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Whether it’s your first time or your fifth, buying a home is a big decision. There’s no one right way to get ready for homeownership, but investing in financial preparation at the outset helps ensure you’ll be ready when it comes time to seal the deal.
Here is a basic guideline to help you get started.
Identify your timeline
Your timeline will be an important factor in defining realistic financial goals that you can achieve before you buy. If you know you’ll be relocating in two months, it’s probably unrealistic to pay off all your debts and save for a big down payment (although you might not need the latter—more on that in a moment).
Most lenders will typically need at least 30 days to close your loan, so plan accordingly.
Understand the costs of buying a home
Buying a house costs money. Not a surprise, right? But how much cash you’ll need at the outset depends on the type of financing you’re using, where in the country you’re buying, and more.
Your costs and fees may include the following:
- Down payment: You’ll typically need a 5% down payment for conventional loans. FHA loans require a 3.5% down payment. Qualified veterans and service members may be able to purchase a home without a down payment using a VA loan.
- Deposit: Buyers often include a deposit, or earnest money, along with their purchase offer. It usually ranges from $100 to $1,000 or more, and can be applied toward the closing costs. Service members who are relocating should talk with a knowledgeable real estate agent about what’s customary at their new duty station.
- Appraisal and inspection: An appraisal helps establish the fair market value of a property and is typically paid outside of closing. An inspection isn’t required but is almost always a good investment. Costs vary, but expect to pay about $400 for the appraisal and about $300 for the inspection.
- Closing costs: There’s a host of costs and charges linked to closing on your purchase, from origination fees and prepaid property taxes to paying for credit reports and more. Many military buyers negotiate to have the seller pay some or all of these costs. If that’s not possible, you will need to pay them.
Review Your Income, Debts & Buying Power
A lender will look at the relationship between your income and your current monthly debts to help determine how much home you can afford. The debt-to-income ratio you need can vary depending on the lender, the loan type, and other factors.
Active service members may be able to use the Basic Allowance for Housing (BAH) to qualify for a home loan.
Debt-to-income ratio requirements can vary by lender and loan type. But that doesn’t necessarily mean you should stretch your financial limits.
If your current expenses leave you with little to no savings each month, it might be a good idea to pay down some debts before you buy new home. Keep in mind that home buying also comes with new expenses, including property taxes, homeowners insurance, and maintenance costs.
One way to prepare for a mortgage payment is to pretend you have one. If your current rent is $1,000 but you’re looking at homes with a mortgage payment in the $1,500 range, try saving an extra $500 each month for several months. If your finances feel tight, you might want to consider shopping in a lower price range.
Set financial goals
The more you can strengthen your financial profile, the better your chances are of getting a great deal and making it to closing day. Everyone’s debt and income picture looks different, especially given some of the fiscal challenges of military service.
Here are three key goals to aim for as you ramp up to buying a home:
- Boost your savings: From down payments and deposits to closing costs and the appraisal, you’ll need cash upfront to land a home loan. Set a budget and look for ways to save money. Bonus: Healthy assets can make you more attractive to mortgage lenders.
- Pay down existing debts: Reducing or eliminating monthly debts will improve your debt-to-income ratio, meaning you may be able to increase your purchasing power.
- Troubleshoot possible snags: Snags such as past-due accounts, outstanding collections, and tax liens can wreak havoc on your home loan chances. Make a list of any skeletons in your financial closet and decide whether it’s feasible to settle them before you start the home-buying process. Some red flags such as judgments and liens will need to be cleared up before you can close on a loan.
No matter your personal situation, make sure you take care of the basics while you’re preparing for homeownership. Set a realistic budget, pay your bills on time, and get a feel for what it’s like to have a mortgage payment.
Stability is key when it comes to showing a lender you’re a good candidate for home financing.
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This article was written by Chris Birk, director of education at Veterans United Home Loans and author of “The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.”
NMLS 1907 (www.nmlsconsumeraccess.org) Veterans United Home Loans is not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency; does not reflect DOD endorsements. Equal Opportunity Lender. 1400 Veterans United Drive Columbia MO, 65203.
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