Let’s be honest, buying a home isn’t always easy. In this market where homes sell like hot potatoes, it may seem like everyone can afford to buy a home, but that’s not true. It takes time, money, energy, planning, money and even more money to become a first-time buyer.
Even with today’s low interest rates, affording a home can be a challenge. And it doesn’t help that we live in a seller’s market where prices keep going up. So what are you supposed to do? Give up the American dream of having a three bedroom house with a white picket fence? Absolutely not.
While affording to buy a home is difficult, it is not impossible. Here’s a step-by-step guide to help you get the keys to your first home:
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Step 1: Know Your Credit Score
What’s your credit rating? If it’s been a while since you last checked out, you should take a look at your credit report. Your score will determine your financing options for buying a home. For example, whether or not to approve a mortgage depends on your credit score.
According to Equifax, a good credit score is between 739 and 670. A decent credit score is between 669 and 580. A bad credit score is less than 579. If you have bad credit, it is less likely that you will. a lender approves you for a loan. . And if they do, it will most likely come with a high interest rate.
The good news is that you can increase your credit score by paying off debt and making payments on time. It’s also a good idea to work with a financial advisor to help improve your score.
Step 2: Explore the different loan options
While being a first-time home buyer can be scary, it does have its perks. First-time home buyers have mortgage options available that do not require a large down payment. For example, if you have a minimum score of 580, you might be allowed to deposit as little as 3.5% with an FHA loan.
There are many programs available for home buyers, so be sure to do your research to find the best option for you.
Step 3: Determine What You Can Afford
To determine the type of home you can afford, you need to analyze your debt-to-income ratio (DTI). Your DTI shows how much money you invest to get into debt each month, and it’s relatively easy to calculate.
First, determine our total monthly debt. How much money do you spend each month on student loans, credit card bills, personal loans, etc. ? Once you have that number, divide it by your gross household income – this will give you your DTI. With this percentage, you can see how much wiggle room you have in a month for a mortgage payment (and any other payments required to own a home).
The DTI is something that lenders also look at when they approve you for a loan. The lower your DTI, the better your chances of being approved.
Step 4: Save Money (Then Keep Saving)
One of the most important, but difficult, parts for first-time homebuyers is saving enough money. Regardless of the type of house or loan, you will have to pay a myriad of expenses to get the keys to the house of your dreams. From down payment to closing costs, it’s important that you have a good chunk of change on hand to be able to afford these costs.
The truth is, saving money takes time. But once you know how much home you can afford and what kind of loan you can get approved for, you can create a goal. And then, a budget to help you achieve that goal.