Looking to buy a new home? We can help! Below are some tips to keep in mind when purchasing your dream home.
Set your price expectations
Living in a big house might be the dream, but paying for one might not be realistic. As you begin your housing search, bear in mind that many lenders use a rule of thumb that limits your housing costs to 28% of your monthly pretax income. This reflects an expense-to-income ratio most people can afford. You’ll pay for this home for years, so factor in how much financial flexibility you want as well.
Raise your credit score
More than just your income affects your choice of home loans. Your credit score gives lenders a snapshot of how well you manage debt. A higher score generally qualifies you for a lower mortgage interest rate, which will save you money. Some steps that may raise your score include paying monthly loan and credit card bills in full and on time and identifying and fixing any errors in your credit reports.
Check for errors on reports
As you build credit, keep an eye on your credit reports. The three big consumer credit bureaus, Experian, Equifax and TransUnion, will each provide a free copy of your report once a year, so space them out. Each one is slightly different and gives you an overview of your borrowing history. To identify mistakes, review your report line by line. If you find a mistake, alert the credit bureau and the lender involved and ask for a correction.
Decide on your loan term
As you research loan options, one question you’ll need to resolve is how long the loan should be. Lenders like Michigan Community Credit Union provide 15-year, 20-year and 30-year mortgages. Typically, the longer the loan term, the more interest you’ll pay in total. On the other hand, a shorter-term mortgage generally means a higher monthly payment.
Consider your down payment
Putting down enough cash when you buy a home can be the biggest financial challenge you’ll face. If your down payment is less than 20% of the purchase price, you’ll generally be required to pay for private mortgage insurance, or PMI, which protects the lender against a default on the loan. This can add hundreds of dollars a month to your payments.
Know about other costs
The down payment might be your biggest upfront expense, but there are other costs as well that can run to as much as 3% to 6% of the purchase price. These can include application and origination fees of as much as $450 and $575, respectively, plus a property appraisal, inspections, transfer tax and legal and other costs.
Taking appropriate steps early and staying informed can put you in a better position to finance your future home at the lowest possible cost and save you a bundle.
Spencer Tierney, NerdWallet
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