Before purchasing any type of real estate it is important to give it some serious thought. There is more to buying real estate than finding what you like and handing over your hard earned dollars. Real estate guru’s like Than Merrill know this to be a fact. Real estate is the biggest investment most people make and it is important to have a short and long term plan in place.
Let’s discuss the planning process before you venture out into the world of real estate.
Your credit score is your financial lifeline. It is essential to know your credit score and if it needs to be improved, take the necessary steps to do so before exploring mortgages. The higher your credit score the better interest rate you will receive when it is time to execute a mortgage.
Take a hard and critical look at your finances and be realistic about what you can afford. A rule of thumb to keep in mind, your mortgage payment should not exceed 31 percent of your monthly income. You can always build in a safety factor and plan on your mortgage payment being 25 to 28 percent of your monthly income.
The amount of down payment you will need will be determined by your credit score. The higher your credit score, the lower the down payment you will need. Home buyers can sometimes find programs that offer down payment assistance, but it is important to be prepared with your own money for a down payment.
You will need to be prepared to cover closing costs and those costs vary, but the average closing cost typically runs between $2,000 and $6,000. If you are purchasing real estate during a buyer’s market, it may be possible to have the seller provide some or all of the closing costs.
One of the things a lender will look at is savings. They want to be sure an applicant is not living paycheck to paycheck. Even before thinking about purchasing real estate, always pay yourself first out of each paycheck and establish solid savings practice. Savings will help cover maintenance and upkeep of any real estate you purchase and repairs can happen unexpectedly.
Once you know what you can realistically afford, get pre-approved for a certain level of mortgage. Pre-approval demonstrates your level of seriousness about purchasing real estate, as well as puts in place financial documentation and helps to streamline the looking process. The first thing a realtor will ask is “how much can you afford to spend?”