You’ve finally decided to dive into the world of homeownership. Congrats! There is nothing better than settling into a space of your very own and leaving something behind for generations to come. It’s a huge responsibility and quite frankly, a big deal amongst the Black community. Owning something of your own brings about great pride, esteem, accomplishment, value, and a long-term reward.
So, what do you need to get started on this journey? What are the hard-hitting facts that you must have?
Check out these 6 critical things you need to know in order to buy your first home:
Your Credit Score Matters
If you’re looking for a new home, you must first qualify for a home loan. Most require a 660 or higher credit score to start. If you don’t have that, work with a credit repair specialist to get your credit on track before you apply. But if you don't readily have $200,000 to dish out for a new home, you have to first find a lender that will approve you, has terms that you understand and one that you will have the lowest interest rate at which is all based on that magic number, your credit score.
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Your Income & Debt Will Reflect How Much House You Can Afford
Getting pre-qualified for a home isn’t solely based on your credit score. The lender will also look at how much you make compared to how much debt you owe or will owe in the future. One of the easiest home loans to get is a Federal Housing Administration (FHA) Loan.
Currently, the front-end ratio is 31% and the back-end is 43%, meaning your debt-to-income should fall below, at or between the two. Front-end ratio considers only housing-related costs, such as the monthly mortgage payment, property taxes, and insurance. The back-end ratio looks at all monthly debt, including housing costs, car loans, credit card payments and any other recurring debt.
Bankruptcies Will Make It Harder To Find A Lender
Getting a mortgage loan after declaring bankruptcy may be harder but it isn’t totally out of the question. However, it will most certainly be with higher interest rates and fees. Bankruptcies are at the highest level when it comes to risks for lenders, so as long as the bankruptcy is still appearing on your credit report, it will affect your ability to obtain credit.
They Will Look At Your Last Two Years of Employment
Have your own business? Starting a new career change? You may need to settle into one field for a while as lenders look to your last two years of employment to verify income and establish how consistent you are with work.
If you just started your business and it isn’t making enough money just yet, make sure to have some consistent supplemental income to back it up. If you’ve been in one career field for less than two years, make sure to stick it out until after you’ve been approved for the loan with key in hand. If they see any inconsistency this can be grounds for denial.
Be Prepared To Pay A Required Mortgage Insurance Premium
Mortgage protection insurance, or MPI (sometimes called mortgage payment protection insurance), is simply a form of life insurance. The cost depends on factors such as the amount of your mortgage, your age, and your health.
This will come in handy if at some point you can’t pay your mortgage due to a disability, job loss or death. Most never really consider this additional cost that will be tacked on to your monthly mortgage payments. But be aware, they don’t come cheap assuming a 1% MPI on a $200,000 loan with only 5% down payment (a $195,000 loan value) results in $1,950 per year or $162.50 in monthly payments.
Your Down Payment & Closing Costs Will Be Out-of-Pocket
Here are the facts, no one has ever walked away from buying a home with putting $0 down. Contrary to fake ads and promotions, your down payment and closing costs will be out-of-pocket. A down payment is typically 3.5% of the purchase price. So, for a $200,000 home, you’re looking at $7,000 of out of pocket cash unless you qualify for a Down Payment Assistance Program in which the state will give you up to 85% of your down payment costs.
So, that’s $5,950 of $7,000 = $1,050 of which you will only have to pay. Closing costs are typically 3% of the purchase price. This is completely separate from your down payment. So, if you’re looking at a $200,000 home, your closing cost would be almost $6,000!
Add that to your down payment, appraisal costs, realtor fee and you do the math... Owning a home doesn’t come cheap – but in the end, if you make the right investment, it will have a great reward.
Tia Muhammad, BS, is an award-winning freelance content & media creative, copywriter, blogger, digital designer, and marketing consultant. She owns the boutique content and digital media company, jackieGLDN|studio.
