Getting Your Ducks in a Row: How to Prepare Your Finances for the Home Buying Process

Are you thinking about buying your first house this year? Although the movies make it look like a simple overnight decision coupled with a brief paper-signing session, the fact of the matter is that there is a lot more to home purchases than most people think. Here are four ways to streamline the process and prepare yourself financially for one of the biggest investments that you will ever make.

Save a Decent Down Payment

If you are like most young home buyers, you might be tempted by those giant “100% financing” offers plastered outside of your local lender’s office. Although it might be possible to get into a house without saving a dime beforehand, it might end up costing you much, much more money in the long run.

Most people don’t realize it, but if you don’t have 20% of the total home purchase price saved for a down payment, you could end up paying Private Mortgage Insurance. Private Mortgage Insurance, or PMI, is an insurance policy that protects the bank from you failing to make your monthly mortgage payment.

Unfortunately, PMI tends to be expensive, ranging about 1-2% of the total remaining balance of your loan, split in to 12 monthly payments. For example, if you get into a $200,000 home with a $10,000 down payment, your monthly PMI payments would probably range between $158-$317, which might impact your budget. To avoid paying Private Mortgage Insurance, try to save at least 20% of the total home loan that you think that you can afford, even if it means waiting longer than you might like.

Meet with a Mortgage Broker

After you have saved a decent down payment and you are ready to start looking for a place, take the time to meet with a mortgage broker. In order to help their members make smart decisions, most banks and credit unions offer free consultations with mortgage brokers to discuss your actual finances.

When you meet with a mortgage broker, they will talk with you about your monthly expenses, your credit score, and the current interest rates on loans. They might also be able to recommend skilled realtors in the area, and give you advice regarding which types of home loans would work best for your personal situation.

Understand Your Expenses

Believe it or not, your down payment won’t be the only expense that you stand to encounter when you purchase your first home. In addition to footing the bill for a place to stay while you wait for your house to close, you might also have to pay for things like closing costs. If you want to make sure that you are making a sound investment, you might also enlist the help of a home inspector to check your house for potential problems.

Although these costs can vary significantly depending on where you live and how large your home loan is, buyers spend an average of about $3,700 for closing costs and between $200-$500 for a home inspector. If you are able to do so, try to set aside some extra money for these types of expenses apart from your down payment.

Prepare Paperwork

To make your dream of home ownership a reality, you will need to do more than save a little money and meet with the right professionals. Here are a few documents that you will need in order to prove that you can afford the house that you love.

• Paycheck Stubs
• Tax Returns
• Investment Account Statements

If you received financial help from a family friend or relative to help you to get into a home, you might also need to provide a letter from the gift-giver stating that the amount they gave you wasn’t a loan that would need to be paid back. These documents help the bank to determine if you are financially ready for home ownership, and that you would be capable of making your payments even if your circumstances changed.

Being familiar with the realities of home purchases might help you to streamline the process, and avoid scary surprises along the way. When you find the home of your dreams, it will get snatched up in an instant if you don’t have your finances and documents in order. If you organize and alter your finances long before you start home shopping, you’ll be ready to go when you find “the one.” The information for this article was provided by the professionals at USDA Loans Direct who specialize in USDA home loans.

Tags: Home, Home Purchase, Mortgage

Category: Housing