As the gap between the cost of rent and the cost of a mortgage continues to close, we see an increasing number of renters interested in buying. But how can renters make the transition to owners? By implementing three critical changes today, you can successfully purchase a home tomorrow.
Talk with a local lender:
Find a trusted lender in the location you are planning to purchase your home. Why is it important to use a local lender? Each housing market is different depending on location. It is important to talk to a lender that is not only familiar with, but understands the current local market and can explain to you what it takes to become a first-time homeowner. Your trusted advisor can then look at your specific financial situation and make suggestions to help you navigate the local market, meet your specific needs, and discuss your available options. This conversation can help you build your timeline for when it is right for you to purchase. Having the right team of real estate and lending professionals on your side can help tremendously when planning for your first home. Together they can help you determine your goals, what you can afford, and help you get pre-approved when you are ready.
Reduce your debt and build your credit:
Your first step should be knowing your credit score and what it means. According to the HUD, the average credit score of first-time homebuyers is 716. Many online tools can help you determine your credit score. If you don’t already know yours it would be advantageous for you to find out. If you determine that your credit score is below 716, do not get discouraged. Knowing your score gives you a snapshot of how you are doing financially and helps you know how to adjust accordingly to reach your goals. There are numerous ways to increase your credit score BEFORE you apply for your home loan.
HUD’s number one recommendation is to reduce your debt as much as possible. Start by reducing your current spending. Start small, perhaps purchasing one less coffee a week or choosing water instead of the soda or martini. These small sacrifices now will add up to big wins later. We recommend TrueBill as an app that can help find hidden savings by canceling subscriptions you don’t use anymore or negotiating your existing subscriptions down. It can also help you develop and stick to a budget!
Pay all your bills on time. Set up auto payments to avoid late payments.
Use your credit card responsibly.
Start saving:
It has been proven that setting aside even small amounts can make it possible for you to save for a down-payment on a home over time. Having funds in savings is also taken into consideration when getting pre-approved for a home loan. You don’t always need a large down payment when buying a home but you will need a good house fund saved up for ongoing maintenance and repairs.
Many experts suggest using hidden savings or a “sinking fund” when saving for your down payment. This is an “out of sight out of mind” savings account. Once money goes in, you don’t take it back out till you are ready. Make sure you keep it separate from your emergency fund or your short-term savings for expenses and set small attainable goals that make you feel accomplished rather than the large goal that might feel daunting and overwhelm you.