Buying a home can be one of the most special times in someone’s entire life, but it can also be  the scariest/anxiety inducing! Will I qualify for a loan? Can I afford a down payment? How much will I qualify for? These are all questions we may ask ourselves when considering that big buy. To help keep your mind at ease, it’s best for you to understand the homebuying process. 

Top 4 Factors to Consider

Take a look at some of the major factors that can go into whether or not you’re ready to purchase a home. 

Income Stability 

It’s important to look ahead and determine how purchasing a home can affect your finances in the future moving forward. First things first, you should have a history of stable employment in the past and feel comfortable that your income will remain secure over the next few years. As proof of income, lenders will need to see at least two years of tax returns or pay stubs. Lenders may also prefer you deposit the money for the down payment for at least 60 days. This will make the lender feel assured that you actually will have the money to finance your mortgage. If you feel like your income isn’t steady enough yet, or won’t remain steady, it probably isn’t the best time to purchase a home. 

Managing Debt

Most of those in the U.S. have some sort of debt, but how well are you able to manage it? In terms of a home loan, those who have a solid history of managing debt are more likely to get betterms regarding the loan. 

Paying your debts each month can lead to a higher credit score. The higher your credit score is, the more qualified your lender will consider you as. 

More information about credit:

• You will qualify for a lower interest rate with a higher score.
• A good credit score according to FICO is 700, but a score of at least 740 is needed for the best rates.
• For many of those with no credit history at all, it is near impossible to obtain a mortgage. 

Building Credit 

Among many younger populations, it’s common to see people with no credit experience. Even with no credit history, it is possible to build your credit! It will just require you to put the effort into a couple different strategies. Strategies to help you establish credit can include:

• Do you know of anyone with an established and good credit? If so, they can help you get a loan or to add you as an authorized user to one of their existing credit card accounts. You will then have your first account listed in your credit report, and you can begin to build a positive payment history. Your payment history and experience with the account will help you build a score of your own over time. 
• Apply for a credit account that is specific to people that are new to credit. Certain loans, like credit-builder loans, can help you start building credit. These loans can be given from a community bank or credit union. 
• Always confirm that the lender will report your account and payment history to one or more of the three main credit bureaus (Experian, TransUnion, and Equifax).
• Use a program such as Experian Go™ to create an Experian credit report. With Experian Go, you can sign up for an Experian membership and create a credit report. You can then begin by adding accounts to your report with the help of the program and start building up your credit report!

Emergency Fund

When considering whether or not  to purchase a home, it’s important to consider the worst case scenario in a variety of different circumstances. Whether it be from a job loss or natural disaster, experts have recommended that potential homebuyers have enough cash to live on for three to six months in a savings account. Homes will require some maintenance and repairs over time, with older homes in worse shapes more likely to need upgrades that can be rather costly. It was estimated that homeowners spent around $3,192 on maintenance alone last year, with almost $2,000 included in repairs! 

Affording a Down Payment

Depending on the type of home loan you get, the down payment requirements will vary. For conventional loans, as much as 20 percent down can be required. With other loans however, like Freddie Mac and Fannie Mae, you could only be required to pay as low as 3% down. There are grants and programs available to homebuyers to help with down payments, with over 2,500 homeownership programs across the country that are administered by federal, state, county or local government agencies, nonprofits and employers.

It’s important to note that borrowers who put down less than 20% will be required to pay private mortgage insurance (PMI). PMI is set up to protect the lender where they won’t lose money, in case something happens with the borrower. The cost of PMI will be added to your monthly mortgage payment, and can range between 0.5% to 2% of the loan amount.

When you’re thinking about how much money you are willing to put up for the down payment, you should consider the future and the life of your loan. Putting up a down payment as high as you can afford will save you lots of money in terms of interest in the long run. 

For example, say you want to purchase a home around $200,000. You have a good credit score, and you qualify for a 3% interest rate on a 30-year fixed rate mortgage:

• If you put 20% down on the home, you’ll have to pay a total of $82,844 in interest over the entire term of the loan.
• If you put just 6% down, your total interest payments would be $97,342. That is over $14,000 more than the first option!

After learning more about some of the different factors that go into purchasing a home, you may be feeling either more confident or uneasy about your circumstances. When it all comes down to it, the best thing is to take your time and be prepared as possible before you go for that big buy. Good luck!