The current market offers some great incentives to move forward on a home purchase. Here’s some tips on how to prepare to buy a home:
- See if you qualify for a federal mortgage borrower program. There are a number of low credit-score mortgage programs available to help people get into their first home. These include Fannie Mae’s HomeReady Mortgage program (low income, limited cash down and lower credit score qualifications); Freddie Mac’s Home Possible program (credit flexibilities, potential three-percent down payment and co-borrower flexibilities); or an FHA Loan (lower credit score), VA Loan (eligible military veterans and/or spouses), and more. They all offer lower credit score qualifications and other solutions.
- There may be state or federal down payment assistance available. The National Council of State Housing Agencies — the association representing state HFAs (Housing Finance Agencies) — has a webpage devoted to each state’s resource. Simply click on your state and find your local contacts. You may be eligible for a special down payment grant (free money); an additional loan (second mortgage) that has financial flexibility and benefits attached; an MCC tax credit program (mortgage credit certificate); a DPA program (down payment assistance); or a CDBG program (community development block grant). It doesn’t hurt to check, especially since, contrary to popular belief, assistance programs are easy to navigate if you have the right help! Down payment assistance is also sometimes available to repeat homebuyers and a variety of these programs are active in nearly every geographic region. You’ll need to make sure your lender knows how the program works and is able to assist you, however, it’s worth checking.
- Take the “30-30-3” rule with a grain of salt. The 30-30-3 Rule, touted by many consumer financial experts, says you should: 1) Not spend more than 30 percent of your household’s combined gross monthly income on a monthly mortgage payment; 2) Have enough cash in savings equal to 30 percent of the market value on the home you are purchasing; and 3) Not purchase a house that’s worth more than three times your household’s combined annual gross income. This rule is just one of several paradigms meant to help you plan. But there’s one glaring problem with it — many a homebuyer’s dream would be passed over if the rule was strictly followed. There are plenty of couples and families who did not follow the 30-30-3 Rule and have still made homeownership a reality through smart budgeting, good leveraging of historically-low interest rates and choosing a credit union as their financial partner.
- Home-in on your household savings versus your spending. If you have had relatively stable job security, your monthly/annual savings may actually be higher given the federal pandemic stimulus money sent to you combined with much less spending on food and recreation. One approach would be to extrapolate this trend. Maybe going into this fall and winter, you don’t take as many weekend trips, cut down on birthday gifts and luxuries, or make a pledge to halt all “fun” experiences and purchases until scientists come up with a tried-and-true vaccine for COVID-19. Whatever the case, a spending tracker on your phone could be a good addition to your financial goal toolkit.
- Are there any opportunities to stretch your time and resources to generate more income? Due to the COVID-19 pandemic, different workers are in different seasons. While many are furloughed or unemployed, some are quickly transitioning to other opportunities in high demand — whether part-time or full-time, or temporary versus permanent placement. Any additional work can help generate that extra bump in one-time savings or income to get your homebuying financial priorities in line. You can go into action on your terms — maybe only a few months, or maybe a whole year. Whatever the case, keep steady and pace yourself.
- Talk with a parent or close relative about contributing to your goals. It doesn’t hurt to ask if someone close to you would feel comfortable letting go of “gift money” or “inheritance money” earlier rather than later to help you get into a home by contributing to your down payment. If this is one more piece of the puzzle you need to be financially free as you seek homeownership, just be frank and have a real conversation. More and more families are able to assist these days.
- Increase your chances of a really good rate by raising your credit score now. Your FICO score (credit score) is calculated by the three main credit agencies using your payment history (35 percent), debt amounts owed (30 percent), credit history length (15 percent), new credit accounts (10 percent) and mixture of credit (10 percent). You can improve it by not arbitrarily opening or closing credit accounts, as well as remaining consistent on monthly payment minimums (or paying more than the minimum if you can). Your Debt-to-income (DTI) is your total monthly debt payments on all loans/credit divided by gross monthly income, before taxes. Usually your total monthly debt should be no more than 43 percent of your monthly income before taxes. You can improve your DTI in the short run by paying down debt, or by increasing your income over the long term, or both.
Make the most of these tips to prepare for a home purchase and begin today. If you have questions or would like to speak with a loan officer to begin your journey of homeownership, contact your local credit union. They can hold your hand through the home loan process and help you get started today.