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Saving for a New Home
So you want to buy a home and finally stop renting. It’s the American dream, right? Now that we are recovering from the housing bust, thousands of people are dipping their toe into the housing market. Planning for such a big purchase requires patience, research, and some key decision-making. If you have a year, we’ve got some helpful information packed in two articles.
We are breaking down four critical factors in the first six months of saving for home ownership.
Start saving and understand the different types of available loans
Check and improve credit reports as necessary
Determine your real needs versus wants
Determine the mortgage you can afford through budget analysis
Day 1 of Month 1, start saving: The down payment required will vary by loan type. With a VA loan, $0 down is required for eligible members (i.e. service members, veterans, and eligible surviving spouses). Another government program, the FHA home loan, requires a minimum of 3.5% down. With conventional loans, a minimum of 5% down is possible with a good credit score. However, if less than 20% is put down, the lender will likely require Private Mortgage Insurance (PMI) which will increase your monthly mortgage payment. The more money you put down, the better the chances of securing a loan and avoiding PMI.
Month 1, check your credit reports: A good credit report, generally considered to be a FICO score above 700, can be a valuable asset. With a higher score you can get a better interest rate on a loan. Even seemingly insignificant errors can result in a higher interest rate or cause you to be denied a loan completely. Therefore, check your credit report regularly for completeness and accuracy from all three bureaus (Experian, Equifax, and TransUnion). Free credit reports are available through Annual Credit Report, a government-approved site.
Months 2 – 3, determine your needs: The home’s neighborhood, square footage, number of bedrooms, etc. will determine the cost. Spend some time researching different potential neighborhoods and evaluating how much house you really need early in the process. By doing so, you will get an idea of how much your desired home will cost and the amount needed for a down payment.
Months 4 – 6, determine the mortgage you can afford: Developing a budget – a spending plan for the money you earn – is critical for determining the mortgage payment you can afford. The first step in the budget process is to track expenses over a three month period.
The two benefits of tracking expenses and budgeting are to identify ways to decrease expenses, freeing up more money to save for the down payment. Buyers must determine an affordable mortgage payment factoring in utilities, insurance, emergencies, and lifestyle.
James Molet is the author of RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit available on Amazon.com. Mr. Molet shares insightful financial information for Healthyblackmen.org readers seeking to purchase a home, this is part one of a two-part series.