If you live in an apartment and can cover your rent from month-to-month, it may at first seem senseless to purchase a house. After all, people typically need decades to pay off a mortgage or two, right? However, buying a home provides several advantages, such as tax benefits, equity building, appreciation, and the satisfaction of ownership. Following these tips can definitely make purchasing your home an easier and more efficient experience:
1. Pay off your debt in full
A frequent mistake of potential homebuyers is saving money for a downpayment on their home, rather than paying off other outstanding debts. A wiser decision would be to utilize the extra capital to abolish other consumer debt with sky-high interest, such as credit cards. The reason is that credit-card debt is pricey and inhibits your capability of saving. Secondly, credit card debt will restrict the amount that you can borrow. Lenders frequently disallow your sum monthly debt service (i.e. student loan, property tax, credit card, mortgage) to surpass approximately 40% of your total income.
2. Assess how much you can afford to spend
To determine this figure, you should make two considerations. The first is how much capital you can borrow. As a general rule, your taxes, homeowner’s insurance, and mortgage payment should not surpass 28% of your gross income. Secondly, you ought to determine the amount of cash that you can dedicate to a downpayment. Remember to save enough capital to cover the closing costs. They can account for 3%-5% of the total value of your home. Lastly, dedicate some funds for emergency repairs that are essential after transferring to your new home.
3. Consider multiple types of loans
If you possess good credit, a steady job, and are purchasing your first house, then you can purchase a home without making any downpayment. These types of loans are more accessible and affordable. Nonetheless, you can increase your options by paying a larger downpayment. Furthermore, private lenders are offering programs designed especially for first-time homebuyers. Lastly, to avoid paying any mortgage insurance, consider taking out a pair of piggybacked loans, also known as 80-10-10s. These loans are pricier than a traditional mortgage and have steeper closing costs. Nonetheless, they generally are cheaper than private mortgage insurance.
4. Bad credit might be less of a problem than you think
If your credit is slightly tarnished, then you might qualify for mortgages that are up to 2% below different financing. However, if you your credit does not qualify for these loans, you may qualify for loan that the Federal Housing Administration (FHA) insures. The government insures these loans that have even less strict credit requirements. You can make a minimum downpayment of 3% for an FHA loan. To secure a loan that the government insures, you must locate a HUD-approved lender or a mortgage broker who is affiliated with one. No limit exists to qualify for a loan that the FHA insures, but the amount you can borrow is restricted.
5. Never dismiss downpayment assistance programs
Every year the U.S. Department of Housing and Urban Development (HUD) provides states and regions funds for housing–for low-income and moderate-income families. A significant amount is used for downpayment programs. You may qualify for a grant to dedicate to your downpayment or closing costs. To be accepted for a downpayment assistance program, you must earn 80% or less of an area’s average income.
