Just imagine – space, a big backyard, and a family-friendly neighborhood. You’ve been patiently waiting for the day when you can buy a new home and enjoy the perks of homeownership, and you’ve decided to take the plunge! This life-changing decision means you’ll need to have your financials in order because money matters that surround buying or selling a home can be daunting. Especially when it comes to buying a home in the towns of northern New Jersey – Short Hills, Millburn and Summit come to mind – the logistics that accompany purchasing a home can be challenging.

Follow these 4 steps, a financial roadmap of sorts, when buying a home. They’ll take you through some of the affordability considerations of the homebuying process and on to a successful closing.

Step 1: Ensure you have good credit before buying a home

One of the very first things to consider prior to the homebuying journey is the shape of your personal credit. For home loan pre-approval, good credit is a necessity. The better your credit history and credit score, the easier it will be to negotiate a favorable interest rate on a mortgage.

Your FICO score, a predictive measure that lets lenders know how good of a “credit risk” you are, is based on your credit history which includes how you manage accounts and pay off balances. A bare minimum for conventional loans is a FICO score of 620, while scores of 700 and above will open doors to even lower interest rates.  

Before you talk to lenders, assess your current creditworthiness and ensure you can speak to why you landed where you are. If you have a track record of paying bills on time, checking and resolving inconsistencies on your credit reports and generally limiting credit usage, you’re likely to get an excellent rate on your mortgage. To check your current credit score, generate a free credit report on AnnualCreditReport.com.  If your credit score is lower than you would like, it’s worth taking 6 months to a year to improve your creditworthiness before seeking a home loan.

Step 2: Save to help make homeownership affordable

Besides being adept at handling your credit, there’s another habit that serves homebuyers well – being a great saver! The more money you can save upfront, the better. Some of the core expenses you’ll run into when buying a house include the down payment, closing costs, and funds for home repair and maintenance. There are property taxes that are often included in your monthly mortgage payments and homeowner’s insurance as well.

The down payment is your initial purchase of home equity, and it impacts your financing payments. If you save enough to make a large down payment, you will reduce your mortgage loan annual percentage rate (APR) and interest rate. Of course, that means paying off your mortgage sooner and paying less overall.

Also, you’ll want to save for closing costs, which usually add up to between 2% and 5% of your home’s total value. There are many items that come under the umbrella of closing costs, including the mortgage application fee, credit report fee, appraisal, and home inspection. In the Victoria Carter Homebuyer Guide, I outline some of the financial considerations. Finally, you should have a safety net for possible repairs and home improvement projects. Even if your new home gets a clean bill of health upon initial inspection, a well-maintained home will have running maintenance costs every year.

Step 3: Determine How Much House You Can Afford

According to Bankrate.com, there are four main factors that determine home affordability: gross monthly income, debt and monthly expenses, credit score, and the down payment amount. Lenders often combine the first two items into a debt-to-income ratio or DTI. This percentage is important to know because your monthly home expenses shouldn’t exceed 28% of your gross income.

Once you know these numbers, you can calculate the maximum mortgage you’ll be reasonably able to pay off month-to-month. Various tools on the web make the calculation easy. This home affordability calculator from Bankrate lets you fill in all the necessary details – even adding current interest rates into the equation. Other calculators are even simpler, such as this one from Zillow that asks for annual income, monthly debts, and down payment amount. The calculator then provides a quick ballpark figure and more advanced options. Even after experimenting with these types of tools, you may want to talk in-person with a financial advisor for a more exact, individualized picture of what you can afford.

Step 4: Secure Homeowner’s Insurance

When you decide on a house, you choose what may be the most valuable asset you’ll ever own, and you will want to protect it and everything inside. To limit your personal risk in the event of theft or natural disasters requires a good homeowner’s insurance policy. It’s prudent to get several detailed quotes to see what makes the most sense keeping the features of the home in mind – particularly its age, location, and current condition.

A real estate agent can help you find out what coverages are most important for the house. Additionally, having good credit and making certain “safety upgrades” at the time of purchase, like security systems and weatherproofing, often help to reduce premiums.

Your real estate agent can guide you on the finances of buying a home

While financial advisors and lenders can answer some questions about the money matters of buying a house, an experienced real estate agent is your best resource. The right real estate broker will help you find a house that you love and can afford. Also, an agent can negotiate offers and closing costs on your behalf and a myriad of smaller financial expenses you might encounter along the way.

For two decades, I’ve been helping buyers find homes that are right for their lifestyles and within budget. If you’re ready to take the leap and purchase a home in one of northern New Jersey’s most beautiful towns – Maplewood, Summit, Short Hills, Millburn, or South Orange – contact Victoria Carter at (973) 220-3050 or email victoria@victoriacarter.com. I’d love to assist you!

 

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