Financial planners don’t just help people balance their budgets or plan for retirement; they also help their clients buy homes. After all, a house usually is the largest financial investment an individual will ever make—so, it makes sense that these professionals would have some strong opinions on just how to go about it. Here, Realtor.com offers some no-nonsense tips from top finance experts.
1. Calculate closing costs
When you purchase a house, you have to shell out a significant amount of cash for closing costs—fees paid to third parties that helped facilitate the sale. Closing costs can vary widely by location, but they typically total 2 percent to 7 percent of the home’s purchase price. So, on a $250,000 home, the closing costs would range from $5,000 to $17,500. It’s important to calculate how long it will take to recoup those costs. Typically, you will need to own a home for at least three years to make up the initial costs of buying the home.
2. Factor in the full costs of homeownership
When weighing whether it makes more sense to buy a house or continue to rent, don’t focus solely on your mortgage payments—you’ll also have to pay property taxes, interest, home insurance, utilities and other expenses. Be sure to budget for hidden costs, such as maintenance and repairs. Also put an emergency fund worth about 1 percent to 2 percent of your home’s value aside in case something major goes wrong with the house. If you don’t have a rainy day fund in place for those kinds of expenses, you could be forced to take on high-interest credit card debt.
3. Try to make a 20 percent down payment
Unless you qualify for Department of Veteran Affairs or Federal Housing Administration loans, you will need to obtain a conventional home loan from a private mortgage lender. When doing so, aim to make at least a 20 percent down payment. If you put down less, you’ll have to pay private mortgage insurance (PMI). This additional monthly fee protects the lender in case you default on the loan and can be pricey—amounting to about 1 percent of your whole loan, or $1,000 per year per $100,000. The good news? You typically can get PMI removed once you’ve gained at least 20 percent equity in your home.
4. Don’t raid your retirement funds
Although it can be tempting to borrow cash from your IRA or 401(k) to amass a down payment on a home, a retirement account is the last place you want to go. If you borrow from either plan before age 59½, you’ll be assessed with a 10-percent excise tax on the amount withdrawn, on top of the regular income tax you pay on withdrawals from traditional defined contribution plans. Making early withdrawals also obviously prevents the money from accruing interest in these accounts, which could force you to delay retirement. A better alternative? You could qualify for one of over 2,200 down-payment assistance programs nationwide, which help home buyers with low-interest loans, grants and tax credits. Home buyers who use down payment assistance programs save an average of $17,766 over the life of their loan.
5. Make sure your credit score is solid
Typically, you need to have at least a 650 credit score to qualify for a conventional home loan, and you need to have excellent credit (760 or above) to qualify for the lowest interest rates. So, you want to get pre-approved for a loan when your credit is at its strongest point. To assess where you stand, pull a free copy of your credit report from each of the three major U.S. credit bureaus (Experian, Equifax and TransUnion) using AnnualCreditReport.com. Your report doesn’t include your credit score—you’ll have to go to each company for that, and pay a small fee—but it shows your credit history, including any black marks such as missed credit card payments and overdue medical bills. If you notice errors on your report, contact the credit-reporting agency immediately.
6. Watch your spending carefully
In the months leading up to your home purchase, make sure you don’t take any actions that could harm your credit score. This includes closing old credit card accounts, opening a new credit card, maxing out your credit cards and making a large purchase such as a new car.
7. Don’t bite off more house than you can chew
A lot of people make the mistake of buying a house that’s simply outside what they can comfortably afford. Don’t stretch yourself so thin that your housing expenses are going to stress you out each month or prevent you from saving for retirement. Use an online home affordability calculator to determine a price range that fits your budget.
