Hoping to buy a house in the next year, but don’t know where to start? We’ve got you covered. Start planning with the help of this guide. Because taking steps to make your dreams come true feels pretty great.
How much house can you afford?
To answer this question, a good place to start is to think like a mortgage lender, and look at your finances using the 28/36 rule.
- The mortgage payment should be no more than 28% of your gross monthly income (before taxes and deductions).
- Other debts should take up no more than 36% of your gross monthly income (student loans, auto, credit card).
Know how much mortgage your budget can handle by plugging your financial details into our mortgage calculator. Just because you can technically pay that mortgage doesn’t mean you should. Leave room in your finances to accommodate everything else, like retirement savings, health insurance, child care, groceries, and taking a vacation once in a while. In other words, you’ll want to continue to live your life!
Assess your credit
In the meantime, check your credit score. Under most conventional loans, lenders require a minimum score of 620. Focus on paying down consumer debt. Continuing to make on-time, monthly payments can go a long way to maintaining that optimal credit score, which can make quite a difference on the interest rate of your mortgage. Even a quarter percent can add up to thousands of dollars over the life of the loan.
The true cost of a home: don’t forget the escrows and prepaids
So you used an online mortgage calculator to get an estimate on that monthly payment on a $250,000 house. Beware, you may not be getting the full picture. Don’t forget property taxes, house insurance premiums and mortgage insurance, which will be lumped on top of your monthly mortgage payment, which is a requirement of most lenders. These are your prepaids, which the bank collects and holds in an escrow account. When they come due, the bank pays them on your behalf. Do your best to get an estimate, so you’re not blindsided later. It’s also wise to consider any maintenance costs or fixes that would be needed immediately. Planning for some home maintenance costs will ensure you’re prepared when move-in time comes.
Start saving for a down payment
Now that you have an idea of how much house your budget can handle, it’s time to start saving for a down payment. Most lenders will want to see at least 5%, but depending on market conditions, your loan program and your credit score, it could be lower or even higher. As a rule of thumb, if you’re looking to buy a $200,000 house, setting a savings goal of $10,000 can help you meet your target. Another expense that is often an afterthought to think about is closing costs. Closing costs can include inspection fees, attorney fees, homeowner’s association fees, title insurance and other expenses depending on the lender and type of loan you chose.
The right terms: 15-year, 20-year or 30-year?
Finally, you’ll want to think about paying down your mortgage. The conventional way is the 30-year loan. But if you’re feeling ambitious and want your mortgage paid off as quickly as possible, you might be eyeing that 15-year mortgage (especially with the attractive interest rate to boot). Remember, once you sign the loan, you’re committed to making that monthly payment. Think about the impact on your finances if you were to experience a short-term financial hiccup. For most borrowers, the best option is starting with the 30-year loan, which has a lower monthly payment. (You can always pay ahead and refinance in a few years.) Another simple loan calculator that can help you crunch the numbers and determine which mortgage option is better for you can be found here.
Find the right loan program
Get to know some of these mortgage programs and see if any apply to you. They may help you get into your home much more quickly.
If you or your spouse have served in the military, buying your first home just got a little easier. A VA loan is guaranteed by the U.S. Department of Veterans Affairs, and offers borrowers a lower interest rate, zero down payment and minimal closing costs.
If you're a first-time borrower, an FHA loan can be worth a look. These government-insured loans offer incentives and attractive interest rates to first-time homeowners with a minimum down payment of 3.5% and a credit score of at least 580. There is a catch to FHA loans. For the life of the loan, borrowers pay a monthly mortgage insurance premium.
Rural homebuyers of low to moderate income can access mortgages with zero down payment and more flexible credit guidelines.
Planning to buy a house is a big step in your life! It’s important to consider all of the costs associated with homeownership, not just the monthly mortgage payment. That’s why you’ll want to meet with a mortgage banker at Minnwest Bank. We can help you weigh your options so you can choose the loan that’s right for your lifestyle, and your long-term financial fitness. Whether you’re just starting to save, or already have a house in mind, we’re here to help.