For renters, the many benefits of home ownership can be enticing. Not only will each monthly payment go toward something you may one day be able to sell at a profit, but you’ll often find that with the right place, you can pay less monthly on a mortgage than you were paying for rent. But getting into a home can be much more challenging than renting, especially if you don’t have a large chunk of money set aside in savings. If you’re ready to give home ownership a try, here are a few things you should consider first.
Special Programs for First-Time Home Buyers
Before you start your search, do a little research into first-time home buyer programs that can help. Many states offer assistance solely to first-time home buyers, often geared toward helping with the required down payment. Teachers and law enforcement officers can also get assistance through the Good Neighbor Next Door program.
Credit Rating Minimums
Another thing to check before you get started is your credit score. Conventional loans generally require a credit score of 620 or better. However, if your credit isn’t quite there yet, your lender will likely steer you toward an FHA loan, which only requires a score of 500. If your credit score is below that, you may need to take some time to improve it before you start your home search.
Down Payment Requirements
One of the biggest reasons renters put off buying is the down payment requirement necessary to take out a mortgage. You’ll at least need three percent of your home price saved up. If you plan to buy a $200,000 house or condo, that means you’ll need $6,000 or more. It’s important to note that if you provide less than a 20 percent down payment, you’ll be required to pay private mortgage insurance (PMI) with your monthly payment. This helps protect the lender if you default on your loan.
Once you’ve worked out your down payment, you’ll probably be curious how much mortgage you can afford. Fortunately, there are online tools that can help. You can plug various house prices into a 30 year mortgage loan calculator and get a great idea. On a $200,000 loan at 4.63 interest over 30 years, for instance, you would pay $1115.54 a month including PMI.
Benefits of Pre-Approval
Before you start looking at houses, there’s one important step you need to take. Shop local lenders and find the best rates, then go through the steps of getting pre-approved at the lender that offers the best deal. You’ll know before you even start looking exactly how much of a home you can afford. Being pre-approved also gives you leverage when you place a contract on a house, since the seller will have the confidence that your loan will go through.
Moving from renting to owning is a big step. It’s important to do your research on the front end to know exactly what you can expect once you reach out to lenders and real estate agents. Keep in mind that in addition to mortgage payments, you’ll also now be responsible for lawn upkeep and basic household repairs, which will be an adjustment from making a phone call and having a landlord take care of it for you.