Millenials now comprise the largest current block of homebuyers.
Buying your first place can seem overwhelming, but there are steps to ease the process.
Prepare financially.
Build a solid credit history. Minimize debt. There are steps to improve your credit score and build a positive credit history. Here are some suggestions.
1) Open, maintain, and only charge what you can payoff at the end of the month.
2) Closing a credit card can affect your credit score even if it is at a zero balance. Here's why.... if you do have debt and you close a card that has no balance, you remove part of your total credit limit available. That raises your debt ratio. Consider it this way. If you owe $4000 and have a total of $20000 credit limit, your ratio is only at 20%, however if you close one of your cards that has a $10,000 credit limit, you suddenly now have used up 40% of your available credit. This can affect your overall score.
3) Minimize debt as much as possible. Pay off student loans as quickly as you can.
4) Your debt to income ratio is your total debt/ gross income. Lenders typically want you to be under 36% in this ratio.
Save, save, save.
1) Your downpayment. There are many loan options these days. While 20% or higher is always the best scenario for a mortgage, there are loan products ranging from 3 1/2% to 10% down. The caveat to any downpayment under 20% is what is called PMI, or private mortgage insurance. This is added to your montly payment until your property reaches a 20% equity at which time, you can petition the bank to remove the PMI. Important note, on FHA loans after 2013, PMI stays attached for the life of the loan. That means the only way to remove it, is through a refinance.
2) Closing costs. These can range anwhere from 2-5% of your mortgage. You will have an accurate idea of closings cost once you officially apply for a mortgage. A loan estimate, a three page document, will be issued to provide a clear picture as to all closing costs, terms, rates, monthly payment,etc. This took effect in 2015 after new federal guidelines were put in place to protect the buyer.
3) Prepaids. This includes escrows for taxes and insurance. Every lender will want guarantees that these two important factors will be paid on the property. Homeowners (or hazard) insurance, Windstorm, and Flood insurance all are prepaid meaning the companies are paid in advance of the coverage for the year. Of these three, only flood is federally mandated to be escrowed. Homeowners and flood can be paid by the homeowner without escrow but always ask if there is a fee for doing this.
Property taxes are paid in arrears, meaning you pay for the time you have already lived in that property. This is why taxes are prorated depending on your closing date, as some tax is paid by the time the seller has lived at the property and the balance is paid by the anticipated time the buyer will live at the property for that tax year.
Getting started.
1) Talk to a couple of lenders about loan options. Meet with a realtor to discuss your wishlist and develop a realistic startegy in terms of how far yor budget will go. Be open to different neighhborhoods. A good agent will be able to guide you to areas that will meet your needs.
2) Enjoy the process. This will be one of your largest assets, so look beyond just asthetics (which can always be modified) to the "bones" of the house. You will make the house, HOME!
3) Be ready to act! In an active real estate market, you must be ready to make decisions quickly, not impulsively but wisely.
I love this process and am always available to answer questions. And as the saying goes, "there are no dumb questions." It is better to ask and know how each step works.