In the financial, home building and real-estate industries, the question of buying a home versus renting one prompts all sorts of calculators, graphics and pro-and-con discussions. It’s a perpetual topic that ebbs and flows according to interest rates and financial markets.
Full disclosure: we’re not crunching all those numbers here.
However, we at ICI Homes are positive that home-buying is a good long-term decision on multiple levels, as we detailed in Part I of our Buying Versus Renting series. So let’s assume you’d like to buy your first home. What comes next?
How’s your financial health?
If your reply is “let’s discuss something else,” you need to discuss this. Buying a home is a tremendous commitment. Put on that fact and wear it. You must be financially stable — or able to tap assistance funds for first-time home buyers — to do it. No legitimate financial institution will approve you for a mortgage if you’re financially suspect.
Only you know how much income you receive each month, how many bills you must pay, what your living expenses are and whether you’re carrying an egregious amount of debt.
Can you safely afford to add a monthly mortgage payment? If not, you have homework to do.
Start by checking your credit
The results might make you react as you did as a child swallowing cough medicine. They might make you giddy too.
You’ll have three credit scores, compiled by each of the top three reporting agencies — Equifax, Experian and TransUnion. Obtain a free report from each agency. It’s the first thing a mortgage lender will do when you apply for a loan, so follow suit ahead of time. Scores typically range from 300 (yuck) to 850 (awesome). “Good” credit scores are considered 700 and above.
Rehab your finances first
If your credit scores aren’t close to 700, rehabbing them is your first priority. Shelve the home-buying journey for now and work on improving your financial health.
How? Pay all monthly bills on time each month. Build up at least a year’s track record of doing so. Stop — or minimize — credit-card use and start knocking down your most obnoxious balance by paying more on it each month. Scale back your spending habits. Make a monthly budget and stick to it. Sock extra cash into savings.
Or, start saving for a down payment
Did your three credit reports come back positive? Nice! You still can make use of the financial tips above in order to save for a down payment on a home. It’s the first payment you’ll make on your loan as a first-time buyer, and the current industry standard is 20 percent of your mortgage total.
That’s a lot of money, but now you know. Prepare.
Financially healthy? Get pre-approved for a mortgage
Perhaps your financial house is in very solid order. You’ve targeted buying a home and have socked away savings for a down payment. Visit a bank or other financial institution and get pre-approved for home loan. Now you’re in the game. You know your price ranges and that buying a home can be a reality.
Why equity is the golden goose
Once you buy a home, building equity in it is your new long-term goal. You’ll be paying off the interest on your mortgage during the first few years of your loan, but as years pass, your payments go straight to principal. That means you build “stock” in your home and can tap it for a home-equity loan, if you need one.
The best use for it, of course, is to roll over the equity of your current home into a future home. Buy a less expensive home than the one you sell, and you’ll make a profit.
Once you buy a home, building equity in it is your new long-term goal. You’ll be paying off the interest on your mortgage during the first few years of your loan, but as years pass, your payments go straight to principal. That means you build “stock” in your home and can tap it for a home-equity loan, if you need one.
