For many, renting is the only option for a place to live. Requirements for purchasing a home can include a hefty down payment, a high credit score, and at least two years of steady employment. Those new to the workforce may need to establish credit and save a little before they can buy. You can take steps now while renting to put yourself in the best position when you are ready to buy your first home. Here are five of them:
- Check and improve your credit score- Your credit report is available from the three national credit bureaus: Experian, TransUnion, and Equifax. You can request them for free once a year per credit bureau. Obtain a copy of each report to review for accuracy and seek advice, if necessary, from a credit expert on how to improve your credit score.
- Determine your DTI – Your debt-to-income, or DTI ratio, is the percent of your monthly gross income that goes toward outstanding debt. Lenders look at this ratio to determine how much you can afford to pay for a home, usually wanting it no higher than 43%. This is also why paying down as many outstanding debts as possible is important. If you want to know how much home you can afford, here’s a calculator you can use.
- Save money – A substantial amount of money is crucial when buying a home. You will need at least a 3.5% down payment for an FHA loan, and some loans may require as much as 20% if you don’t want to pay private mortgage insurance. Plus, you may need to cover closing costs and other fees. Start saving as soon as possible, putting away as much as you can toward these costs. Opening a certificate of deposit account can be a good option; they have higher interest rates than most checking and savings accounts. Some banks even offer better rates when combined with opening a checking account.
- Research different mortgage loan programs – First-time homebuyers should look into all available purchasing programs, including FHA loans, VA loans, and down payment assistance programs. Getting pre-approval to be ahead of the game is also a good idea. Some banks offer programs that allow you to be underwritten upfront so that when you find your home, you’re ahead of the process versus other buyers. This is especially advantageous in a low inventory market. And if you are self-employed and can’t supply a W-2 or pay stubs, a bank statement loan is a good option.
- Find a reputable real estate agent—The right agent can make all the difference when buying your first home. Find an agent who will seek your best interests and give you their full attention. Ask friends and family for recommendations, check online reviews, and talk to two or more agents before you make a decision.
These are just a few tips to help you prepare to purchase your first home. The main things are saving, researching, and improving your credit standing. And enjoy the ride!
Here's a calculator to help you determine whether buying a home is a better deal than renting. If you want to talk to the home loan experts at NASB, call us at 888-661-1982 or click here to start your home-buying journey.
