Preparing for Home Ownership
Thinking about buying a house? Finding the idea a little daunting? It’s a big decision and an important one for your future, especially if you’re considering your first home mortgage. This is a good place to start gathering information that can help you decide whether or not to pursue the dream of home ownership and how to make that dream come true.
The Benefits of Home Ownership
Owning a home comes with responsibilities that renters avoid, but it also has a number of financial and non-financial benefits that make it well worth considering:
- Opportunity to build equity. Paying down a mortgage, increases in housing value, or homeowner improvements may all build equity and personal financial wealth.
- Partial control over housing costs. Fixed mortgages ensure level payments over the life of the loan. Although payments can rise with adjustable-rate mortgages, the law mandates a lifetime cap. Landlords can raise rents as much and as often as they wish.
- Tax advantages. Some or all of the interest paid on a mortgage, depending on its size, is deductible. Rent is not.
- Credit improvement. Paying off a mortgage on time each month is good for credit.
- Lifestyle freedom. Homeowners can change or decorate their home to suit their own taste. They can also have pets, set up a workshop or do other activities a landlord might not allow.
- Long-term appreciation. No one knows what the housing market is going to do in the short-term. But despite some dips, residential real estate has historically tended to rise in value, relative to inflation, over the long term.
- Pride of ownership and community involvement. Studies have shown that homeowners are more likely than renters to be active in their community.
How to Prepare for Buying a House
Many individuals, couples and families may not believe they’re financially ready to purchase a home and aren’t sure how to get ready. A combination of saving and building good credit is the answer. Adequate savings makes it possible to afford the expenses associated with the purchase of a home. Good credit ensures that potential buyers are eligible, low-risk candidates for a mortgage.
Budgeting for a House
The first step to owning a home should begin well before its purchase – with savings. To save consistently, future buyers need to make it part of their monthly budget. Of course, buyers need to know how much they ultimately need in order to plan out their monthly savings.
The expenses they need to cover at home buying time include:
A down payment: The higher the down payment, the lower the ongoing monthly costs. Plus down payments less than 20% generally require buyers to purchase private mortgage insurance, an additional monthly expense.
Closing costs: Closing costs are the fees required to obtain a mortgage and transfer ownership, such as attorney costs, an appraisal, title insurance, a recording fee, points, and a loan origination fee. Sometimes buyers can negotiate for the seller to pay some of these fees.
Post-purchase reserve funds: Lenders want to see that buyers will have savings left over after their home purchase. This provides assurance that the mortgage can be paid even if the buyers experience cash flow problems. At least three months worth of mortgage payments is a good safety net. A good reserve fund should also include enough to cover the deductible on the homeowners’ insurance policy, in case anything happens to the home.
Extras: When home buyers plan to purchase a fixer-upper, appliances or new furniture, these costs need to be included in their savings plan.
The amount that potential homeowners can save per month will depend on their income, timeline and how much of a priority they make it. Having a set amount automatically transferred from checking to savings after every paycheck can help make saving painless. Individuals and families can also try lowering their day-to-day expenses to have more to set aside. For example, they could eat out less often, take a stay-cation this year and explore locally, cancel subscriptions for apps or tv networks that they don’t really use, or just refrain from buying things on impulse that they don’t really need. Which is more important — a cute new purse, a fun new gadget or a new home?
Careful budgeting doesn’t end with the savings period, of course. Home buyers also need to be prudent when choosing a house. They should know exactly what their must-haves are and how much they want to spend — and then stick to the plan. This requires patience, but is well worth it. Finding the right house at the right price is essential if buyers don’t want to find themselves frustrated by a home they don’t really like or feeling the pinch of too-high housing costs.
Building Credit Score for a Mortgage
To get a mortgage, especially one with a low interest rate, home buyers generally need to have a good credit score. The most common scoring model is the FICO score, issued by Fair Isaac Corporation. Scores range from 300-850 and the higher, the better. They are calculated using data from credit reports compiled by three national bureaus: Equifax, Experian, and TransUnion. A lender may check a home buyer’s score from all three bureaus or only one.
