Tired of kissing your hard-earned cash goodbye every month and handing it over to your landlord? Thinking about taking the plunge and purchasing your own place? Well, hold up, young Padawan—before you apply for a mortgage on a whim, you should probably pump the brakes.
If you're really ready to shed the renting lifestyle once and for all and get serious about buying your first home, there are a few considerations you must make. The home buying process, though worth it, can be one of the most emotionally and mentally demanding experiences of your life. The good news is you can at least partially alleviate your stress by doing the following things prior to submitting your mortgage loan application.
The conventional wisdom is that you should make sure you have a clean credit history—so no late payments, low balance on credit limits, and the like—for 12 months prior to applying for a mortgage loan. But don't be surprised if you are required to explain blips 24 months out or even further back in your credit history. Start cleaning up your (credit) act now.
Check Your Credit
While we're on the subject of credit, you're going to want to check yours. The quick and easy math to remember is that the lower your credit score is, the higher your interest rate will be. If you even qualify for a mortgage, that is. Most lenders prefer a credit score of 700 or higher, but there are those who will dip into the 600s. You won't know for sure until you speak with a lender.
Clean Up Your Credit
So you found a few negative marks hiding on your credit report, eh? Hey, it happens to the best of us. With due diligence, though, you can bring up your credit score simply by resolving some of those unsavory issues. Also, it's possible there are discrepancies on your credit report that shouldn't be there at all, in which case you'll need to file a dispute with the respective credit bureau reporting the problem. If your credit report came back stellar, pat yourself on the back and pour yourself a cocktail, friend. You're one step closer to homeownership.
Crunch the Numbers
Thanks to the advent of online mortgage calculators, it's incredibly easy to figure out how much mortgage you can "afford." A word to the wise, though? The figure those magic formulas spit out doesn't take into account the whole picture, and being "house poor" isn't anyone's idea of a good time. Look at your debt to income ratio, lifestyle, monthly bills and expenses, and come up with a mortgage budget that feels comfortable for you. Then stick to your guns: Once you get the go-ahead from a lender, your real estate agent is going to slip at least a few houses into the viewing rotation that max out your approved mortgage.
Save, Save, Save
No matter what type of mortgage loan you get, you're likely going to have to bring some (er—lots of) money into the process upfront. Most loans require a down payment, so you will need to have anywhere from 3.5 percent to 20 percent of your home's purchase price saved up in advance. And unless you can guarantee the seller will cover all your closing costs, you'll also need to tack on an additional 2 percent to 7 percent of the home's purchase price. More on that here.
Have a Heart-to-Heart
Don't worry; you don't have to pull up a chair, put on a pot of tea, or fuss with any of the formalities you normally would if you were about to delve into deep conversation with another human being—'cause this heart-to-heart is with yourself. Before you apply for a mortgage loan and get the home-buying ball rolling, be explicitly honest with yourself about whether or not you are prepared for this kind of commitment. Thirty years is a long time! And no one is going to swoop in and fix that hot water heater when it breaks, either. You're on your own now. Ready?