Planning for a New Home
Many savvy savers dedicate one of their SmartyPig goals to save for a new home. Whether building a new home or moving to a new or better area, a home is often the largest personal asset, making home equity a significant majority of a family's overall wealth.
The path to home ownership can seem overwhelming, but in truth, it doesn't have to be daunting if you follow a few simple steps to prepare yourself and your finances.
Lay the Foundation
The first step is to review your credit situation with a reputable loan officer. A good credit score is critical when applying for any kind of loan, especially a mortgage, so ensure you pay bills on time, reduce debt as much as possible, and avoid making too many purchases on credit cards. Maintaining a low card balance in relation to your limit helps raise your score with the credit bureaus. The other score you need to be aware of is your FICO® Score. More than 90% of lending decisions are based on this score, and it determines your qualification for the lowest interest rates.
Next, develop a budget. Planning for a new home takes time, so create a savings plan and automatically deposit a portion of each paycheck into a dedicated savings account. Don't forget to budget for moving expenses including repairs to your current home, moving supplies, a storage unit, moving truck, realtor fees, and utility hookups at the new place. Likewise, evaluate how large of a down payment you'll be comfortable with. A larger down payment will help reduce the monthly payment and your overall obligation.
Finally, have your current home appraised. Understanding the value of your current home will aid in planning for your new home. Be sure to spruce things up in advance of the appraiser's visit and make them aware of any upgrades and improvements that will increase the value of your home.
Set the Frame
Contact at least three lenders to ensure you find the best deal or least expensive loan. Once you select an institution that meets your needs, your loan officer will guide you through the pre-approval process and help you determine how much home you can afford. You'll be able to estimate your monthly payment and compare loan terms and interest rates. If applicable, be sure to ask about first-time home buyer programs!
It is equally important to meet with a variety of reputable Realtors. Research their online reviews and ask for references to ensure you select the best match for your family. Your Realtor should be able to provide insider information on city government if you're looking in more than one area, the various neighborhoods, and even available homebuilders.
Once you find the home of your dreams, don't make an offer too quickly! Carefully evaluate the home's condition and be aware of any necessary repairs or improvements as well as the estimated annual taxes. Also consider the neighborhood, school districts, proximity to shopping and other conveniences as well as your commute. After you've made your decision, your Realtor will draft the contract and help you decide how much to offer.
Complete the Finish out
You're almost at the finish line! As you approach closing day, your lender will provide documentation outlining the amount of money needed for closing and other associated expenses. Most loan closings take place at a title company office. Be sure to bring your ID along with the cashier’s check or wiring instructions to cover closing costs. Double check all documents for accuracy before signing.
Remember, each loan payment not only reduces the overall debt (principal and interest) on your home but increases your personal wealth as well, so make payments on time and without fail. Most importantly, avoid borrowing against your home.
Maintaining a separate SmartyPig goal for your emergency fund will help ensure you can always make a mortgage payment and are prepared for unexpected repairs.
Under normal circumstances, home values increase over time. You can maintain your home's value and even build equity over time with proper maintenance and upkeep. Consider using a quarterly checklist to stay on track.