Buying a house and achieving home ownership have always been cornerstones of the American dream. With historically low home mortgage interest rates today and soaring rent prices, there is no better time than now to buy a house even with a small budget.
For a lot of first-time homebuyers who are working with a small budget, the idea of buying a home may seem next to impossible. But if you make a solid home buying plan and do the necessary research, you can buy a house even without a lot of money and with limited credit.
EXAMINE YOUR CREDIT
The very first thing you should do once you decide to buy a house is check your credit. You should go to www.annualcreditreport.com and obtain your credit report from all three credit bureaus, www.equifax.com; www.experian.com; and www.transunion.com.
Read all three of your credit reports thoroughly and make sure there are no errors on your reports. If there are errors on your credit reports, you need to gather the necessary proof/paperwork and initiate the dispute process with each credit bureau as soon as possible.
Double-check the payment history of any accounts where you may have been an authorized user. If there are late payments reporting on these authorized user accounts, ask for these accounts along with the poor payment history to be removed from your credit report.
Keep your credit utilization at 30% or less in order to achieve the best credit scores. If you do have some late payments, the best thing that will help your score is time. Recent late or missed payments may drop your score 30 or more points for each occurrence. The more time that has passed since your last late payment the better and your credit scores will rebound. Higher credit scores equal lower interest rates when buying a house.
If you have any charge-offs or collection accounts within the last 24 months, you should contact the creditor and either dispute the derogatory information if incorrect, or negotiate a settlement amount in return for immediate payment. Make sure to get the settlement details in writing so that your credit reports can be updated. When you have limited credit and/or previously damaged credit on top of a restricted budget, you do not need any additional obstacles like unpaid collection accounts hindering your quest for a mortgage approval to buy a house.
On conventional mortgages, if your down payment is less than 20%, you will normally have to pay mortgage insurance. The cost of mortgage insurance varies and it can add anywhere from $50 to $250 or more to your monthly payment. With an FHA mortgage, the minimum down payment is only 3.5% of the purchase price but FHA mortgages also require mortgage insurance premiums.
When preparing your budget for mortgage purposes, you need to include the minimum payment on any debts that you have like student loans, credit cards, and car loans. While other expenses and costs such as life insurance and car insurance premiums are not included and calculated as far as the mortgage qualification is concerned, you should include these expenses and other variables such as saving for inevitable home repairs and maintenance in the future in your budget. There are costs of homeownership and these expenses should be included in your budget to give you a realistic idea of how much house you really can afford.
Once you have included all of these costs along with your other household expenses like food, utilities, and transportation, you should have a good idea and a realistic budget of how much you really can afford to spend when buying your first home. Don’t stretch your budget too thin trying to buy more house than you afford. Keep your new home search within the range of your budget where you will still have some wiggle room or money left over at the end of the month.
DECIDE ON YOUR “MAKE IT OR BREAK IT” LIST AND “MUST HAVES”
When you are buying a house on a budget or buying a house for the first time, you should decide early on what features in a home you have to have and what you cannot sacrifice. Keep your budget in mind but also think about your future housing needs. For instance, if you are initially only looking at a 2 bedroom property, consider the fact that 3 bedroom properties sell faster and for more money than 2 bedrooms. This is important when it comes to reselling the property in the future. This may be your first house but it doesn’t have to be your only house or your last house.
Next, list the “must haves” that you really need such as a certain school district or a house close to your job or near access to public transportation. Because of health reasons, you or your family members may need a single story home with no steps. Prepare this list of “must haves” for your Realtor so that the list of properties the Realtor selects for you does not include homes that will not meet your needs.
And when you are working with a small budget, you should not buy a house that will need a lot of repairs or renovation. Houses that need a lot of renovation can turn into a nightmare quickly, especially when you have limited funds to begin with. Foreclosures may appear to be a good deal but these foreclosed homes may have hidden repairs and issues that could really put a strain on your budget after closing. You should choose a house that meets your needs, in move-in ready condition, and in the best location/neighborhood that you can afford.
