Step One - Are you Prepared?

Purchasing a home is a massive step, and not something that one should take likely.  It is not like you can wake up one morning and decide you want to go out and buy a home that day.  Buying a home is a process, and it is wise for the potential buyer to begin by really asking themselves, "Am I prepared for homeownership"?  In the blog below, I have broken this down into four action items to consider when purchasing a home.

Action Item 1 – What are your short-term plans?

What are your short-term plans over the next five years?  Are you settled with your job or relationship? Now may not be the time to consider buying a home.  You may ask, what does that have to do with homeownership?  As a general rule, it will take at least four years after you purchase your home for you to break even with the purchase.  Remember, the goal of homeownership is to build equity, not to lose money.

Action Item 2 – Financial Status

When discussing finances, you want to look at two critical factors that the lender will be monitoring.  What are your credit scores and your debt to income ratio?

1. Credit score. Obtain your score on all three credit bureaus. Prospective home buyers should aim to have 760 or greater credit scores to qualify for the best interest rates on mortgages. However, the minimum credit score requirements vary based on the type of loan you get and who insures the loan. The higher the score, the lower your interest.

2. Debt to Income (DTI). Debt to income (DTI) is your monthly income that goes to pay debt payment. Lenders prefer debt to income ratio to be, on average less than 43% of your monthly income. An example would be if you have $2,500.00 to pay each month to bills that include utilities, credit cards, auto loans, school loans, and rent and your monthly income is $4,000.00. Your DTI is 62.5%, which is above the recommended ratio.

Evaluate your credit score and debt to income at least six months before looking to purchase a home. This time allows you to reduce your debt and increase your credit score to obtain the best mortgage.

Action Item 3 – Save for down payment & closing cost

Today, most mortgage lenders require that a buyer have some money to use as a down payment.  This amount varies on the type of loan you plan on receiving, from 3.5% for an FHA home loan up to 20% for a conventional style loan.  Do not worry; we will discuss mortgage loan types in another blog.

When you purchase a home, you will also have a closing cost that comes with the purchase.  These costs range anywhere from 3 to 5% of the purchase price, depending on the lender.

Being a first-time buyer has some benefits.  Mississippi has a first-time buyer's program to assist with down payments.  Your lender will be able to tell you more about the available assistant. 

When you get to this point in the decision process, reach out and talk with a real estate agent or mortgage loan lender.  A real estate agent will be happy to point you to a qualified lender if you need assistance.

Action Item 4 – Decide where you want to Live!

You likely already have an excellent idea of where you want to live, but take some time to look around.  What are the school systems like in the area, how much are the taxes?  What is your lifestyle?  Do you like to shop and eat out several times a week? These are all questions that a new home buyer needs to consider before taking the next step in the home buying process.

This article will continue over the next few days so please check back for the complete process.