HOW TO BUY A HOUSE?
As my husband and I prepare to buy our first home, I was in for a reality check of how overwhelming the process is. Once we made the decision that we wanted to own a home I quickly realized that I knew very little about the process.
Both of our parents came to America from Puerto Rico with the dream of starting a family and raising them with the hopes of giving their children better opportunities. For years of our relationship owning a home wasn't something we wanted. I liked the no strings no responsibilities lifestyle that renting provided. But when we got married our perspective started to shift. When we wanted to start a family, thats when the dream of owning a home became a desire. I wanted to see my children have a backyard to play and have a home big enough for them to run around and play.
So with the dream came a lot of research. I am a researcher. I never jump into a decision with feeling prepared and knowledgeable. This is when I realized I had a lot to learn about the home buying process.
BE PREPARED BEFORE YOU BEGIN
The first I wanted to do was learn what the most important steps to take before buying a home. I looked up so many articles and watched a few youtube videos from mortgage lenders. I learned that its important to learn the Five C's of credit for every first time home buyer. The Five C's of credit are character, capacity, capitol, collateral and conditions. If you want dive more into this there is a great article via credit karma that breaks this down into detail.
With that being said we started to dive into credit reports. Now my husband credit score wasn't above 600 when we started this process so we quickly pulled up all three credit reports for free via annualcreditreports.com and strategized. In this process I suggest you carefully make sure everything listed is accurate. We reviewed personal identifying information, all soft and hard inquiries made, all accounts listed etc. We realized that his debt to income ratio was low so in order to increase that I added him to my credit card as an authorized user.
Why I did this?
I had the better credit however he had the two consecutive years of employment so we knew he was going to be the primary lender. But since I had the better credit my credit card had a higher credit limit and I always made my payments on time. I researched this method and saw that being added as an authorized user to a responsible credit card holder that had a high credit limit and made payments on time was a high to bump up your credit score.
Next we looked at debt to income ratio. This plays a huge role in qualification for a mortgage. Lenders look at this as part of the pre-approval process. Lenders calculate your debt to income ratio by dividing your monthly debt obligations by your gross income (pretax). Now there are many different opinions on what the best percentage to have is. But I wanted it as low as possible. We had a goal of 10-20%. I wanted all credit cards to zero!
SAVING FOR A HOUSE
Whether you are planning to apply for a loan that will minimize your down payment costs lenders still want to see that you have money in your savings or checking accounts. A real estate friend of mine recommended we make an appointment with a friend of hers who was a mortgage lender. When we met with her one thing that she mentioned was that underwriters (who I had to research what that was) want to see that your deposit and closing costs have been in your accounts for a couple months confirm your financial stability. This was a big eye opener for me because I didn't find this information online! Bottom line is: the more money you can save the better.
I started to research Dave Ramsey's steps to first time home buying. Now if we followed his steps to a tee we wouldn't own a home until 10 years from now! But I wanted to read what his recommendations were.
First I wanted to ensure we had an emergency savings fund. Dave recommends $1000. I saved this amount in my savings account. Next we worked on saving for both a down payment and closing costs. Luckily this year we are actually getting a tax return so that return will go into our house savings account.
We researched local grants in our area and federal loans that we would qualify for. In a perfect world yes it would be better not to have to apply for any of these loans like Dave Ramsey suggests but it is what it is! If you can do it his way so you have more financial freedom then GO FOR IT!
Steps to save money are different for everyone and personal. We are currently in this phase and haven't hit our goal yet. When we do I will write a dedicated in depth post on this for you guys!
So for now this is where we are at guys!
As of now our steps have been:
1.) Research the process before beginning
2.) Knowing our credit and working on a goal of improvement
3.) Lowering debt to income ratio (DTI)
4.) Setting up an emergency savings fun
5.) Strategizing our savings goals
I hope this posts is a source of encouragement or resource for anyone thinking of buying a home. Subscribe to this blog to get the latest news on new posts and an alerts of new posts within this series!
If you have any advice or tips for the FAM please leave them below!
Stay safe everyone and remember to wash your hands!
Hi Alana,
ReplyDeleteThanks so much for posting this and encouraging everyone and I who is also looking.
A bit of clarification:
1. $1000 is the starter emergency fund under Baby Step 1 of Dave Ramsey’s plan
2. He however recommends that before buying a home we save 3-6 months expenses (based on mortgage) - that is Baby Step 3. This helps cover costs if a family loses income.
3. The house deposit savings he classified as baby step 3b and encourages the 20% to reduce your risk and avoid negative equity (and for those in the US to reduce PMI)
I agree that 20% down payment is far fetched and there are schemes out there that doesn’t require 20% but still makes the monthly payments affordable.
I have saved 6mths expenses saved and trusting God for the right home. Again like you say, clarity and patience.
Thank you for this post. Will be looking out for follow-up ones