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How to Prepare Financially for Buying a Home

Are you ready to buy your first home in the Dallas area? If so, congratulations! This is an exciting time in your life. However, it can also be stressful—especially if you’re unsure how to financially prepare for your purchase. Fortunately, with the help of the right real estate agent and some knowledge of the home-buying process, you can set yourself up for success and ensure you are financially prepared for this large step. Here is more information on how to financially prepare for buying your first home.

Check and Improve Your Credit

Many first-time homebuyers go into the process without knowing what their credit score or history is and are surprised when they cannot qualify for the loan they want. Avoid this situation by checking your credit score (a score of 620 is usually required for optimal loans) and working with a mortgage company to get pre-approved for financing. If you find you cannot qualify for the loan you want, consider waiting to buy and spend some time improving your credit. Pay down credit card balances, ensure you make all monthly payments on time, and avoid taking out any new loans or credit cards to bump up your score and better position yourself for a mortgage.

Save for the Down Payment

Though there are many loan types for first-time buyers that require small to no down payments, it’s still a smart idea to try to save 20% before you purchase a home. If you are buying a median-priced home of $449,200 in Dallas, 20% would be $89,840. Putting 20% down on your new home will help you avoid private mortgage insurance, which can amount to anywhere from 0.58% to 1.86% of the original loan amount per year.

Need help with making a down payment? There are numerous federal, state, and local programs that assist first-time homebuyers. The Texas Affordable Housing Corporation has a program for qualified buyers that provides down payment assistance in the form of a grant that never needs to be repaid or as a deferred forgivable second lien loan which will only need to be repaid if you refinance or sell the home within three years.

Have Enough for Closing Costs

In addition to saving for a down payment, you will also need enough cash to cover closing costs, which are typically 3 to 5% of your loan amount. For a $449,200 home, the closing costs could be anywhere from $13,476 to $22,460. You will need to come up with this money during closing and before taking possession of your home. Most of those who are
buying and selling at the same time will be able to use the equity from the sale of their home to cover closing costs as well as make a down payment on their new home. However, first-time homebuyers do not have this option. If you have not saved up enough to pay for closing costs, you can take out a short-term loan, borrow from a qualified retirement plan, sell assets such as fine jewelry, classic cars, or precious metals, or borrow from family members.

Get the Best Interest Rates

One of the reasons why so many people are buying homes right now (and why inventory is low) is due to record-low mortgage interest rates. Rates are hovering around the 2.5% mark for 30-year fixed purchases, and experts don’t expect those to rise much in the near future. To qualify for these low rates, though, you have to choose the right type of loan, and you have to be in a relatively stable financial position.

Conventional loans with these interest rates usually require a credit score of at least 620 and will also require you to have a low debt-to-income ratio, a solid credit history, and verifiable regular income. If you cannot qualify for one of these ideal loans or if you need a loan that does not require a substantial payment, you will likely be paying a higher interest rate as well as possible private mortgage insurance. Before you choose a loan, speak with several mortgage companies to discuss your unique situation and the options available to you.

Understand the True Costs of Home Ownership

When deciding what they can afford when it comes to a home, many first-time homebuyers fail to consider all the costs of owning a house. In addition to budgeting for your monthly mortgage payment, you will also have to figure in interest and taxes, both of which can add hundreds of dollars to your monthly bill. You’ll also have to take into consideration what it takes to keep a home running smoothly. Depending on the neighborhood in which you buy, you may have to pay
HOA dues, which can range anywhere from $100 to over $1000 per month. Make sure you talk with your Dallas real estate agent before choosing a home so you fully understand the fees you will be required to pay for buying in a certain neighborhood.

As a homeowner, you will also need to be prepared to pay for utilities such as water, electricity, and trash services that you may not have been required to pay when renting or living with family. You’ll also need to make sure you have savings for unexpected maintenance or repair costs. Factor all of these into your budget so you can choose a monthly mortgage payment that is reasonable and will not cause you financial stress.

If you’re ready to buy a home for the first time, one of the best pieces of advice is to work with an experienced real estate agent who can walk you through the entire process. Not only can an agent help you find the home of your dreams and make an offer that will be accepted in this competitive market, but he or she can also connect you with mortgage companies and other professionals who you’ll need during the buying process.

Ready to take the next steps? Reach out to experienced Dallas real estate agent Steve Killingback for guidance.

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Steve Killingback uses his eye for detail and design, combined with knowledge and instincts, gained from extensive global travel, to transform a house into a home. Contact him today!

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