If you would like to buy a house at some point in the future, it is never too early to start preparing. Between deciding how much of a payment you are comfortable with, saving up for a down payment and maximizing your credit score, there is plenty you can be doing. Here are some tips and advice that can help you get ready to make the transition from renter to homeowner.
Do the Rent vs. Own Math
If you are used to renting, there are some homeownership costs you might not be used to paying. Normal utilities include sewer & water, trash collection, power and gas. If you live in a place with a homeowner’s association, you may have monthly HOA dues. Also, if anything breaks, you are responsible for fixing it as a homeowner, which is a reason many people opt to buy a home warranty as part of their home purchase. Homeowner’s insurance and property taxes are also included in your monthly mortgage payment.
On the positive side of ownership, keep in mind that there are advantages to paying a mortgage instead of paying rent. A highly recommended idea is to have a personalized Rent vs. Own Analysis done by a professional.
When you rent, you are simply paying a monthly amount in order to live somewhere. One of the benefits of paying a mortgage instead of rent is amortization. This means that as you make your mortgage payments, the balance you owe on your house goes down.
Eventually, if you keep the house long enough (30 years), your balance will reach $0 and you will be mortgage-free.
Even with the downturn in home values over the last decade, the long term average appreciation rate for Yuma is 2.71%. That means if you own your home for long enough, it is going to go up in value. If you buy a house today for $150,000 and it appreciates at 2.71% per year, it will be worth $224,018 at the end of 15 years.
Many new home buyers overlook the tax benefits that come along with buying a home. If you buy a home for $150,000, and you are in a 25% tax bracket, your savings over 10 years will come to roughly $16,800. That’s either an additional $1,680 tax refund, or about $140 a month, which might help to offset any higher cost of owning.
Start working on your credit now
There is nothing that will save you more money and frustration when getting a house than making sure your credit is clean and your score is as high as possible. The difference between a 680 score and a 720 score can be as much as .375% on your interest rate. On a $200,000 mortgage, that’s about $47/month. That adds up over the years! There are a few simple things you can do maximize your score, and if you start planning early, you will have time to do them before you pull the trigger on your home purchase.
According to Jennifer Humphrey, FCRA Certified FICO Professional and Credit Analyst at Nova Home Loans, here are some quick credit tips:
- Pay down credit card balances but keep the accounts open. 30% of your credit score is based on how you handle your revolving accounts. That means it is important to have a credit card or two that are open and active, but not maxed out. Ideally, you want to keep the balances at 10% or less of their credit limits.
- Make sure to pay all your monthly bills on time. This sounds like a no-brainer, but since 35% of your credit score is based on your Payment History, a single late payment can kill your score for 6 months or longer
- Don’t let a lot of places pull your credit. Only 10% of your score looks at inquiries, but if you have marginal credit history, and then start applying for new debt all over town, it can have a pretty negative impact on your credit score. As a rule of thumb, you don’t want to let anyone pull your credit when you are getting ready to apply for a home loan.
If you want a personalized credit plan, fill out a loan application. We will pull your credit and have Jennifer run a customized analysis for you, along with advice on what to do and not to do, as well as a timeline on how long it will take to have you ready to buy. This is a free service for Jackson Team clients!
Start saving for your down payment
There is no way around it, buying a house is going to cost you some money. Yes, there are ways to buy a house with next to nothing down. But even if you are eligible for a $0 down VA loan or USDA loan, or use a down payment assistance grant, you will most likely need to offer some earnest money, as well as pay for an appraisal and home inspection. In most cases, you should prepare to need at least $1,500 to $2,000.
Many people have it as their goal to put 20% down on their home purchase. A 20% down payment will save you from paying mortgage insurance (the dreaded PMI). However, there are many attractive options for putting less than that down. FHA loans offer the option of low 3.5% down payment. Conventional loans allow for 3% down for first time buyers, or 5% down for repeat buyers.
Something to keep in mind with your down payment funds is the documentation requirements. Due to a whole array of state and federal regulations, any funds you use to purchase a house must be meticulously documented. Keep in mind that the source of any non-payroll deposits to your bank within the 2 months leading up to your home purchase will need to be “sourced” and documented.
Read our write-up about how to handle this properly here: Why do Mortgage Companies Ask for So Much Stuff?
Cost of Waiting Analysis
Sometimes waiting too long can be more costly than jumping in before you are ready. Talk to a realtor about the current real estate market. If home prices are on the rise, that new house might cost more 6-12 months from now. Every $1,000 the home price goes up will cost you $6 to $7 more per month on a 30 year mortgage.
Also consider interest rates. The interest rate on your mortgage loan plays a major impact on your monthly payment. Every half percent the rate goes up will lower your buying power by about 5%. That means a $600 principal and interest payment at 4.0% will get you a house for around $125,000. But if you wait and rates go up to 4.5%, you will only be able to buy a $118,000 house for the same monthly payment.
Disclaimer: This data is for informational purposes only. Your results may vary. There are no guarantees, promises, representations and/or assurances concerning the level of accuracy you may experience.
If you have any specific questions, or are ready to get the process started, fill out the quick form below and we will get in touch with you personally!