For someone who wants to stop renting and start owning a home, the goal may feel like steep climb. With housing prices and rent rising, it can be hard to imagine making a large purchase such as a home. However, with research, due diligence, and a practical approach, you can start to make steps for transitioning to home ownership.
Understanding your credit score
One of the biggest factors that affects the ability to buy a home is your credit score. There are minimum scores required for different loan programs, and a higher score may also help you when looking for a larger loan amount. Paying bills on time, making sure you have no overdue bills and debt, and keeping your credit usage active and balances low will help improve these scores over time.
There is also good news for people for people with large medical debt in the state of Maine. In the past, that medical debt would be reported to credit reporting agencies as debt that was in default until it was paid off. Just recently however, Maine legislature passed a bill that requires medical debt to be reported as a consumer credit transaction, as long as the patient is making regular, scheduled periodic payments towards their debt (which means a better credit score). You can find out more here: https://legislature.maine.gov/legis/bills/bills_129th/chapters/PUBLIC77.asp
Knowing the types of mortgages available
One of the biggest hurdles to home buying is saving up for a down payment. In the past, mortgages often required approximately 20% down payment of the home’s value which would have been anywhere from $20,000 – $50,000 for the average first home. For many people that is a year’s worth of their salary, and not practical for the average consumer to save up over time. However, now-a-days many mortgages offer plans with lower required percentages on down payments.
The Federal Housing Administration (better known as FHA) loan is a mortgage that is targeted to help low-to-moderate income borrowers and first-time home buyers in purchasing a home. Loans with less then 20% down payment do come with the caveat of paying for mortgage insurance, but you can talk with an experienced mortgage broker to understand how that may affect you.
USDA Rural Development Program has some no-money down loan programs but the program is restricted to certain areas and it has an upper income limit.
Some lenders also have in-house loan programs with 5-10% down payment options.
Calculating your home buying budget
If you have a good credit score and a solid income, you may be approved for an amount that is much higher than you would like to spend per month. There are mortgage calculators all over the internet that can help you calculate monthly cost of a loan amount with a percentage of a down payment. In general, most mortgage lenders say that you shouldn’t spend more than 28% of your monthly income (before taxes) on your mortgage payment; however, you still should take the time to factor in any other debt, loans, and credit card payments into your desired mortgage rate.
If you find a home that you are interested in buying and is within your initial budget, make sure to investigate the average cost of utilities and taxes per year, as well as any association fees if applicable. If a home that you are planning to purchase is older or needs extensive repairs, you will also want to calculate an emergency repair fund that is separate from general savings. An experienced Real Estate Agent can help you better understand these expenses when researching a home!
Separating “wants” and “needs”
Often times, when we might start the home buying process, we have one big list of “needs” that narrow down our available choices and may push you out of your price range. When you are examining your list, take time to consider what is a “want” vs a “need”. For example, 15 minute commute to work may be ideal, but if living a little further out can save some significant money, it may be worth the trade-off! However if you are a family trying to triangulate between different workplaces and school, considering the commuting time for all of your family members is more than likely a “need”. In this case, you may want to consider other factors, such as an extra bedroom or a deck to be a trade-off item to help you save.
If this is your first home, it doesn’t need to be perfect. As you live in the space, investing time in making improvements and maintaining the home will help build its value over time. When the time comes to move on, not only will you have built this investment that allows you to buy your next home, but you will have a better understanding of the things that truly matter for you and your family’s needs. When navigating this process, your Real Estate Agent has the expertise to help guide you towards a first-time home that will work best for you!
