Home ownership remains one of the best financial decisions you can make for your future. Home appreciation over time as well as the tax advantages of home ownership can help you move into a more stable financial position. Also, don’t forget about the enjoyment of owning your own property and having the freedom to paint the walls, plant a tree, finish your basement, or do whatever you want to do with your property.
So stop paying your landlord’s mortgage! Follow these 5 easy steps to go from renter to home owner.
Step 1 – Job Stability: The first step to home ownership is job stability. Most loan programs require a two year job history in the same line of work or two years self-employed. If you have recently graduated from college or a trade school, or are re-entering the work force after maternity or another valid reason, you may be eligible with less than a 2 year history.
Income goes hand in hand with job stability. Lenders also want to see stable income that can be documented (paystubs, W2s, and/or tax returns), and is sufficient to pay for the mortgage and your other debts.
Step 2 – Save for a down payment: There are very few loan programs still in existence that do not require a down payment. FHA and VA require the smallest down payments, with VA one of the only remaining 0% down programs. Aside from the down payment requirement, socking away a good savings shows a lender that you are responsible and disciplined enough to save your money. Also, many loan programs will require that you have at least 2 months worth of mortgage payments in reserve after closing.
Step 3 – Get your credit in shape: Credit is an extremely important factor when applying for a home mortgage. If you have not established any credit yet, or have only a minimal credit history, now is the time to start establishing your credit. Most loan programs will require at least 3 credit lines to be open and active for at least 12 months, and some lenders will want to see at least a 24 month history on at least one of the three. Some exceptions can be made.
A good place to start if you have no credit is to ask your bank about a secured credit card- a card that is backed by a cash deposit you put aside with the bank equivalent to the maximum credit limit on the card. After establishing a pay history on the secured card for 6-8 months, you should be in a position to apply for another credit card, an auto loan, or another type of credit line.
In addition to establishing a credit history, lenders want to see that you are responsible and pay your debts. Generally speaking, you will have to have a clean credit history over the past 12 months with no late payments, collections, or judgments. Bankruptcies must be 2 years old and foreclosures 3 years in your past.
Step 4 – Figure out what you want: Take a serious look at your family needs and your future plans, as well as your location preferences, to get a sense of what is available in the marketplace. If you plan to get married within the next year and try right away to have a baby, for example, try to find a neighborhood where you can afford a 3 bedroom home instead of the prime location where you can only afford a one bedroom condo. The worst case scenario would be to have to move again 2 years after buying your first home.
Step 5 – Get pre-approved: Now that you have your finances in line, your credit in-shape, and you have a general idea of where you want to buy, it’s time to apply for the financing. It is very important to get pre-approved before you start to look at homes so that you know exactly what you can afford and that you can in fact get the financing. There is nothing more frustrating than spending hours looking at homes, finding one that you fall in love with, and then finding out that you can’t qualify for the mortgage!