First-time buyers planning to make the shift from renter to homeowner this year should begin preparations as early as possible. Prior to starting the home-buying process, potential buyers should make sure they are ready to buy a home where they will live for three to five years or longer, since it can take that long to build equity in a home and recoup investment costs.
The first step a home buyer should take in the home-buying process is to check their credit score. Lenders base mortgage qualification on a variety of factors, including income and assets, the borrower’s debt-to-income ratio, pattern of savings, and job stability. However, the most important factor is the credit score. Lenders tie the interest rate the borrower pays to the credit score, so borrowers with a credit score of 720 and sometimes 740 and above are the only ones who will pay the lowest mortgage rates. Borrowers with a credit score below 620 may not qualify for a mortgage at all until they can improve their score.
A lender tells the borrower how much they can borrow, but each potential homeowner should create a simple budget for themselves with income and spending to determine how much they are willing to spend on housing payments. Financial experts recommend that homeowners spend a maximum of about 30 percent of their gross monthly income on principal, interest, homeowners insurance, and taxes. Included in the budget should be approximately 1 percent of the home price for condo or homeowner association fees and maintenance costs.