Home Ownership is Achievable. Prepare with These 8 Tips

Are the high home prices and interest rates kiboshing your plans of home ownership? It doesn’t have to be hopeless. Follow these tips so when the right house, the ‘affordable’ house, is available, you can confidently make an offer.

You can still prepare yourself to be a homeowner. Here’s what you should do. Prepare with these 8 tips.

1. It is crucial that you get your finances together.
2. Shop around for mortgage lenders.
3. Look for first-time homebuyer grants and programs.
4. Get prequalified for a loan.
5. Find a buyer's real estate agent.
6. Create a list of home must-haves & nice-to-haves.
7. Determine which neighborhoods you want to target.
8. Shop around.

1. It is crucial that you get your finances together.

• The first step is to determine how much house you can afford. A Home Affordability Calculator can be helpful in this respect. This is different from a mortgage calculator. A mortgage calculator will tell you what your approximate mortgage payment might be, not what you can afford.
• It’s important not to buy a home that becomes a financial burden. Ideally, you want your monthly mortgage payment to be NO MORE than 30% of your monthly take-home (after tax) pay; some advisors recommend 25%, others 28%.
• Now that you know how much house you can afford, use a Mortgage Calculator to compute an approximate monthly mortgage payment. Mortgage calculators allow you to change the factors of your potential loan, IE: the down payment amount, loan length, and interest rate. It’s an eye-opener! Use it to identify what you need as a down payment that results in a monthly payment that you can afford.
  A monthly mortgage payment usually includes a principal amount, interest, property taxes, home insurance, and PMI (if required).
  PMI is Private Mortgage Insurance. Yes, it comes with a monthly cost, but it allows banks to provide financing to individuals or couples who provide less than 20% cash down on their home’s purchase price when financing.

What do you need in savings to buy a home?

• For a conventional home loan - the most common type of mortgage - a cash down payment of 20% of the home’s purchase price is the goal to avoid PMI.
  Prevail Bank offers conventional home loans AND other mortgage options that require as little as 3% down, just so you know.
• A down payment isn’t the only cash you’ll need when you close on a home. Anticipate loan closing costs (an appraisal fee, home inspection fees, loan origination fees, credit report fees, possible attorney fees, home insurance, and your portion of the property taxes).  On average, these closing costs are 2-4% of your home’s purchase price.
• Lenders also want to know that you’ll have some money left over after you make your down payment and closing costs. Ideally, a person should budget to spend 1%-3% of a home’s value, every year, to cover maintenance expenses. So, if your home is $254,600, the minimum you’ll want to have handy is $2,506 in a separate savings account. Use this as the cash cushion that lenders are looking for.

Add it all up. This is what you need – in cash – prior to becoming a homeowner. Start saving!

20% down payment +4% closing costs +1% maintenance cushion = 25%

25% of a home priced at $254,600 = $63,650.

• Getting your finances together also includes paying off as much debt as you can, in addition to increasing your credit score. Financial institutions aren’t comfortable lending their money to individuals who struggle to pay their bills. It’s usually an indicator that you’re already too deep in debt to be incurring more. Pay off your small debts and work your way to the bigger ones.
  Conventional loan lenders typically want you to have a credit score of at least 620. The higher your score, the better. Paying off debt is one possible way to increase your credit score. Other ways to do so include:
  • Avoid missed payments / Avoid past due payments.
  • Don’t max out your credit cards.
  • Stay below your credit limit.

The key to saving money and paying off debt is making and sticking to a detailed monthly budget. Do some quick internet research for “Best Budgeting Apps” and pick a free resource to get you started. You need to use it and stick to it, if you want to get ahead.

Prevail Bank offers its customers Credit Sense, a free credit score monitoring service that offers help and tips to improve a person’s credit score, a financial assessment and budget breakdown analysis that provides personalized suggestions for improvements so you can achieve your home buying goal.

Prevail Bank’s website has a ‘Banking / Money Management’ blog category that includes numerous articles relating to: How to improve your financial health, increasing your credit score, and how to save money - automatically.  

Besides getting your finances together, what else should you do in preparation to buy a home?

