Many experts will tell you that purchasing a home is the soundest investment you’ll ever make.
At the same time, home values have taken a serious hit in the last few years, leaving some people to wonder if homeownership is really all it’s cracked up to be. Others just like the comfort of knowing when the pipes burst, it’s their landlord’s problem.
But let’s face it, owning a home is still part of the American dream. There’s a certain sense of pride that comes with knowing that your home is your own. And lots of younger Americans agree. About 40 percent of people under the age of 35 own a home, according to U.S. Census data.
Still, for those on the proverbial white picket fence, purchasing a home can seem incredibly daunting. Don’t fret, homebuyers-to-be: We’ve put together 10 steps to buying your first home.
Start saving for a down payment
The biggest expense associated with buying a home is the down payment. In most cases, you’ll need anywhere from 3.5 percent to 20 percent of the purchase price to put down at closing. I’ll give you a second to do the math. For most people, that means some serious cash. If you haven’t already, start saving now. Consider setting up an automatic monthly deposit to a savings account. Set it and forget it!
Get a copy of your credit report and FICO score
Don’t get blindsided by errors or red flags on your credit report — know what’s in it before you apply for a mortgage. Under federal law, you can get a free copy each year (visit Annualcreditreport.com for more information on how to do this). Otherwise, you can purchase a copy of your report online.
Your mortgage company will use your FICO score as part of its assessment of your creditworthiness. Make sure you’re actually getting your FICO score, not a “credit score” offered by a credit bureau or other agency. The law doesn’t entitle you to a free copy, but you can get a FICO score $20 at www.myfico.com. If you are applying for a mortgage jointly with someone else, make sure you both know your scores – lenders will usually use the lower of the two.
Visit with a mortgage professional and get pre-approved
Make an appointment with a mortgage professional, such as a mortgage broker, who will go over your credit history, income and other factors to find out what kind of loan and rate you could get. He or she can send you home with a letter of pre-approval, which tells you how much money the bank will be willing to lend you. This number will help you shop for homes in your price range and will strengthen your offer when the time comes. Ask family, friends or coworkers if they can recommend someone.
Calculate what mortgage payment you can afford
Just because the bank will give you $300,000 to buy a home doesn’t mean you want to spend that much. It’s crucial to determine how much you can afford each month when you take into account your household budget. Use a mortgage calculator to plug in the price of the home, your anticipated down payment and interest rate to find out what your principal and interest will cost you each month.
Don’t forget to factor in property taxes and mortgage insurance, which are often rolled into your monthly payment to the bank. Peruse properties at realtor.com and see what property taxes cost in your area. Mortgage insurance helps banks manage the risk that you won’t be able to make your payments, and it’s typically required for borrowers who have less than 20 percent invested in their homes. Your monthly premium will depend on the size of your loan and down payment, and your mortgage professional should estimate these costs for you. Some good news: your interest and property taxes are tax-deductible. (Mortgage insurance premiums are deductible through 2010, and no word yet on whether Congress will extend that tax break in the future.)