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Take These 4 Steps Before You Buy a Home

By Melissa Green | Citizens Bank Staff

Becoming a homeowner can be an intimidating process for anyone, especially young adults. Before you contact a real estate agent and begin viewing houses, there are a few steps you should take to prepare yourself financially.

Buying a home starts way before you apply for a mortgage. To help set you up for success, complete these four financial steps.

Save for a down payment

As soon as you set homeownership as a goal, you should start saving for a down payment. A solid objective to strive for is 20% of the purchasing price. If that sounds unrealistic, don’t worry you can still qualify for a mortgage with a lower down payment — the average first time home buyer puts down 6%. Additionally, there are programs that allow you to put as little as 3% down. How much you should put down will depend on your unique situation.

Some of the advantages of putting down more than the minimum down payment:

  • You may be eligible for better interest rates.
  • The less money you need to borrow, the lower your monthly mortgage payment will be.
  • You won’t have to pay for private mortgage insurance (PMI).

Check your credit report and score

Your credit score plays an important role in qualifying for a mortgage. A score of 740 or above will help you qualify for lower interest rates; while scores below 740 may prompt lenders to offer you higher rates.

The difference between interest rates can equate to thousands of dollars over the life of the loan. Take a look at the example below.

30-year fixed-rate mortgage:

  • Loan A: $300,000 + 4.25% interest rate = $1,476 monthly principal and interest payment
         Over the life of the loan you pay = $531,295
  • Loan B: $300,000 + 4.62% interest rate = $1,542 monthly principal and interest payment
         Over the life of the loan you pay = $555,271
    • Loan B costs $23,976 more than loan A over the life of the loan.

Because your credit score impacts your interest rate, go through your credit report to make sure everything is accurate. Every 12 months, you’re eligible to receive a free report from each of the three major credit bureaus — Experian, Equifax, and TransUnion. Dispute anything that looks incorrect directly with each bureau.

Many would-be home buyers find themselves with flaws on their credit reports from missed student loan or credit card payments. Before you apply for a pre-approval, make sure you’re presenting yourself as a strong, responsible borrower.

Determine how much home you can afford

It’s time to take a realistic look at your budget and determine how much you can comfortably spend. Your lender will have their own guidelines for determining how much they are willing to lend. They’ll consider your:

There are pieces to your financial story your lender may not take into consideration. If you’re planning to have a baby, get married, or anything that may impact your expenses, make sure you include these when creating your budget.

Experts recommend that your mortgage payment (including homeowners’ insurance, property taxes, and, if applicable, mortgage insurance) be 28% or less of your gross monthly income.

For example: If a couple’s gross monthly income is $10,000, their mortgage payment should be $2,800 or less.

Research your potential neighborhood

Knowing how much you can afford will help you narrow down where you look for homes. It’s important to do some research on the neighborhoods you’re considering. For example, you’ll want to consider the local job market and cost of living. Are their plans to build a train station or shopping center in your area? The development of a neighborhood could affect your property value, so do your homework on your potential area.

Here are some other factors that may impact your quality of life:

  • Access to public transportation
  • Length of commute
  • School system
  • Crime rate
  • Upcoming development projects

What to remember

Purchasing your first home can be a significant undertaking, but it’s not impossible. By preparing yourself financially, you’re already on the right path to being a successful homeowner.

More information

The road to homeownership can be an exciting one. We can help you develop the right plan to save for a home and find the right mortgage for you. For personalized assistance in preparing for a home purchase, talk with a Citizens Bank Loan Officer.

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