First-time home ownership is an exciting prospect, and most renters aspire to one day have a place to call their own. Gone are the worries about difficult landlords, noise issues from adjacent neighbors, the added hassle of doing laundry, and potentially having your rent go up from year-to-year. The mere thought of owning your own place, decorating it exactly the way you want, and earning equity on your investment is enough to make you want to start the process immediately.
But buying a home can be quite involved and a bit harrowing if you don't know what to do. It's important to understand what you're getting into before you apply for the loan, sign the mortgage documents, and close on the house. It's not all unicorns and rainbows, but if you do your homework and plan well, it could make your first home a truly celebratory experience. Here are five tips to help you begin that transition from renting to owning.
1. Check Your Credit and FICO Scores
Your credit score and/or FICO score are the biggest determinants of what your mortgage interest rate will likely be. If you have no clue what your credit score is or haven't looked at it for a long time, you can get free scores on a number of sites including Credit Karma, USA.gov, Experian, or TransUnion. Keep in mind that not all the scores will be the same since each entity has slightly different criteria for scoring, but scores generally range from 300 to 850, and the higher, the better.
For the purposes of home buying and getting a mortgage loan, you should aim for a credit score of 650 or above. 620 may qualify you, but a higher score improves your chances of loan approval, and a score of 740+ will qualify you for the lowest interest rates. We recommend that you work on your credit score by paying down credit card balances on time, paying your bills on time, staying current with your auto loan, and keeping credit card applications down to a minimum.
2. Establish a Mortgage Budget
Your monthly rent amount doesn't necessarily translate directly to your monthly mortgage payment for your new home. If you pay $1,500 a month to rent your current apartment, that same $1,500 may not cover your mortgage and other home-related monthly expenses. While renting, some of your utilities like water may be included in the monthly rental amount, but you will almost assuredly have to pay your water bill separately for your new home. There are also expenses such as homeowners insurance, real estate taxes, mortgage insurance, and condo/homeowners association fees (where applicable).
Budgeting prior to buying is a vital part of the process, especially for that first year of ownership. It would serve you well to factor in expenses such as additional furniture (if your new home is larger than your current apartment), landscaping costs, home maintenance costs (since you'll no longer have a landlord), etc. These all add up to more than you might think, so planning the best you can prior to purchasing will help tremendously in the long run. After you determine what your monthly budget is for your mortgage payment, use a good mortgage calculator to help finalize things.
3. Figure Out How Much Home You Need
Some first-time home buyers get in over their heads and choose a house that's too big, too expensive or both. As much as you would love to have a big, fancy house, what you don't want to do is get in over your head. Stick with your budget and consider homes that would suit not just your current family situation but one that also allows room for some growth. If you lived in a two-bedroom, one-bathroom apartment, and things were getting crowded, consider upsizing to a three-bedroom, two-bathroom house. Just don't go for a house that's way beyond what your needs are and way above your price point.
Use real estate sites such as Redfin, Trulia, or Zillow to start looking for homes in the areas you're interested in. Once you've figured out some locations, do plenty of research in the areas you're considering living in (look at schools, access to public transportation, crime statistics, shopping, etc.) and plan accordingly. You'll find that there are a number of options that fit into your budget and strive not to deviate from it.
4. Save for the Down Payment
This might be the biggest hurdle in the entire process. Most lenders want to see 20% of the purchase price of the home as a down payment. This percentage might seem nuts ($50,000 on a $250,000 home), but it will significantly improve your chances of getting approved and getting a lower interest rate, as well as a lower monthly mortgage payment. If you put less than 20% down, you can still get approved, but you'll probably have to get mortgage insurance. A mortgage insurance policy protects the lender in case you can't make payments.
You might think 20% is impossible, but you'll have to prioritize your non-negotiable expenses over your negotiable ones. Ditch that daily Starbucks and make coffee at home, eliminate streaming services, reduce your internet data usage, stop eating out unnecessarily. You get the idea. In order to get a new home, you have to start cutting costs now to get that down payment secured. It will be worth it in the long run because you'll start building equity, and you'll have a place to legitimately call your own.
5. Get Pre-Approved and Pre-Qualified
Once you have most of your ducks in a row (items 1 through 4 above), then you can start the process of getting pre-qualified and/or pre-approved. There's a difference between the two. Pre-qualification is less formal and is based on your income versus current debt. It can occur early in your home buying process, and it may not involve a credit check. Pre-qualification is essentially an estimate of what you may be able to borrow rather than a hard number.
Pre-approval is more serious and reflects how much you can borrow. It's also proof that you've been working with an actual mortgage lender. Getting pre-approved means your lender has checked your credit and verified your relevant information on documents provided to the lender. This means you are actually formally pre-approved for a specific dollar amount, and this enables your real estate agent to help you find the actual home you're looking for. A pre-approval letter also lets the seller know you can afford it, and your offer is good.
There are, of course, advantages to renting versus buying. Much of it depends on your current situation. But if you're serious about buying a home rather than continuing to rent, these guidelines will get you on the right path to home ownership. It takes patience, focus, and a bit of time, but the journey is a worthwhile one. When you start getting discouraged, come back to this list and re-commit. You'll be glad you did.