Owning a home is one of the dreams of every individual. However, before buying your new home, you must plan and perform your groundwork for a home loan. The following are things you must decide at the initial stage of your home buying venture:
- Plan your budget.
- Perform research for your ideal location and neighborhood.
- Decide the type of home you want according to your budget.
All these things will eventually decide your home loan. Apart from these, the following are some of the financial advice the first-time buyers can intake:
1. Check Your Credit Score Before Applying For A Home Loan
Before starting your venture for the new home, you must check your credit score. It’s one of the crucial aspects that can save your finances. A good credit score for the new home buyer ensures you get the best interest rate with a lower down payment. A credit score of 620 or higher will ensure an excellent deal for the new buyers.
Even if you have a credit score of 550 to 600, you will be on the safe side. The Federal Housing Administration does accept credit scores as low as 500 with a 10% down payment.
The following are some ways you can uplift your credit score:
- Pay down all your credit card debt
- Increase your credit limitation (if possible)
- Clear your dues and check for errors
Remember, the better your credit score, the lower the interest rate you will receive on your mortgage.
2. Clear Your Debts
Another important aspect before buying a home loan is clearing all your debt. Minimize your debt to income ratio, which is critical to your down payment amount. Mortgage lenders look out on your debt-to-income ratio to ensure your financial ability to pay off the mortgage apart from your current debts. For new buyers, it’s important that your monthly debt, including the mortgage, does not exceed 36% of your gross monthly income.
3. Plan Your Budget
One of the elementary mistakes new home buyers commit is that they consider a house mortgage the only expense. Apart from your home loan down payments, you have multiple expenses such as brokerage amount, property taxes, maintenance and repair expenses, homeowner insurance, and other utility and emergency bills. So it’s essential to plan your budget accordingly.
4. State Tax Credit For First-Time Buyers
Many states offer state tax credits and a reduction in property tax for one year to first-time buyers. Several municipalities offer these tax reductions specifically for the new buyers. All you need is to contact a financial consultant and check if your location is eligible for these reductions where you are buying the property.
5. Get Rid Of PMIs
According to the house mortgage you will take, there will be an additional expense of PMIs (Private Mortgage Insurance). You can avoid this by giving the 20% of the mortgage amount at the initial stage. This mitigates the lender’s risk and ensures you get a lower down payment. Avoiding PMIs can also save you thousands of dollars every month on down payments.
To Sum it Up
If you want to buy a home loan, the mortgage rate depends on various factors. In short, an ideal way to start is by having a decent credit score, avoiding PMIs, clearing your previous debts, and planning and buying a house mortgage according to your budget and financial capability.
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