Are you planning to buy a home in the next few years? Throughout the last few years as a real estate agent, I have found that there are numerous guides on the home buying process but very few on how to PREPARE to be ready for home ownership.
How much down payment do you need? How do you save for it? Preparing and budgeting for a home can take months if not years and we are never taught what to do in school. What credit scores are needed? What even IS a credit score?!
I’ve created a FREE workbook that takes you through visualization exercises, downpayment calculations, credit growth tips, and arms you with some of the best home ownership tools out there! I even include a few budget saving challenges and a blank budget calendar for you to fill out! I encourage you to download it and work through the exercises with me, otherwise you can get a summary of it in this blog post!
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1. Know why you are buying a home
This is one of the most important steps throughout the process. You need to figure out WHY you want to and need to buy a home- is it because you’re outgrowing your apartment? Are you tired of throwing money away for rent? Are you ready to invest into your future? The home buying process can lead to some obstacles and if you do not have a clear “why” then it might cause you to veer off track and lose sight of your goal. Take a few moments to write out everything you believe home ownership can bring you and hone in on WHY you are taking this step!
2. Determine your budget and timeline
The top 2 things that keep people from buying are a low credit score and not enough savings for a downpayment. In order to qualify for an FHA loan (one of the most common loan programs), you need to have a 580 credit score and a 3.5% downpayment. Besides that you will also need roughly 4% of the purchase price towards closing costs. (This is all according to current guidelines, please check with your mortgage lender to confirm).
Common Loan Programs and Downpayment Amounts:
- Zero downpayment for VA (veterans) and USDA (rural areas, USDA eligibility map)
- Downpayment Assistance Programs (These typically have a higher interest rate than if you were to cover your own downpayment. Here is a tool to find programs)
- 3.5% FHA loan
- 3% Conventional Loan for first time home buyers (those who haven’t owned a home in the last 3 years)
Closing Costs (~4% of purchase price): sometimes you are able to negotiate and have the seller cover these.
Home Buying Process Costs (~$1,500): These are the costs accrued during the actual home buying process. The costs below could vary depending on your state, but they are roughly:
- Inspection: $600 (could be more or less depending on the inspection types)
- Appraisal: $600
- Survey: $300 (Sometimes the previous seller has one they could provide)
Now that you know the costs of buying a home, you can work backwards and determine how long it will take you to save the money. My workbook goes through an example and walks you through the calculation. It also has a blank calendar template where you can set monthly, weekly and daily savings goals for yourself as well as some fun savings challenges you can do!
3. Tackle your credit score
Our credit history plays a part in so many day-to-day items: utility companies, car loan providers, mortgage loans! A number of my clients have received a copy of their credit report and were shocked at unknown collections they had, or credit cards they had forgotten. It is important to monitor your credit and you can do so by regularly reviewing your credit report. You are able to request 3 FREE credit reports per year (one from each of the credit bureaus). I would recommend spreading out the requests throughout the year so you are constantly monitoring the reports. You can request yours here.
Unfortunately, the free credit report will not provide your credit score, but below are a few resources you can use to check a rough estimate of yours. Keep in mind that the credit score lenders pull will most likely be different than the one these websites show. Lenders look at all credit scores from all 3 bureaus.
- Credit Karma
- Credit Sesame
- Check if your bank will provide one
What minimum credit scores do lenders require?
All lenders are different, but below are a few average scores to aim for
- VA-580
- USDA- 640
- Downpayment Assistance- 620
- FHA- 580
- Conventional- 620
What goes into a credit score?
- 35% Payment History
- 30% Total Debt
- 15% Length of History
- 10% New Credit History
- 10% Types of Credit Used
The most important aspects of a credit score are Total Debt and Payment History. It is important to keep your Total Debt down and pay all of your credit cards/bills on time. Try to use less than 30% of your credit lines
15% Length of History: Many people neglect this, but it makes up a big chunk of the credit score! Very often I see people talk about cutting credit cards up and closing the accounts, when length of credit history is so important. Creditors want to see that you are an experienced credit user.
10% New Credit History: If you are applying for new credit cards often, this can hurt your credit scores.
10% Types of Credit Used: Lenders want to see applicants have at least 3 types of credit. The most common ones are credit cards, car loans, and student loans. It is important to diversify your credit portfolio. Banks love it when you use them and when you use them well.
As you can see, many aspects play a role in your credit score. Do not let yourself get discouraged and talk to a lender to decide which aspects you should focus on first.
My free workbook also lists a few tips on growing your credit and how to improve your score!
4. Decide what you are looking for
I believe visualization is such a powerful tool for achieving your goals. Take a few minutes to picture what your life would be like as a homeowner. It will help you realize what you’re looking for in a house! Picture yourself throughout the work week as well as the weekends. How do you use the space? Do you spend more time in one area of the home than the other? What are your priorities? Focus on the items you cannot change easily (you can always add a fence and paint the walls later).
5. Familiarize yourself with the tools
Below is a list of FREE tools I would love to share with you for your home buying journey!
- Home search App: This app is a wealth of information. It is directly linked to the Multiple Listing Service and here are just a few of its features: street view, property lines, school districts and their rankings, (you can even search by school district), commute time, mortgage calculator, photos, and it works with GPS! The GPS tool is helpful when you’re driving past a home and do not have time to capture the address.
- Home Search Websites: These websites are commonly used for searching for homes. They are more user friendly than other sites, but sometimes have errors.
- Crime Maps: Realtors are not allowed to disclose to you which areas are safe or not. It is best to do your own due diligence and drive around the neighborhood at different times throughout the day to decide whether you’re comfortable with it. Here are two free tools you can use to find local crimes and sex offenders:
- Sinkhole Map : In Florida, sinkholes are very common. If you are nervous about sinkhole activity, the following website shows a map of reported sinkholes (not all of them will be on here).
- FEMA Flood Zone Map : If you are worried about flood insurance costs and being in a flood zone, you can check the FEMA website for most up-to-date information.
- Tax Estimator Website: I always recommend checking your county tax estimator to determine a more accurate estimate of your taxes. Go into Google and type: “Hillsborough County Tax Estimator” (substitute the underlined portion for your county).
- Neighbors : The best way to learn about a neighborhood is to door knock and ask the neighbors. They will be the ones who are most honest with you and will let you know what they love about the neighborhood and what their concerns are.
6. Interview Realtors
Here are the most common ways to find a Realtor:
- Referral from friend and family. ask around! Realtors know Realtors all over the country as well, they can help you find a Realtor no matter where you are based
- Search on Zillow, Yelp, or Realtor.com you will be able to read their reviews here too
- Visit open houses- Realtors regularly host open houses and it’s a great way to quickly meet numerous Realtors
- Social media- follow popular hashtags on Instagram (#tamparealtor , etc). you can learn a lot about a Realtor on social media.
7. Interview lenders
I encourage you all to shop around at least 3 lenders! Each lender will have different loan programs and offer different rates, find the one that suits you best.
Here are the most common ways to find a lender:
- Referral from a family, friend or co-worker.
- Search on Zillow or Yelp! You will be able to read their reviews here too.
- Social media- follow popular hashtags on Instagram (#tampalender , etc)
8. Get your documents ready for a pre-approval
The pre-approval process is what helps determine your eligibility for a loan! It takes about 30 minutes and can either be done online, over the phone or in person. I would recommend shopping around at least three lenders. Before calling the lenders, be sure to have the following documents ready (they will also pull your credit and verify your employment):
- Last two years W2s
- Last two years Tax Statements
- Last two months bank statements
- Two most recent pay stubs