Home buying can feel out of reach if you don’t have a high income. You may be concerned that you do not earn enough money or have not saved enough to purchase a home. Fortunately, there are many programs available to help low- to moderate-income buyers make their dream a reality.
The following steps will help you prepare to buy your first home. Lenders are available to help guide you along the path to homeownership.
Step 1: Address your credit. The credit score is an important factor in the lending process. Today, credit is used for borrowing, employment, insurance pricing and utility deposits. Scores range from 300 to 850; the higher your score, the more opportunities are available. The score is determined by the timeliness of payments, the ratio between how much credit is available on revolving accounts and how much is used, how long your credit has been established, the types of accounts you have and the number of recent inquiries have been made about your credit score.
Credit has two components: the actual report and the score. The score is a calculation based on the information found in your report. To get a free copy of your credit report, go to www.annualcreditreport.com. For home buying, get copies of the reports from all three credit reporting agencies, Experian, Equifax, and TransUnion. If you’re a Discover card holder you’ll receive an update on your FICO credit score in each monthly statement.
Once you receive your reports, look over them carefully and correct any mistakes. Accounts that are not yours, addresses where you have not lived and all other errors should be corrected. Check again in several months to be sure requested changes were made. Lenders will assume everything is correct. Ensure that all of your bills are caught up. Do not close accounts even if they have zero balances, because this could actually lower your score.
Step 2: Establish a monthly budget. Generally, lenders will allow you to have a monthly debt-to-income ratio of up to 36%. This will include all debt payments found on your credit report in addition to the new mortgage payment. Creditors use the minimum monthly payment when establishing a debt-to-income ratio. This may result in a payment that is higher than you are comfortable with.
By living within a budget, you can determine how large a monthly payment is best for your lifestyle. Begin by using your current rent payment in the budget and then set aside the largest amount possible for a few months to see if you can manage a higher monthly expense. This will also help you put money aside for the down payment and closing costs.
The total cost of homeownership includes more than the mortgage payment. Other expenses, like maintenance and utilities, need to be considered. If something breaks in your new home, you must be able to repair it.
Step 3: Save for the down payment. Sticking to a budget is one of the best ways to reduce expenses and increase savings, both of which will help build a down payment for your home. Other ways to save include getting a second job or a roommate to share rent. Set a goal to save at least 5% for the down payment and closing costs.
Step 4: Meet with a lender. A mortgage lender can help review which loans you will qualify for and how much you will need for a down payment. The lender will verify your income and determine what price you can afford and what your monthly payments will be. Finally, the lender can help you get pre-approved. This will enable you to proceed through the home buying process with confidence and peace of mind.
When you take these steps before you even begin looking for a home, the process is much smoother. You can then start your search with higher confidence that you will be able to follow through on the purchase when you find a home you like.