Buying a Home: A Step-by-Step Guide
Buying a home is often the biggest financial decision you’ll ever make. It’s not just about choosing a place to live; it’s about making a long-term investment that will impact your financial future for years to come.
Step 1: Have a Strong Credit Score
Make sure you have a strong credit score. The higher the credit score, the better the terms you’ll get on the loan, and the lower the interest rate will be. For example, a FICO score ranging 760 to 850 might qualify for a 6.226% annual percentage rate, which can translate to a $1,842 monthly payment.
Step 2: Start Saving for the Down Payment
While a 20% down payment is not required to buy a house, buyers try to put more money upfront to avoid mortgage insurance costs and potentially lower monthly payments. In the third quarter of the year, the average down payment was 14.5%, and a median of $30,300, Realtor.com reported.
Step 3: Boost Your Emergency Savings
It’s not just the down payment that needs to be built up. You should have six months of your spending needs, including the house spending needs, in an emergency fund, said Shaun Williams, private wealth advisor and partner at Paragon Capital Management. You don’t want to be in a situation where you use up all of your savings for the upfront costs of buying a house and end up with no cash left.
Step 4: Think About the Lifestyle You Want
Ask yourself what kind of lifestyle you look forward to, said Brian Brady, vice president at Obermeyer Wood Investment Counsel. Are you looking for a condo? Do you want a single-family home? Then you can focus on factors like location and price.
Step 5: Factor in Other Homeownership Costs
Owning a home goes far beyond the monthly mortgage payment. You need to factor in additional costs, experts say. To that point, the costs of homeownership add up to an average $18,118 annually, or $1,510 a month, according to a report by Bankrate.com.
Step 6: How Long You Plan to Stay in the House
"We like to use a five to seven year minimum," said Stephen Cohn, co-founder and co-president of Sage Financial Group. The longer you’re in a house, the more likely the fixed costs will amortize, or pay off, over time.
Conclusion
Buying a home requires careful planning and consideration. It’s essential to have a strong credit score, save for the down payment, boost your emergency savings, think about the lifestyle you want, factor in other homeownership costs, and consider how long you plan to stay in the house.
FAQs
Q: How can I improve my credit score?
A: Paying down existing debts on time and in full, and avoiding new loans, can help improve your credit score.
Q: How much should I save for the down payment?
A: Aim to save 20% or more for the down payment to avoid mortgage insurance costs and potentially lower monthly payments.
Q: How much should I save for emergency savings?
A: Aim to save six months’ worth of spending needs, including the house spending needs, to avoid using up all of your savings for the upfront costs of buying a house.
