It's Financial Literacy Month. Here Are 3 Tips to Make Buying a Home a Reality
KEY POINTS
- With home prices and mortgage rates up, it's not the best time to be a home buyer.
- Improving your credit and saving for a down payment will put you in a better position to buy, though.
- You have options for mortgage lenders and mortgage types, so be sure to shop around before deciding which lender to go with.
For many people, buying a home is the American Dream. April is Financial Literacy Month, so this is an especially great time to dig into what you need to do to make it happen. It's not a great market for buyers right now, as home prices are still elevated from the salad days of earlier in the COVID-19 pandemic. To add insult to injury, mortgage rates are still high too -- as of this writing, Freddie Mac is reporting that the average rate for a 30-year fixed mortgage is 6.27%. That's up from 5% just a year earlier.
There's a lot buyers can't control, but luckily, there are a few things you can. Here are three tips to help you focus on your finances ahead of buying a house.
1. Get your credit in good shape
Your credit score helps to determine the interest rate you'll pay on your mortgage, as well as which lenders will approve you. You may be able to get a government-backed mortgage loan with a lower credit score. For example, FHA mortgage lenders generally require a credit score of 580 to make a 3.5% down payment, or 500 with a 10% down payment.
But if you're hoping to have your pick of many lenders and have your sights set on a conventional mortgage, a score of 620 is the generally accepted minimum for approval. Get your credit score above 700 (or higher if you can) and you'll likely have many more options (and qualify for lower interest rates).
If you're ready to tackle your credit, start by getting a copy of your credit report. These are free every week through the end of 2023, and you'll have one from each of the three major credit bureaus (Experian, Equifax, and TransUnion). Look through it and make sure that all the accounts listed are yours and are accurate. If not, you can dispute entries with the credit bureaus. Credit report errors are quite common, and having them removed can boost your score.
Other ways to improve your credit include paying down debt and making your payments to your creditors on time every month. These two factors (amounts owed and payments history) combined make up almost two-thirds (65%) of your FICO® Score, so focusing on them can have a major impact.
2. Save money for a down payment
The biggest hurdle to get over for many people who want to buy a home is the down payment. While it's a good idea to put down 20% if you can (because you'll spare yourself from having to pay for mortgage insurance and lessen the chances of ending up underwater on your loan), it isn't a strict requirement.
Consider lower-cost mortgage options if you're otherwise in good shape financially and can swing the cost of mortgage insurance (which is a monthly cost for conventional loans and an upfront and monthly cost for FHA loans). Note that for other government-backed mortgages with low or no down payment required, like USDA and VA loans, there are upfront funding fees you'll be responsible for paying.
While you might be able to cut back your discretionary spending to save more for a down payment, you may come to resent the whole process if you no longer have any money to spend on things you enjoy. A better idea might be to get a side hustle and dedicate your income from that (minus taxes, of course) to home-buying expenses.
3. Shop around for a mortgage loan
If you've got a chunk of money saved and solid credit, you've put yourself in a good position to start vetting mortgage lenders. There are a ton out there, from your community credit union or hometown bank to online-only lenders. You can get pre-approved by more than one and compare what each offers in terms of loan types, amounts, and interest rates. It's best to apply for multiple loans within 14 days of each other, however, so your credit score doesn't take a big hit; multiple mortgage loan inquiries within a short period of time will count as one. When you find the best deal for you, you'll be ready to find the home of your dreams.
If you're hoping to become a homeowner sooner rather than later, keep the above tips in mind. Saving money, boosting your credit, and exploring all your options for mortgages are the best favors you can do for yourself to make buying a home a reality.
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