We all are aware of the fact that there are a lot of considerations and decision-making that go into finally buying our own dream home. But are we informed enough to be able to distinguish between the decisions that should be made priority and the ones that can be deliberated upon at a later stage in the home buying process?
To make sure that you know what you are getting yourself into, we want to discuss an element of home buying that is the most important and needs plenty of attention - Financing and Budgeting. If you call yourself a responsible home buyer, you need to make sure that all your financial requirements and documentation are in place. Now is the best time to educate and inform yourself on strategies that work best when it comes to handling money to buy a new home. After all, no preparation is too much preparation when it comes to financing!
Most of us want to buy a house as soon as we think we have found just the right one. To make this possible, there are a few financing decisions that you need to be prepared to take beforehand. We have come up with a list of financial considerations that are critical and will impact you in both the long and short term. Go through these and along the way, try to ask yourself some questions and make mental notes on where you stand in terms of your financial situation at the moment. We assure you that having an understanding of all these terms and factors will help you make the process significantly smoother and easier.
Also Read: Importance of Home Insurance
1. Financial Documentation
Your documentation is the only financial proof that will imply that you are worthy of owning your own house. Start with making a checklist of all the financial documents that are needed for the pre-approval process. The real estate industry today has become so competitive that most sellers and realtors do not even consider selling property to an individual who does not have all his/her financial documents in place. To name some financial documents - bank statements, assets, employment verifications, stubs, tax returns, income, debt, etc.
2. Minimum Credit Score
This score is used to judge your worthiness in terms of being lent money. The score ranges between 300-850 and the higher the number, the higher the chances of you being preferred by money lenders. This score is based on both your short and long-term credit history. Now is the time for you to make sure that you at least have a credit score of 300. Maxed-out credit cards and a history of not paying your debts on time are two factors that can significantly reduce your chances of earning a credit score.
3. Down Payment
You are required to pay the down payment right at the beginning of purchasing a property. This is a prerequisite and is non-negotiable. This payment will comprise a portion of the total price of the home you are planning to finalize upon. Even if you ask your friends and family, you will realize that there are slim or no chances of a scenario where you are not required to give a down payment. Did you know that the majority of realtors demand at least a 3.5% down payment of the total purchase price?
4. Closing Costs
Apart from the total purchase price of the property, you need to be prepared to pay an additional amount during the closing of the deal. Without paying this before or on time, your real estate transaction will remain incomplete and you will just end up wasting time. Even if you have qualified for a loan, it is on you to ensure that the lender has faith in you and is ready to vouch for your character.
Also Read: Price Negotiation Tips Every Homebuyer Should Know
5. Debt to Income Ratio
This ratio will give you a reality check on whether you can afford a home or not. It is not just you who will have more clarity, but the banks too will give the ratio a lot of importance in terms of deciding whether you are eligible for the loan. However, you need to understand that you cannot blindly follow what the bank thinks. Even if they think you can afford a home, they are not aware of whether you have a large family, again parents, or any future childcare costs you may need to take care of. Sit with yourself and make a note of all the factors that need to be kept in mind.
6. Affordable Interest Rate
A rule of thumb is to never sign with the first lender that comes your way. If you do not weigh your options, you may miss out on a better deal. Your goal is to finalize on a lender whose interest rate on the loan is low. Do not be afraid to explore and seek options out of your comfort zone. Community banks, online lenders, and credit unions are some of the less popular options but work wonders.
7. Cash Flow
Make a list of your financial resources and make sure you have enough cash flow to cover expenses that go beyond tax and mortgage payments. Repairs, maintenance, insurance, utilities, petty expenses like flooring and interiors are some of the extra costs that you need to incur once you shift into your new home.
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8. Resale Value
While this may not be applicable for some, most homeowners tend to move and sell their houses every few years. Take into account the value of the house if sold, and the real estate agent fee that comes with it. Think Like An Investor and You’ll Be Less Surprised By Reality, are two popular books that you can read on this topic. These books cover all financial aspects when it comes to home buying and also reveal some of the hidden costs of homeownership.
Diving into the realm of homeownership has never been easy. If you have previously been a homeowner, you must have had the first-hand experience of realizing what all it takes to finally close the date and be able to call the chosen property your home!
Now that you are aware of all these financial considerations, you have already taken the first step towards making the whole process easier and less stressful. The second step is to analyze your financial situation to figure out your strengths and pain points. By the time you are ready to buy a home and you have made up your mind about the same, you would already have worked out your financial situation, and purchasing a home will be no less than a cakewalk!