Where to begin? This is a common problem for people of my generation and anyone that is trying to purchase their first home.
The first thing to do before you get so far into the home buying niche is to start small. Focus on you! Are you ready to move onto something that takes time, effort and a lot of your money? Do you currently have your finances in order or do they need a little work?
Generally, if you have a high debt to income ratio it will be difficult to get approved for a loan for a home. In addition to the difficulty of being approved, you’ll also have to worry about paying a mortgage and utilities and any repairs as well as paying off your credit card debt! That’s difficult!
If you have an apartment right now and you pay your landlord in cash, you’re going to want to start paying with money orders or by check. This is much easier to trace back to where all of your money is going and helps determine any money unaccounted for.
Also, establishing credit with things other than a credit card, such as a car or something as small as a computer or mattress, anything can help you out in the long run. Banks like to see that you have made on time payments and are reliable if they are lending you a large sum of money.
Are you planning to get the house by yourself or with someone else? If the mortgage will be split between two people they look at the other persons credit and debt just as much as they look at yours! Although you may be able to get a higher loan because you have two incomes as opposed to one, if the other person has a credit score lower than yours, this is the score that the interest rate and all of the costs affiliated with buying a house will go by.
Make sure the other person is also fully committed to this, it’s a huge step and if you would feel more comfortable going at it alone, do that and let them live with you and pay for utilities or something! You may get less up front but in the long run you will find it so worth it when you aren’t struggling to find money to pay off the interest on your mortgage loan.
Student Loans can affect your score and how much you can afford when looking to get approved for a mortgage but they may hurt you less than you think. My boyfriend and I have a joint balance of approx. $33-35k. That is a high number and scary to think about but there are people who are trying to buy a house with student loan debts of over $100k! Banks are used to that and they have all the fancy calculators to determine if you will be able to pay these loans and for the house. They literally account for EVERYTHING!
Have you filed bankruptcy? or collected unemployment?
This is huge when it comes to buying a house because you have taken money from the government or faulted and you have a target on your back. Luckily, some banks are forgiving but they do get a little bit more strict with how far back you need to show your financial stability before they will give you a loan for a home. As I have said in posts before, no ones situation is the same as the next person and banks expect that; therefore, they are understanding and want to help you. In the end, they want to give you money because they end up making money off interest in the end so they want to help you.
The next step after you think about yourself is to think about your daily expenses and monthly expenses. It opens your eyes WAY more than you think. Consulting with family and friends about their monthly expenses and where they live, the area taxes and bills may change but it will allow you to get an average base amount for every bill you may encounter. Make sure your family doesn’t include themselves in things that don’t involve them, this is a journey between you and your other, too many opinions can sometimes be a bad thing.
Our parents have no idea what is going on because we have decided to keep it a “we” thing. Additionally, when you are looking into monthly expenses, don’t forget to include things such as gas, insurance and phone bills. These are things that generally get overlooked because they aren’t necessary to keep the lights on or heat pumping in a home, but they are luxuries you have room to pay for now but may not in the future. This was the key factor that opened our eyes when looking to see what we could afford and what our monthly costs would be.
Once you write down everything that you think you would have to pay for on a monthly basis, its time to use an online mortgage calculator to find out how much you can afford with the mortgage. This will also be determined when you meet with a mortgage loan officer but its nice to have an idea before you meet with them so there is no shock factor. I’m all about knowing information before someone else tells me…I like doing my own research.
When using the mortgage calculator it asks for an interest rate, depending on the time of year (and what year it is) this changes all the time. As of right now, spring 2018, the average interest rate is about 4.2-4.6% depending on what bank you go through. This isn’t terrible but isn’t as good as it has been in the past. Once you find the average, I suggest you go with the higher rate just to give yourself some wiggle room just in case.
Also, once you determine the mortgage you can afford its imperative you realize there are extra costs associated with living in a house, you need a money buffer in case something goes wrong and you need to cover the cost, it is also important to have an emergency fund for things like healthcare or in the event you may lose your job or the co-owner loses their job, to have a backup fund.
The Fun Part! This is when you finally have all your paperwork together and a general idea of what buying a house entails and you get to meet with a mortgage broker! You’ve done all the things that you could to get approved, now once you do get approved it’s time to go looking for your future house!
Anything you can think of that could be important to add to this? Let me know!