When you’re making headway relating to your financial situation, your employment is steady and secure, and you expect to be in one location for at least the next five years, then….

2. Choose your local mortgage lender.

Prevail Bank has experienced home loan originators (mortgage lenders) who are committed to providing one-on-one assistance and finding a solution when home ownership is the goal.

When you use Prevail Bank’s home loan rate calculator (after you type in the home’s purchase price, a down payment amount, and credit score) you will receive an approximate closing fee total and an estimated monthly mortgage payment based on the current interest rate at Prevail Bank. (NOTE:  Interest rates do have the ability to change without notice. But, if you like what you see after clicking ‘Get Rates’ there is an option to APPLY NOW (online) through Prevail Bank’s website.)

3. Look for first-time homebuyer grants and programs.

There are special grants and loan programs out there for first-time homebuyers, homes in rural areas, for veterans, and fixer-uppers. Wisconsin Housing and Economic Development Authority may have homebuying programs to consider as well. These programs are tailored to help buyers with limited resources and/or those with less than perfect credit scores.

Be aware, all of the special grants and loan programs you’ll read about are not offered by all of the financial institutions out there. That’s because each program requires a special relationship with another vendor who can process all the detailed requirements that come with it.

Prevail Bank can offer you FHA, USDA, VA, and conventional home loans. Read “Finding the right home loan: FHA, USDA, VA, or Conventional?” blog to learn the differences – some have significantly lower down payment requirements!

Or, contact a Prevail Bank home loan originator for a personal consultation and more information.

4. Get pre-qualified for a loan.

Pre-qualification is an estimate of how much a lender may loan you based on factors like credit history and income. Usually this can be done over the phone or online and is often free. Pre-qualification is NOT a loan guarantee; it just gives you a general idea of the home price you can start looking at. 

5. Find a buyer’s real estate agent.

You want someone who fits your personality, communication style, specializes in the neighborhoods you’re interested in, and one who will help educate you. The agent’s name that is shown on the ‘for sale’ sign or as the ‘listing agent’ in a home’s online profile is NOT the person you want to have as your agent (especially if you’re interested in those homes), because they represent the seller. The seller would be their first priority, not you.

6. Create a list of home must-haves & nice-to-haves.

Remember to be flexible about home size and location. Some must-haves, IE: hardwood floors, can be added later as a home improvement. Discuss this list with your agent.

7. Determine which neighborhoods you want to target.

Share with your agent what you can afford – and stick to it. Ask if any neighborhoods just outside your circle of interest may be a worthwhile consideration based on what you can afford. A slightly longer commute may be worthwhile for a less expensive, but nicer home.

8. Shop around.

Take tours of homes, physically and/or virtually, and again, stay within what you can afford. When you’re ready to make an offer, your agent will manage all the paperwork and negotiating. Follow their lead and recommendations.

What if you can’t afford your housing market?

• It is frustrating when the dream of home ownership is yours, but the home prices in your targeted neighborhood are just too high for your pocketbook. What should you do then?
• Consider a different neighborhood. You may not have to move very far (perhaps an hour from a metropolitan area) to see a major change in the cost of homes. Could the longer commute be worth it?
• Increase your income: consider another job, a side hustle, or a new job that pays more.
• Review your ‘must have’ list. Let go of the luxuries: outdoor pool, hardwood floors, granite countertops; be flexible. These extras could be added at a later date as a home improvement project.
• Be patient and diligent. Keep saving money. It may take awhile to save what you need (for a down payment, closing costs, the first year’s annual maintenance expense) --- That’s okay!  Because if you don’t and you buy a house you can’t afford, it will put you on the fast track to going broke.

For more information relating to home ownership, home loans, and mortgage tips, review the articles posted under Prevail Bank’s “Home Loans” blog category, or speak to any one of Prevail Bank’s home loan originators.

Prevail Bank offers home construction loans, land purchase loans, home improvement, home refinance, and home purchase loans (adjustable rate, and short/long-term fixed rate mortgages).

Prevail Bank is an Equal Housing Lender / Member FDIC
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