What are the potential red flags on a credit report?
Late payments: Late payments definitely impact scores negatively. The more recent, frequent, and severe the lateness, the lower the score. Bankruptcies, judgments, and collection accounts have serious consequences.
Excessive debt: Carrying high balances on revolving debt (like credit cards) and personal loans, especially if the balances are close to the credit limits, will lower a home buyer’s score.
Short credit history: The longer home buyers have had their accounts, the better.
New additional credit: Recent inquiries (other than by the credit holder) and newly opened accounts can lower credit scores. However, all mortgage or auto loan inquiries that occur within a short period of time are considered just one inquiry for scoring purposes.
Lack of credit variety: Scores are boosted if home buyers have a variety of accounts, such as credit cards, retail accounts, and loans. Having only credit cards and no other types of loans, such as a car loan, can be detrimental.
It’s a good idea for everyone to review their credit report regularly, but it is particularly important for prospective borrowers. Even with an on-time payment history and low level of debt, home buyers can suffer if their credit report contains score-lowering errors. They should do a check at least 60 days before they plan to apply for a mortgage, as it can take some time to resolve issues.
Free credit reports are available from Experian, Equifax, and TransUnion once a year through the Annual Credit Report Request Service. Errors can be reported by sending a dispute letter to the relevant credit bureau(s) indicating which information is incorrect. The reporting bureaus must investigate all claims and remove unverifiable information.
Home Shopping Tips
When it’s time to start home shopping, there are many things to consider. All prospective home buyers want a house that fits their taste and “speaks to them.” Of course, every family will have space requirements too, like a minimum number of bathrooms and bedrooms that will accomodate them comfortably. They may want a yard or low maintenance outdoor space, community amenities or complete privacy. Plus there are other practical considerations.
Location. Location. Location. There’s a reason for that saying. Home buyers need to consider what kind of neighborhood they want to live in — one with lots of children, more mature families, or a mix. Are there parks and schools nearby? Even if young families have no children yet, they might want to plan ahead. Is the location near to shops and restaurants? Is the neighborhood up and coming, stagnant, or heading downhill? This will affect future home values and the financial health of anyone who buys in the area.
Home buyers shouldn't ignore any of these considerations. No matter how wonderful a front porch a home has, buying it can quickly result in regrets if it falls short in other areas.
Calculating Home Ownership Costs
Of course, remember that cost is a critical consideration. Buying a home that’s too expensive is a bad decision that can have serious financial consequences. Every home buyer should have a ballpark figure that they know is affordable before they get into shopping mode.
If you aren’t an expert in financial calculations, you may be wondering how you will ever be able to figure this out. Bethpage is here to help. Our How Much House Can I Afford calculator will analyze the estimated loan amount you'll qualify for — and the total price tag of the home you can comfortably buy — based on your down payment amount, affordable monthly payments, term and loan interest rate.
Laying the Foundation for a Mortgage
One other step can be very helpful for serious home shoppers — pre-qualification. It starts with a mortgage application. A lender uses the information provided on a home buyer’s application to provide an informed estimate of how much they can borrow. The pre-qualified amount isn’t yet a sure thing because the lender will take a closer look and verify all the information later in the loan process. However, most lenders will provide a pre-qualification letter that buyers can show to home sellers to demonstrate that their offer on a home can be taken seriously.
Getting pre-qualified for a mortgage with Bethpage can make home buying smoother and quicker. You and your seller will know what you can really afford, which can make all the difference between getting your dream home and losing out.
Applying for a Mortgage with Bethpage Federal Credit Union
When you’re ready to purchase your home, Bethpage is ready to help you through the process. We have professionals to guide and advise you on all the choices you’ll need to make from your type of loan to its term length. Plus, we’ll keep you informed throughout the loan process so you know what’s going on.
Ready to take the next step?
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