Here are the six tips Hammond provided via email:
Establish an emergency fund
When you go from renting to owning, you are responsible for maintaining the property, which can be more expensive than you may realize. What often is not discussed is that with many banks you have to have extra money for closing on top of the closing costs and down payment. These are referred to as post-closing reserves. Cash reserves can ensure you are able to make your mortgage payment on time once you are in the home.
- If you deplete your entire savings account balance for the sake of becoming a homeowner, it can leave you relying on high-interest credit card debt should you run into an unexpected expense or emergency — be it an illness, a job loss or an essential repair on your new home.
- Establishing an emergency fund is a good way to protect against the unforeseen. Just remember that the money in your emergency fund isn’t meant to be used for your down payment, moving or closing costs. It’s your buffer for managing the cost of unforeseen situations.
Determine all upfront costs
- Your upfront costs include more than your down payment — you also need to pay closing costs, moving expenses and more.
- It’s important to factor in the additional expenses above and beyond your mortgage that come with homeownership. This can include everything from inspections to repairs to property taxes to insurance. And in addition to added monthly costs, you’ll also need to consider the added upfront costs, like fees on your mortgage loan, your closing costs and the cost of a home inspection.
- Additionally, closing costs vary drastically depending on where you are buying. It’s important to work with an agent and lender in your local market who can provide clarity on closing costs specific to your market. If you can’t pay for the closing costs, you can’t get the property. Understand what that number looks like in your local market and work with an expert to ensure you have the total money needed.
Determine your budget
- To calculate how much house you can afford, look into your household income, monthly debts (for example, car loan and student payments) and the amount of available savings for a down payment. As a home buyer, you’ll want to have a certain level of comfort in understanding your monthly mortgage payments and a lending expert can help you do so.
Use tech to make savings simple
- If you need a way to boost your savings and stay consistent with your home-buying goals, setting up an automatic funds transfer can help. You can set up a transfer from your checking to a savings or investment account at your financial institution. Another method can be having a portion of your paycheck directed into a retirement or other account by your employer, if possible. A variety of banks and savings apps also round up purchases to the nearest dollar and put the change into a linked savings account, so you can save without it being a heavy burden.
Understand your debt
- Checking and tracking your credit will probably come in handy long before you start shopping for a home — like when you’re trying to qualify for a credit card or an apartment to rent. When it comes to homeownership, your credit score, along with your debt-to-income ratio — is a major factor in determining whether you’ll be approved for a mortgage, and if so, at what rate. Your debt-to-income ratio compares your minimum monthly payments on all debt with your gross monthly income.
- Creditors look at this number to determine how risky it is to lend to you. The higher your ratio, the riskier they consider lending to you to be, and the smaller chance you have of being approved for a home loan at a good rate. If you apply for a loan the bank will look at any item that appears on your credit report.
- There are services like “Chase Credit Journey” which help gauge the potential impact various actions or events could have on your credit score. Ultimately, any score in the 700s or above is considered excellent and will help you to get a loan with the lowest interest rate.
Evaluate your specific scenario
- I recommend that clients conduct research with a local real estate agent, a lender or an attorney based on their specific situation. What’s required for home purchases varies greatly and it is not a one-size-fits-all situation. Some local areas have different grants and money for a down payment and that varies by area as well.