(This post is part of our Free First Time HomeBuyers’ course. For more information and/or to sign up, click on this link, or select ‘Education’ under the ‘Buy’ drop-down menu above.)
Sure, you might have enough money for a down payment, but that’s not enough. Hopefully by now, you’ve had a few years to establish your credit through credit cards, loans, etc. Since this is the most important factor in determining how much money you can put toward a house, it’s good to start a few years in advance. That might be disappointing to some people who thought they were more ready, but it’s a responsible decision to make- waiting until you’ve built up better credit before buying a house. There are a few ways you can start establishing credit if you haven’t already:
1. Become an authorized user on someone else’s card. When I turned 16, my parents gave me a credit card of my very own, under their account. I was only allowed to use it for gas- but to this day my credit is reaping the benefits (because they always made payments on time).
2. Get a credit card. There are secured options for those of us who are very careful, and then there are unsecured options (with a co-signer) for those of us who just want to go all in immediately (having done it that way, I’m not sure I’d make the same choice again).
3. Sign up for a rent-reporting service, that attributes your rent toward your credit score- which is like a credit card without all the risk and interest, as long as you pay your rent on time.
4. Apply for a credit-builder loan (which is exactly what it sounds like).
Already have credit, but it needs a little work? There are some simple ways to get that number up.
1. Make all of your payments on time. We’re talking 100%. Make your bills the first thing you pay every month- don’t wait until two days before. I have my credit card payment dates scheduled in my phone’s calendar- and I set my phone to remind me a few weeks before, and then 1 week before it is due. Most of the time, I get to shrug those reminders off, because I’ve already done it. But other times, those things saved my life (well, credit, same thing almost).
2. Keep your credit utilization low. The agencies like to see that you have the possibility to get yourself into a lot of debt. They also want to see that you DIDN’T DO IT. Key words- DID NOT. Most recommend using a maximum of 30% of your credit line if you do not pay the card off every month.
3. Don’t close those old accounts. The longer you’ve had accounts open, the better it looks. Tip: If one of your accounts has fees (like those lovely annual fees), that’s an okay one to think about closing. Consult your personal banker or mortgage specialist to figure out exactly what would be best for your credit.
4. Check your credit reports. There are three agencies that give you scores: Equifax, Experian, and TransUnion. You get one free copy of each report once a year- if you request it more than once, it can ding your credit- so don’t do that. You have the option to get all 3 at once (which is simpler) or to space them out over 4-month intervals (which is smarter). You can do all of it on https://www.annualcreditreport.com/ – that’s the only source authorized by Federal law to give you free credit reports. Be wary of letting anyone else get into a number that is so crucial. When you’re a young adult, tracking your credit should be an obsession. If you don’t already, print out a line graph and start tracking the movements of your credit every time you hear about it.
Alright, so your credit is good (ideally a 750 or higher. 620 is usually the minimum required to get a mortgage). Awesome! Now, do you have enough money saved up in your emergency fund? Financial advisors recommend having emergency money saved, so that if- for any reason, heaven forbid- you get this house and then lose your job, you have a cushion. It should be enough to cover what it costs you to live and pay bills for 3 months. On top of your emergency money, do you have enough money set aside to make a good down payment without digging into your savings?
What about covering those little hidden expenses?
There are a lot of expenses people don’t think about when they plan on buying a house. As the buyer, just to get the house you must pay:
· Down Payment (ideally 20%)
· Half of the title and escrow fees
· Lender fees (for obtaining that mortgage)
· Homeowner’s insurance (they usually require a minimum of one year up front)
· Fee to obtain your credit report (your free ones can’t apply)
· Inspection and appraisal fees
· Moving costs
On average, closing costs run 2-5% of the purchase price of the home, so you have to be prepared. Then, you have to consider the monthly costs of owning a home- which include:
· Interest for your mortgage
· Property taxes
· Standard maintenance
· Property insurance
· Landscaping/Lawn Maintenance
· Pool (if applicable)
· HOA fees
· Home Security
As a first time buyer you have to ask yourself: can I afford to spend that much money each month, ideally, without exceeding 30% of my income? Am I in a stable enough place in my career where I can be certain I will have job security for years to come? This is an investment you’ll have for a long time- the National Association of Home Builders found that people stay in the same home for an average of 13 years. Can you be relatively positive that you’ll be able to take care of those monthly costs even then?