6 Steps to Buying Your First Home in 2016

Posted by Laine Smith on 2/21/16 3:45 PM

Topics: Home Buying

So you’ve decided to buy a home in 2016. Congratulations! But before you start thumbing through online listing photos, there are a few educational and financial steps to complete to get yourself in the best shape for a mortgage.

Here’s how to get on the right track to becoming a first-time homeowner in 2016.

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Keep (or Get) Your Credit Score in Good Standing

Your credit score is one of the most important factors in your mortgage approval, because it’s used to determine your risk as a borrower. If you plan to buy a home in 2016, here are a few do’s and don’ts for getting mortgage-ready credit:

  • Do pay all of your bills on time. Even one reported late payment can drop your score anywhere from 60 to 110 points, depending on your credit history.
  • Do check for errors on your credit report. The Federal Trade Commission estimates that one in four credit reports contains a serious error.
  • Don’t apply for new lines of credit or any other types of loans without consulting with your mortgage banker first. New credit inquiries can drop your score and taking on more debt can lower your mortgage affordability.
  • Do keep other bills in good standing, like cell phone bills, rent and utilities. Some loan types allow borrowers to use non-traditional sources of credit if their traditional credit history is not sufficient.
  • Don’t pay off any old collections until you get the go-ahead from your mortgage banker. If you pay off an old collection, the old discrepancy is brought to the present and can tank your score. Collection payments are usually made a condition to close.
  • Do keep balances low on revolving credit (i.e. credit cards). Aim to keep balances less than 30% of your credit line. Less than 10% is ideal.

Start Saving

Even if you are eligible to purchase with a loan that finances 100%, you’re still going to need some reserves. Closing costs typically range from 3 to 5 percent of a home’s purchase price. You may need some cash for new furniture, new appliances, paint, hiring a moving company, etc.

It’s also a good idea to set aside some cash for home maintenance once you actually become a homeowner, after all you won’t have a landlord to call to finance and repair maintenance issues. A good rule of thumb is to set aside 1 to 3 percent of your home’s purchase price each year to cover these items.

Pay Off Some Debt

Most lenders recommend that your mortgage payment, including principal, interest, taxes and insurance (both mortgage and homeowners), be less than 28 percent of your gross monthly income.

Your mortgage banker will also analyze your debt-to-income ratio, which includes other monthly obligations like credit card payments, auto and student loans, alimony, child support, etc. along with your principal, interest, taxes and insurance. Lenders ideally want this to be at or below 36 percent of your gross monthly income.

While you don’t have to be debt-free to buy a home, paying down amounts owed increases your home affordability. Click here for some of the best strategies to pay down debt.

Figure Out Your Best Loan Option

Finding the best loan option depends on your financial standing and your homeownership goals. Do you have a lot of money set aside for a down payment or will you need a loan option with a small down payment requirement? Are you wanting to buy a new home or looking for a fixer upper?

Talking to a mortgage banker once you decide you want to purchase a home is essential because of this step. Knowing your loan options and their eligibility criteria will also help you set down payment, credit score and debt pay-down goals.

Discuss Your Homebuying Budget

A home is likely the largest purchase you will make in your lifetime. While your lender will give you an amount you could be approved to borrow, you have to determine what is affordable for you. Keep in mind the costs of home maintenance, improvements and other homeownership expenditures. Budget for what you are comfortable spending now, not 10 years from now.

Meet with a Mortgage Banker

A pre-approval should always be the first step in homebuying. To get a pre-approval, your mortgage banker will run your credit score and compile a loan application with the information you provide regarding income, assets, employment, etc. The lender will analyze this information and issue a decision on whether or not you are eligible for a loan.

For more information about becoming a first-time homebuyer, download our free Mortgage 101 Handbook, which includes everything you need to know about the homebuying and financing process.

Download: Mortgage 101 Handbook

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