Real Estate 101: Keys to Financial Preparedness

Equity. Escrow. Earnest money. Eeeek! Budgets. Credit scores. Debt ratios. And more! There’s a ton of new jargon when it comes to buying a home. Over the course of the next month or so, we plan on guiding you through the process, the legalese, and the weeds (so-to-speak) of the home buying process so that you understand the basics when it comes to buying a home, securing a loan, and budgeting maintenance. We want you to be prepared and know what to expect, so that you can set yourself up for successful home ownership. 

The first step to owning a home is figuring out your finances. How much home can you afford? What factors and costs do you need to consider?

Let's start with your credit score.

Your credit

If you don’t already have a good or great credit score, it’s time to work on paying off your debts, cars, or other loans. Generally speaking, the higher your credit score the more options will be available to you. That could mean a lower interest rate and/or a better loan term. There are plenty of resources available, such as credit score monitoring websites and apps that can provide tips to lowering your debt and increasing your overall score. Essentially, you want a score of 740 or better to secure most loans. 

Consider the current mortgage rates

Rates were just at an all-time low, and they are still quite low now. If you’ve worked out the remainder of this list and you’re in a solid position financially, you may want to take advantage of this buying window. If you still need to heed more of Dave Ramsey or another financial guru’s advice, then wait. Mortgage rates tend to ebb and flow with the economy, but even the smallest changes in rates can have a big impact. The lower the rate, the more affordable the home and the more you can budget for.

Establish your budget

What exactly can you afford as a homebuyer? That depends, mostly, on your income and credit. Generally speaking, anything over 740 is considered good credit and most lenders should approve you as long as you have proof of employment. Most lenders suggest a monthly mortgage payment of NO MORE THAN 28% of your monthly gross income. For example, if you bring home $5,000/month after taxes, you should spend no more than $1,400/month on your mortgage payment-- including principal payment, interest, taxes, and insurance. There are a wide range of payment calculators available for free online. You can adjust your down payment, area code, and more at bankrate.com: For example, if we stick to the $5,000/month gross income and are looking for a home in the 22204 zip code, our example family could afford a $400,000 house with a down payment of 10% or $40,000 and estimate a mortgage payment of $1,399 with AmeriSave Mortgage Lenders.

Down payments and other home-related costs

Saving up for a downpayment is the biggest hurdle. You may not have the recommended 20% to put down, but there are other options to consider. You’ll have to put down at least 3%, and most lenders require between 5-20% down. There are a few different options, however, if you can’t afford a huge down payment. Grants, government incentives, and Private Mortgage Insurance (PMI) could all be options for you, and we will delve into those in the next blog piece, as we don’t want to overwhelm you now.

We aren’t done yet, though, as there are other costs to consider, such as closing costs, moving expenses, and other incidentals. Of course, closing costs can be negotiated as part of the offer, but in this market with low inventory and most purchases going well over listing prices, buyers should expect to pay closing costs. Estimate to pay about 2-5% of the overall purchase price in closing costs. Closing costs are basically all of the fees that pay everyone helping make the transaction. Your lender, attorneys, and the real estate agents get paid, but it includes all of the paperwork: government recording costs, appraisal fees, credit report fees, lender origination fees, title services, tax service fees, survey fees, attorney fees, and underwriting fees all fall under closing costs. 

And after your hand gets a workout signing your John Hancock about one hundred times at closing, you may still have to pay movers’ fees, buy new appliances, or spruce up your new abode with some fresh paint. Just so there aren’t any surprises, it’s important to sit down with your lender or your real estate agent to consider all of the factors mentioned above. 

We will continue to layout and explain the home buying process over the next few blogs, but taking a hard look at your finances and anticipating costs is the first step to home ownership and one that you can prepare for now. If you aren’t already tracking your credit, perhaps download the Experian phone app and get started there. 

Stay tuned for our next blog, where we will tackle the lending process, escrow, and earnest money.