It’s okay to admit that you’ve recently thought about buying a house. Rent prices continue to move steadily upwards and and when you do the math and see how much less some of your friends who are home owners pay per month on their mortgage compared to your sky high rent, it makes sense to get serious about home ownership. As a young person though, it’s likely that you’ve avoided thoughts of buying a house because of the cost. The price of a house is probably the most overwhelming factor that frightens renters away from even visiting a lender to see how much they can be pre-approved for. However, if you’ve shied away from starting the home buying process, chances are it may be for other underlying reasons. Before getting your heart set on your dream house in your favorite neighborhood, there are a few things you’ll need to get sorted if you really want to leave the renting world behind.
Your credit score
You always knew your credit score mattered, or maybe you didn’t and people just told you it did. Well now more than ever, if you want to buy a house, you credit score will directly impact your ability to borrow. Your credit score is an overall grade on how good you are in paying back debt and ranges from 500-800. If you’ve borrowed and borrowed by way of taking out lines of credit and only have bothered to pay the minimum monthly payment, if anything at all, chances are your credit score may be in the low 500s. Banks and independent lenders alike will have a tough time giving you another loan if your credit history shows you have difficulty maintaining payments or paying down the principle. Conversely, if you’ve managed to make a dent in your debt and have practiced healthy financial budgeting, your credit score will reflect that and you’ll able to secure a higher loan amount than your counterparts who are struggling to repair a damaged credit score.
Your student loans
Unlike your Mom and Dad who paid for college in the 70s with a summer job, you may have loans that will not be paid off anytime this decade. While student loans are considered healthy debt, if any of your loans are in default you won’t be able to secure a home loan of any amount. While it may be uncomfortable to have to call up or answer your lenders who have been harassing you with mail and phone calls reminding you of how much you borrowed and the need to start to repaying to get your loans out of default, it’s a necessary step you’ll need to take to get on the road to home ownership.
Most people in the mortgage business will tell you that the amount of money you can be approved for varies based on fluctuating factors like national interest rates and the stability of the market. In any instance, you’ll want to have a considerable downpayment put aside for the home you eventually purchase. Some lenders even recommend near 40% of the cost of the house for the lowest possible mortgage. If you’re sharing the expense of buying a home with your partner, that will ease some of the financial burden, but you’re still going to need to make a considerable contribution to the overall downpayment cost.
Your other debt
Other debt you’ll want to consider are credit cards, car payments and insurance payments. This kind of debt is on file with the credit bureau too, and if in addition to not paying back student loans you also have not paid back other debts you’ll need to get a cap on those outstanding balances before you consider calling up a lender to get pre-approved.
If you’ve had a tough time staying in one place (we get it, you’re a free spirit), then you may want to hold off on considering a home purchase until you’re in a more stable place. Your job history and income will play a role when lenders are considering if you’re a safe bet for them to lend their money to. If you have a healthy work history and have been employed at the same place over an extended amount of time, lenders will feel more confident loaning money to someone who has shown consistency and commitment to steady, gainful employment. When reviewing your income history, banks will definitely be looking at gaps in employment history and may ask for an explanation of such before securing a loan for you.
We’ve all secretly looked around to see just how much that dream house in our favorite neighborhood would cost to buy. And the truth is that home ownership can be achieved if you start planning and commit to managing your finances and existing debt.