Home Buying Tips for the Financially Challenged
Home ownership remains a goal for most people, as it shows success, gives independence and provides future equity. While rewarding, the process can be daunting for anyone. However, if you are on a tight budget, it is imperative to plan ahead and make well-informed decisions. These tips will help you avoid traps and get the most out of your investment.
The most important step in the homebuying process is planning ahead. If you think you might want to buy in the next couple years, you must get your credit under control. Begin by accessing your credit reports (free every year at AnnualCreditReport.com). Do any accounts have inaccurate statuses, balances, or payment data? Are there any old/false judgements, liens, or collection reports? Contact the bureaus and institutions to remove on erroneous information that may be hurting your score. Many banks and lenders also provide free credit scores as a service or when you apply for a loan, and you can obtain scores from the credit bureaus as well. If your scores are below the mid-600’s, try building your credit as much as possible before applying for a mortgage (see FICO.com for helpful tips).
As far as finances go, most mortgage lenders will require debt-to-income ratio to be under 40% so work on paying off credit cards and avoid making new credit purchases. They will also want to see steady employment and income, as well as savings that could cover payments for at least a few months. Standard down payments of 20% are common with conventional loans, but special programs may reduce it to 10% or less. So if you are considering a home purchase, focus on saving – cut the pricey drinks, take-out, clothes sprees and other extra expenses. You should also begin paying attention to real-estate market trends in the area, as a “buyer’s market” will grant you the best deals (conversely, a seller’s market is when you want to put your home on the market).
Have Realistic Expectations
If the real-estate and sub-prime collapses of the past few years taught us anything, it should be to have realistic expectations and stay within our means. Once you are comfortable with your credit and savings, get pre-approved by a lender. They will tell you how much you can get a loan for, and provide estimates of interest rates and payments.
Track your expenses for a couple months (loans, credit cards, phones, vehicles, food, etc) and see how much spare income you actually have. For your budget, make sure you factor in local property taxes, insurance, homeowners’ association fees, estimated utilities, appliances and furnitutes you might bring in the new house. Once in the mortgage phase, don;t forget to include space for incidentals like application fees, appraisal fees, notaries, and furnishings/updates for the new house.
Once you know your price range, take a look at how that compares to listing values in your desired areas. Make a list of a few “must have” features that you would not be happy without, but realize there may be some compromise and that homes can be improved over time.
Understand Your Mortgage
The other crucial factor when buying a home on a budget is to truly understand your mortgage terms. Shop around, know your interest rate, and understand your payment plan. Just because a lender offers you an amount doesn’t mean you need to reach it – work out your budget and don’t borrow more than you can afford.
Most mortgages are fixed rate, meaning the payment will remain the same throughout the life of the loan. If the mortgage you are offered is an adjustable rate (ARM), then that means after the fixed period, your payment will fluctuate. Do not rely on your future income increasing or quickly selling when taking ARMs – this is a dangerous trap that has caught many borrowers. If you have a limited income and would not be able to afford the fluctuations, than stick with fixed rate loans.
Also, make sure you explore alternative options available to you. Military veterans qualify for special loan programs as do some other government service sectors. First-time homebuyers, single parents, seniors, HUD buyers and others can qualify for FHA-backed loans that offer lower down payments and more affordable interest rates than conventional loans. Learn more at FHA.gov.
More Important Tips
- Plan on staying in your home at least 5-10 years, otherwise the costs and hassle won’t necessarily outweigh renting.
- Don’t overlook foreclosures/HUD homes – you may get a better value and possibly qualify for special loans.
- Use a 3rd party home inspector to catch expensive issues or problems with your prospective purchase.
- Give yourself and your family room to grow. Even if you don’t plan on a any new family members, having an extra room is a good idea for guests and surprises. This extends the home’s usability and ensures you’ll be comfortable in it for awhile.
- Commuting can make sense when home prices are significantly lower and the commute is less than an hour each way.
Ultimately buying home, improving peripherals, buying appliances, redecorating your room and buying new beds or tempurpedic mattresses are just like making any investment, it is best to do your homework and avoid impulsive decisions. Get your affairs in order, educate yourself about the buying and mortgage process, and shop around for the best deal. Remember that the interest rate has the biggest impact on your payment, so take steps to improve your credit. When you pick a home suited to your family and your budget, home ownership will prove more rewarding and sustainable.