One of the best ways to build wealth over time is by buying a house. By taking a mortgage plan, you can build equity gradually and ultimately own a debt-free home. Homeownership also comes with additional benefits such as capital gains exclusion and mortgage tax deductions.
Despite the benefits of homeownership, the process is often complicated for first-time buyers, and bad decisions can make the experience less enjoyable. In this article, you will find insightful tips to help you on your journey towards homeownership.
Take Your Time to Prepare for the Journey Ahead
The process of buying a home should begin long before you start visiting open houses. Taking up a mortgage commits a portion of your income for a period that usually lasts between 15 to 30 years.
Therefore, it is essential to work out a financial plan that will ensure that you can meet your obligations to your family and lender throughout this period. The first thing you should do is develop a savings plan to help you raise the down payment.
It is advisable to start saving two years or at least a year before you approach mortgage lenders. A down payment is a crucial aspect of mortgage loans and will determine how much you will have to pay in monthly installments.
Also, work towards paying off existing loans and credit card debts to help improve your credit score. Some tips to help you improve your credit score include:
- Correcting mistakes and errors on the report
- Ensuring all your payments are made on time
- Clear all revolving debts
- Do not deactivate older accounts
Improving your credit score takes time and effort, but it’s worthwhile. With a high credit score, you will access a low-interest mortgage loan.
Have a Clear Picture of What You Are Looking For
When it comes to buying a house, having clear goals will make the process easier. Assess your present and long term financial obligations and determine what you can afford to spend on the house. Paying too much on the mortgage will limit your ability to save for retirement and meet other obligations.
Ensure that the figure you will commit to monthly installments plus taxes and insurance does not exceed 30% of your income.
Begin Your Search for Mortgage Lenders
Once you have saved enough for the down payment, you can start shopping for a suitable lender. It is advisable to get quotes from several lenders and choose the one with the most favorable terms.
Once you get a suitable lender, request for a mortgage pre-approval, a pre-approval is crucial as it will prevent you from shopping for houses that are beyond your price range. However, there are times that lenders can offer you more than you had planned for. If this happens, stick to your plan. Deviating from it will put a strain on your finances in the future.
Choose a Suitable Payment Option
There are many options when it comes to loan types and payment options. Loan periods of 15 to 20 years are often suitable as they carry low-interest rates. However, you can also take up a loan period of 25-30 years if you are worried about spreading yourself thin.
Begin Your Search for a Home
Once you have been pre-approved, you can begin your search for a house. It is best to hire a realtor to handle the house search for you. Talk to your relatives, friends, and colleagues and see if there’s a realtor they can recommend.
The benefits of hiring a realtor include:
- They have an extensive network which makes finding a house easier
- With their experience, they can advise you on the best deals
- They handle negotiations and repair requests for you
It’s best to work with a realtor whose main area of operation is where you’re looking to buy. Let them know exactly what type of house you are looking for and any vital detail. This will increase the chance of finding your dream house.
Have the House Inspected
Once you have identified a suitable house, it’s prudent to have it inspected before purchasing it. The purpose of such inspections is to ascertain the real condition of the house. You do not want to buy a home only to find out that it requires repairs later on.
The inspection report will highlight all the areas that need repairs and the potential cost. With this information, you can request the seller to do the repairs or renegotiate the price to factor in repair costs.
Prepare Your Finances
Once you have agreed on the terms of sale with the seller, ensure your finances will be ready. A pre-approval is not a loan request approval. You will have to go back to your lender and make a formal loan application.
Before they approve your request, they will want an appraisal done and an inspection report separate from the one your seller provides. You will also be requested to get homeowner’s insurance as lenders need to know you are protected from the word go.
Close the Deal and Move-In
If your lender is satisfied that the house is suitable and you have met all the requirements, they will approve your request. All that will be left at this time is ensuring the terms of sale and loan terms are favorable. Have your lawyer go through both documents. If they notice any issues, ask for adjustments.
Budget for Your New Responsibilities as a Homeowner
Owning property comes with additional responsibilities and costs. Your lender will take care of your insurance and taxes for you. With every installment you pay, a small portion will be set aside in an escrow account to cater for those costs.
However, all the other responsibilities fall squarely on you. These include repair costs, changing light bulbs, cleaning gutters, and general maintenance to ensure the property is safe.
Some of these costs may seem negligible, but they can put a strain on your finances if you are unprepared. To be safe, identify all the repairs that need to be done periodically and set a small amount aside every month to help you meet those costs.