Budgeting for your dream house
It’s been nearly 9 years since the “housing bubble” burst and sent the US real estate market into a tailspin. Americans are more cautious than ever to make the leap to homeownership, especially millennials who have been choosing to rent a home or apartment in the last decade over signing a mortgage for their dream house.
A recent Goldman Sachs study says 30 percent of millennials consider buying a home important but not a priority while 15% flat out have no intention of ever buying a home in the future. With results like these, it is obvious that young people today could use some assistance with making one of biggest financial decisions in their lives.
Here are some easy steps anyone can take to make sure they get their dream home without breaking the bank.
Tip #1: Set a Budget
The first step – and by step, I actually mean marathon – to owning a home is getting the capital to do it. It is time to reevaluate your finances and start saving up for the down payment. This means more than looking at your monthly spending and carving out a little nest egg, you have to dive much deeper into your financial situation, see what can be adjusted, and begin considering future projections for more savings.
If the idea of sitting at your table to spreadsheet your projected financial future makes you queasy, don’t be afraid! There are professionals that can help you.
Make an appointment with a financial advisor at your bank and get some professional help. During these meetings, you can better gauge your finances with someone who can offer you valuable information and ways of strengthening your chances of meeting your financial goals. One important thing you and your financial advisor should discuss is your current income-to-debt ratio, the percentage of your monthly gross income that needs to go toward paying your debts – think credit cards, student loans, car payments, etc.
You might be shocked to find out your DTI is actually too high. This would mean you first have to pivot your finances toward paying off some off that pesky debt before you can begin seeking long-term financial commitments, like buying a house.
On the other hand, your DTI could be low enough for you to move a step closer. But first, there is another thing to consider doing to increase your chances of getting approved for a mortgage.
Tip #2: Increase Credit Score
Let’s talk credit score goals – 700. A good credit score is anything above this number, and obviously anything under 700 would be considered a low credit score. The farther below 700, the less likely it is you will be approved for a mortgage.
You can obtain your credit score from a number of free online agencies. Credit Karma, Credit Sesame, and Quizzle all offer free credit reports and don’t require users to provide a credit card. Once you know your credit score, you can diligently work to raise it as fast as possible by paying your bills on time and reducing any outstanding debt you might have.
Having a good credit score is perhaps the most important part of preparing to buy a home, simply because the higher your credit score, the more mortgage options you are likely to be offered and the more likely you can quality for a lower interest rate as well. It goes like this: when you apply for a loan, a lender will usually look at your credit score from the three major credit agencies: Equifax, Experian, and TransUnion – each of which are offered by the three agencies above. The lender will then make a decision based on the middle score. If you are applying with another individual, the lender will choose the lowest middle score between you.
All in all, the shinier your credit score, the better candidate you will be for a home loan.
Tip #3: Choose a Mortgage for Your Dream House
Before you go applying for loans, pre-approval is a simple and useful step that can only increase your odds. In a competitive market, home sellers prefer offers from pre-approved buyers. Getting pre-approved involves sharing some information about your income and debt with a lender who can then provide you with a letter stating how much you will be able to afford to borrow. There are companies, like Citi Bank, that can help get you started with free evaluations and advice from mortgage representatives. Once you are pre-approved, you can decide on a mortgage.
Which mortgage is right for you?
Choosing a mortgage can be a bit difficult with so many types available. It is important to go through every option thoroughly with your lender.
Fixed rate mortgages
A fixed rate mortgage is exactly like it sounds – your interest rate is fixed and never increases. Your rate will always remain the same which makes budgeting much easier. Fixed rate mortgages usually come in 10, 15, or 30 year payment periods. The longer your payment period, the lower your monthly payment will be. Although a shorter your payment period also means higher payments, the upside is that you are likely to build your equity faster too.
These are usually more popular for homeowners who plan to stay in their homes for many years.
Adjustable rate mortgages
An adjustable rate mortgage, ARM, will eventually begin to fluctuate based on certain factors. Typically, a borrower will have a lower, fixed interest rate for a set period of time, but afterwards it will begin to adjust based on the financial market. A likely scenario is that your monthly payment will be lower in the beginning, but then increases over time if interest rates go up.
The most common type of adjustable rate mortgages is called the Hybrid ARM (also 3/1 or 5/1 ARMs). From the beginning, the lender guarantees a fixed rate for an initial period, after which the rate changes to the current market rate. For example, with the 3/1 ARM, the first number represents the period of time the interest rate remains fixed, 3 years. The second number represents how often afterward the interest rates adjusts to the market, every 1 year.
ARMs are good choices for borrowers who believe that interest rates are likely to remain stable or even go down in the future.
Tip #4: Consider Alternate Payment Options
Buyer’s Assistance Programs
One of the biggest reasons people postpone applying for a mortgage or even consider buying a home an option, is a limited income. It’s important for everyone, even cautious millennials, to understand there are structures in place that help those who might not be as financially-prepared as others.
First-time buyers, military veterans, and other hopeful homeowners can typically benefit from federal, state, or local buyer’s assistance programs.
HSH.com is a great resource for those looking for a mortgage that suits them. They have conveniently compiled a helpful map showing home buyer programs by state for 2016. See what statewide home-buying programs are accessible for you in your area. Also check if certain options are available, such as low-cost loans or no-cost down payments. Loan programs vary by lender and by state, but down payments can be negotiable and can be as little as 3 percent of a home’s value with a good credit score.
By being proactive in your pursuit for the right mortgage and by following these simple yet useful steps, even first-time buyers or low-income individuals can get the assistance they need to find a nice home.
Kyle Kivett is an Editor at Legal Templates where his main goal is to equip people with the right tools to be their own legal advocates. He covers a multitude of legal and business topics that can be found in Lifehacker, Millennial Magazine, Realtor Mag, YFS Magazine, and more. When Kyle is not writing about breaking legal news, he will likely either be hiking a new trail or going to the beach.