Are You Ready for Homeownership?
5 Steps to Owning Your Own Home
1. Check your credit history. When preparing for homeownership, you’ll want to devote some time to evaluating your credit history. Since people who repay their bills on time are likely to fulfill their mortgage obligations, lenders will use your creditworthiness to determine if you can receive a home loan. If you’re not sure what information your credit report contains, the Fair Credit Reporting Act allows you to request one free personal credit report each year.
2. Take steps to improve your credit rating. While a one percent interest difference may not seem like a lot, it can add up to thousands of dollars over the life of your loan. To save money, you’ll want to get your credit rating in the best possible shape before applying for your loan. You may want to consider quitting smoking, taking the bus to work, or replacing your morning latte with a cup of company coffee. Take the money you save and use it to repay old debts.
3. Determine what you can afford to spend on your new home. If you’re wondering how large of a mortgage you can expect to qualify for, multiply your yearly gross income by 2.5. However, you may not want to actually spend this much money if you anticipate an upcoming change in income or added expenses such as paying for a child’s education. Before you commit to buying a home, you must be confident that your total debt is at a manageable level. Homeowners must be able to accept responsibility for property taxes, repairs, and other costs associated with homeownership.
4. Gather funds for a down payment. In most cases, you’ll be expected to use some of your own money to finance your new home. As a rule of thumb, you’ll want to have the largest down payment you can afford in order to avoid the expense of private mortgage insurance. To save for a down payment, open a separate bank account and arrange to have a portion of your paycheck automatically deposited. If you plan to use a gift from a family member as part of your down payment, check with your lender to see if this will be acceptable.
5. Know your rights. Since many people are unaware of all the fees involved in obtaining a mortgage, the federal government has enacted consumer protections to provide you with the information you need to make an informed decision about your home loan. When you apply for your loan, lenders are required to offer you a Good Faith Estimate that lists the approximate charges for your mortgage. The federal Truth in Lending Act requires that lenders provide you with a full disclosure of the terms of the loan agreement and the cost of obtaining credit before your home loan is finalized. Review these documents carefully and ask for clarification if necessary.
