Home ownership was considered a goal beyond my siblings’ and my reach when I was growing up, as likely as winning the lottery. My parents never owned a home until I was grown, which certainly contributed to that mindset. Even as I experienced my own firsts – jobs, cars, apartments – somehow buying a home was off my radar. I wish someone had sat me down when I was young and helped me plan for my first home purchase. I have not made the same mistake with my own children.
I can almost guarantee that one day you will want to purchase a home – it is the American Dream for a reason, isn’t it? As soon as you have your first job, develop a budget. Save your receipts and review your bank statements, tracking your expenses and habits. Undoubtedly, you will find ways to save money. You can teach your children to have a budget, so they get used to seeing where their money goes. Another video game? They might think twice when they see how much it really costs.
Reduce your debt
When you apply for a home loan, a lender will look at your debt-to-income ratio (DTI) and generally look for a debt load of no more than 36 percent of income. This is one way lenders measure an individual’s ability to manage monthly payments and repay debts. DTI is calculated by dividing total recurring monthly debt by gross monthly income and is expressed as a percentage. This figure includes your housing expense, whether it be rent or mortgage. (Housing expenses should be between 25-28 percent of your net household income.) Monthly payments on installment debt – car loans, student loans and revolving balances on credit cards – should be down to between 8 and 10 percent of your net monthly income.
Save for a down payment
Set aside a certain amount of money to put in your savings account each month and watch it grow. There are various loan programs available to first time homebuyers (more about those programs in an upcoming blog) which do not require the once-typical 20 percent down payment, but you will still need a considerable down payment. Save.
Stay in the same job
Having a job for less than two years may mean you will be paying a higher interest rate for a loan. Also remaining in the same career field can be helpful when applying for a home loan.
Establish a good credit history
If you have credit cards, use them and make all of your payments on time. Pay off balances as quickly as you can. Obtain a copy of your credit report and make sure you do not have bad debts or late payments. If there are errors, correct them immediately. If you have less than stellar credit, begin today being more financially responsible with your credit.
Save, save and save more
When you are in escrow on a home, you will need to have money to pay closing costs (these costs average between 2 and 7 percent of the home price) and inspection/appraisal fees.
Meet with a loan officer
Along with a Realtor, a good loan officer will be an invaluable partner in the home buying process for you. Even if you are not quite ready to purchase a home, you can meet with a loan officer to see what you still need to do to qualify. He or she can help determine the size of a loan for which you will qualify and explain the various loan options available to you. Before you meet with the loan officer, gather the documentation a lender will need to preapprove you for a loan, such as W-2’s, copies of pay stubs, account numbers and two to four months of bank statements. Once you are preapproved, your loan officer will provide you with a preapproval letter.
Then the fun begins – the home search!
Owning a home is a terrific wealth-building asset, but deciding to buy a home is a personal decision. Circumstances change throughout life, and even if you are not ready now, reconsider home ownership in the future. Following the steps above means you will be ready when and if you decide the time is right.