Dear Olivia,
I want to buy my first home, but I’m not exactly sure where to start. What should I do in the new year to get ready to become a homeowner?
Sincerely,
Ready to Buy
Buying your first home is SO exciting, but I also understand that there can be a lot of questions about what to do to get ready for taking that step. Though there are way too many steps involved to talk about in this short column, we can at least get the ball rolling!
Get Rid of Debt
One of the best things you can do to prepare for buying your first home is to pay down as much debt as possible.
Mortgage lenders look at your debt-to-income (DTI) ratio to determine if you have enough income to pay for the added expense of a mortgage. Obviously, the less debt you have, the better your DTI ratio will be.
To determine your DTI ratio, add up all your monthly debts and divide that number by your gross monthly income. Then multiply that number by 100 to get a percentage. So, if your monthly debts are $1,500 and you make $4,500 per month, your DTI ratio is a little more than 33 percent.
In a perfect world, you want your DTI ratio to be under 36-37 percent. Though it isn’t impossible to get financing with a higher DTI ratio, it is more difficult.
Get Pre-Approved for a Loan
Photo by Scott Graham on Unsplash
There are a couple of important benefits of getting pre-approved.
First, a pre-approval helps you identify how much house you can afford. I’ll talk more about budgeting in a moment, but it’s obviously important to know what you qualify for, that way you know what homes you should be looking at.
Second, being pre-approved sends a good signal to sellers. If you’re pre-approved, they know that you’re a serious buyer, that you have pre-approval for enough money to purchase their home, and that you’ve done your planning and preparation to become a homeowner. This could make the difference in you getting the home over someone that isn’t pre-approved.
Lastly, pre-approval will help you save time. Since you have to submit your financial information for pre-approval, that’s one less step you have to do later in the process. In many cases, lenders can close more quickly on loans if the borrower is pre-approved – and that’s certainly something you (and the seller) will appreciate!
Set a Budget and Stick to It
The phrase “house poor” refers to people that overspent on their home and have little cash left over at the end of the month. You don’t want to be that guy!
When setting a budget for buying a home, you have to consider things apart from the cost of the mortgage. How much will utilities be? Are there HOA fees? Are there appliances or furniture pieces you need to buy? Do you need to pay for any repairs to the home right away? Also think about your down payment (if you have one) and closing costs. This can be a significant amount of money that can quickly drain your bank account.
The moral of the story is that you need to be practical about your first home purchase. This will likely not be your forever home, so you don’t need to try to buy the perfect place. Instead, consider what you can reasonably afford and work with your Realtor to find homes that fit your budget.
Good luck in your home search! If you have other questions about the house hunting process, feel free to call me at 307-856-3999!
~Olivia