FIND A REALTOR WHO HAS EXPERIENCE WORKING WITH FIRST-TIME BUYERS
In just about every city or county in the U.S., there are programs designed to help first-time homebuyers achieve homeownership. Normally, one of the best sources of information on these programs is an experienced Realtor. Many non-profit organizations as well as government and homeownership advocates will reach out to local Realtors to promote their programs. Realtors who specialize in working with first-time homebuyers will often times have knowledge of grants and special mortgages that are available which may not be widely advertised or promoted.
A good Realtor could be the difference between finding the perfect home or going around in circles for months without ever finding a house to buy. You should hire an experienced agent to represent you as your buyer’s agent. A buyer’s agent will search properties in the MLS to find homes for sale for you to consider. A buyer’s agent will schedule appointments and show you houses for sale that are within your budget with the criteria and amenities that you need such as location, a particular school zone, or within a certain proximity to your job or church.
Normally, the vast majority of the time, the buyer’s agent is paid by the seller through the commission so there may be very little if any cost to the buyer. A buyer’s agent will also assist you in determining the price and terms to offer when you’ve found a house you want to buy. Your buyer’s agent will handle the negotiations and all of the contract details like asking the seller to pay your closing costs, choosing a title attorney and scheduling the final walk-thru and closing.
Your buyer’s agent can also refer to you to mortgage loan officers who have experience working with first-time buyers or buyers on a small budget. A good buyer’s agent will make the huge task of buying a house much easier.
GET PRE-APPROVED FOR A MORTGAGE AND NOT PRE-QUALIFIED
There is a big difference between a pre-qualification and a pre-approval when you are buying a house. Anybody can be pre-qualified. You can input basic information about your situation like how much you make per year, a guesstimation of your credit score, and the amount of your debt payments each month in any number of online home mortgage calculator programs and get pre-qualified. A pre-qualification simply means that based on the information you provide, it is likely that you could buy a house for $X amount of dollars. This does not mean anything because it may not remotely be what your actual situation is.
When you are serious about buying a house, you should officially apply with a mortgage banker or with the mortgage person recommended by your Realtor. You should bring your last 30 days of paystubs, your last two years w-2s, your last two years tax returns, your last two months bank statements, and proof and documentation of any other income you may have like disability or social security payments or child support to your appointment.
It would also be helpful if you have a property address in mind that you may be considering purchasing. With this information, the loan officer may be able to submit your information through an automated underwriting system that will pull your credit reports and analyze all of this information to give you an accurate pre-approval. With complete information, the loan officer should be able to tell if you actually can buy a house and how much house you can afford.
SAVE SOME CASH, MONEY, DINERO, MOOLAH, DEAD PRESIDENTS, ETC.
Whether your down payment is 20%, 3.5% or 0%, you will need to save some money. Along with the down payment money, there are lots of other costs involved in buying a home.
When you and your Realtor find the house that you want to purchase, you will have to make an earnest money deposit. The earnest money deposit is just like a deposit you would put down on a car or a layaway at the department store. The earnest money deposit shows that you are “earnestly” attempting to purchase the property and the deposit along with the agreed upon contract and pre-approval letter puts a “hold” on the property. The earnest money can range from $25 to $5,000 or more. The actual amount of earnest money will be determined by you and your Realtor.
Once you have a signed and agreed upon contract to buy a house, you should have a home inspection done. The home inspector will inspect the house from top to bottom and point out any issues that the property has. The home inspector will need to be paid at the time of the inspection. Home inspections normally cost anywhere from $200 to $750 depending on the property.
Once the home inspection is completed and everything is agreed upon concerning any repairs needed, the bank will send an appraiser to the property to determine the value of the property. The appraiser is normally paid at the time of the appraisal and the cost normally ranges from $400 to $800 or more depending on the property.
There are also closing costs involved in buying a house that the buyer has to pay such as homeowner’s insurance, credit report fee, and mortgage underwriting fees. Although it is common to ask for the seller to pay some or all of the buyer’s closing costs, the buyer will still often times need some funds at closing.
After your closing, money will be needed to actually move into the property. New home buyers will have additional expenses like paying for a moving truck and/or movers, deposits for utilities, and for things like furniture and window coverings.