How to Know You’re Ready
Before you get started with your homebuying journey, you should be able to check three important boxes first:
- Build up enough savings for a down payment. One of the most important things you can do as you consider homebuying is to save for the down payment, which can cost 3% to 20% of the total mortgage purchase price. Ideally, you will be able to pay 20% to get access to the best possible interest rates.
This process can take people years, so if you’re thinking about it, best get started. Also, if there is a chance of getting a “gift down payment,” make sure you understand how that works as well.
- Figure out your budget. Calculate all of your expenses and figure out how much of your monthly take-home pay can be allocated to a mortgage payment. Determine your average debt payments and see how a mortgage could fit into the picture.
Also make sure you understand all the costs associated with a mortgage (which we’ll cover in the next section).
- Check and improve your credit score. Your credit score can make a big impact on your mortgage rate, so it’s good to boost it before mortgage shopping. Your score can be improved if you pay down debts, pay bills on time, and avoid frequently applying for more credit.
The process of repairing credit can take a long time, so it’s good to get a handle on it early.
Understand All the Costs
For your initial budget, outlining your monthly expenses and income is a good start. But to get a more precise budget, you need to understand all the costs of the homebuying process. This can seem intimidating at first, but it’s the best way to empower yourself to be an informed, confident buyer.
You get a rough estimation of your down payment and mortgage with a free mortgage calculator, but you should also consider how the following costs may impact your budget:
Pro Tip: As you create your budget, use a worksheet to check off which items you’ve included and which ones you still need to calculate.
- Impound account deposit — Also known as escrow accounts, the impound account is set up by a mortgage company to make sure you have enough money to cover things like taxes and mortgage insurance. A reserve deposit stays in the impound account until the mortgage is closed/refinanced and you typically get a refund within 30 days. Some buyers may be shocked by how much they have to put into this account.
- Land survey fee — You may need to pay a land surveyor a fee to verify property boundaries in certain states.
- Processing fee — This fee is paid to the mortgage company for processing your loan. It typically costs between $500 and $700.
- Title insurance policy fee — You’ll want to pay a title company to make sure the deed to your potential home has no other owners or people who can make a claim to the property.
- Underwriting fee — You’ll need to pay an underwriting fee to your lender for determining whether it should approve your loan.
- Appraisal and inspection fees — These are out-of-pocket fees that you need to pay companies or individuals to appraise the value of the home and inspect it for issues.
- Earnest money deposit — This deposit shows that you are a serious buyer. You’ll often need to put down 1% to 3% of the total purchase price that will later go toward your down payment.
- Home repairs — There’s a very good chance that whatever home you buy will need repairs, some of which you’ll need to do in the first few years of ownership. These can include things such as HVAC fixes and filter replacements, fixing windows and doors, leaky faucets, paint retouching, furnace and appliance repairs, and more.
- Utilities — utilities, like water and electricity, will be monthly expenses and the bill will likely be higher than what you were paying previously.
- Moving costs — There’s a good chance you’ll need to hire professional movers if you’re settling into a new home. If you need to move a lot of possessions, movers can cost thousands of dollars.
- Natural disaster insurance — Standard homeowner’s insurance does not cover damage from earthquakes and floods. If you live in an area with a history of earthquakes or flooding, you may need to purchase special insurance to protect your home.
- Home insurance — When you’re done buying your home, you’ll need to purchase insurance to protect from theft and damage like fire and wind. Also, keep in mind that payment of your first year’s worth of home insurance may be required at closing.
- Property taxes — Every year, you’ll need to pay property taxes to the county in which you live. Also, keep in mind that you may need to pay a prorated amount of taxes upfront at closing.