number.
After you’ve submitted all the required documents it takes about three days to get your loan estimate, which not only tells you if you’ve been approved, but lets you know how big of a loan you can take out. While getting pre-approved doesn’t guarantee you’ll get your dream house, it will give you a better sense of how much dream house you can realistically afford.
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