How to Prepare for Buying a House

Buying your first home is an exciting milestone. As you look forward to this major purchase, we want you to feel confident and avoid surprises during the process. While finding your dream home may be top of mind, the financial preparation leading up to your home search and closing day is equally as important. By budgeting properly, improving your credit score, saving for upfront costs, and understanding mortgage options early on, you’ll set yourself up for success. Here’s your guide on how to get started.

Determine Your Budget

An essential first step is to understand how much home your budget can comfortably accommodate. While mortgage lenders will approve you for a certain loan amount based on your income, debt levels, and credit profile, this should not necessarily dictate what you spend. You want to avoid being "house poor," where the bulk of your take-home pay gets eaten up by housing costs.

Calculate Monthly Housing Costs

Use mortgage calculators to estimate monthly costs—principal, interest, taxes, and insurance (PITI)—at different home prices and down payment levels. For example, for a $250K house with 20% down and 6.00% interest on a 30-year fixed mortgage, you may spend around $1,300 per month. Boost that to a $500K home with the same terms, and the monthly figure could jump to $2,500. Mapping out these projections helps dimension the price range you can truly swing.

Complete a Budget Worksheet

Next, document your current regular income streams and spending habits across all categories from household essentials to discretionary splurges. This exercise spotlights where your money goes and any potential areas to cut back. If your current rent exceeds 28-36% of your gross monthly income, that's a red flag you may be overextending with a mortgage.

Make Budget Adjustments

If needed, tweak your budget to free up more for housing costs—like directing raises into savings, downsizing expenses, or increasing income. Establish a feasible monthly amount for mortgage payments based on your comprehensive financial picture, not just the lender's qualified amount. This poises you to hunt for homes squarely within sustainable reach.

Check Your Credit and Improve Your Score

Your credit score significantly influences the mortgage terms lenders can offer you. Knowing your current score and taking steps to boost it months before applying for a loan can make a big difference.

Order Credit Reports

If you’re an FCU member, you can access your FICO credit score for free through FCU Anywhere. Otherwise, you can begin by accessing free copies of your credit report from Equifax, Experian, and TransUnion. You are entitled to these every 12 months. Carefully review all information for inaccuracies that could unjustly lower your score. If errors exist, immediately dispute them with evidence to get the record corrected.

Understand Scoring Models

Most lenders use FICO scores, which range from 300-850. Key influencing factors include payment history, amounts owed, length of credit history, pursuit of new credit, and mix of account types. Different lenders have different credit requirements, and while they may also look at other factors when evaluating your application, you want your score to be in the best shape possible.

Improve Your Credit Score

If needed, allow 6+ months for score-enhancing measures to fully register in your reports and reflect better numbers:
●    Pay all bills early or on time
●    Pay down balances below 30% of limits
●    Limit new credit card applications
●    Keep old accounts open
●    Correct report errors
●    Consider credit counseling

Save for Upfront Costs

Beyond a down payment to cover a portion of the home price, buying a house requires paying many fees at closing plus moving and other expenses. Saving funds to foot this initial cash outlay makes for smooth sailing.

Save for the Down Payment

Although low down payment programs exist, putting at least 20% down benefits you by lowering the amount borrowed, required mortgage insurance, and interest paid over the loan’s lifespan. On a $200K purchase, that means saving $40K—so start stashing cash away as early as possible. Every little bit helps chip away at the goal.

Research Closing Costs

Closing costs range between 3-5% of the total purchase price. These items include the home inspection, appraisal, legal fees, taxes placed in escrow, and loan origination charges among others. On that same $200K home, allot $6K-10K to cover items due at closing.

Don’t Forget Moving and Upgrades

Finally, pad savings for not only moving your belongings but also upgrades like paint, furniture, or appliances the home may need. These extra touches quickly add up too. Allocating money for them prevents blowing through cash reserves required for closing. By planning ahead for hefty sums required, you won’t drain an emergency fund, rack up credit card debt, or scramble for money at the eleventh hour. 

Understand Mortgage Options

Home loans come in different shapes and sizes, each with their own pros, cons, and terminology. Doing your homework on the menu of mortgage products empowers you to choose the best fit for your situation.

Fixed-Rate Mortgages

The interest rate and monthly payments on fixed-rate mortgages stay constant for the full loan term, commonly 30 years. This reliability allows easy forecasting of costs, though rates trend slightly higher than adjustable loans.

Adjustable-Rate Mortgages

Often abbreviated ARM, the interest rate floats up and down over the loan duration based on market indexes. The initial rate is typically very low to make payments more affordable short-term. But significant jumps down the road are possible, making budgeting a challenge. In a high rate environment, ARMs have a tendency to be more popular, but we would highly recommend working with a mortgage loan specialist to explain the difference.

FHA and VA Loans

These government-backed loans help qualified buyers by requiring lower down payments and credit scores than conventional mortgages. Features can include fixed or adjustable rates and no monthly mortgage insurance.

Compare Term Lengths

Standard repayment terms span 10-30 years. The longer the term, the lower the monthly dues and the higher the total interest paid over time. Weigh your budget, goals, and how long you may stay in the home when selecting terms. Doing diligent research now prevents surprises after the ink dries. Once educated, consult loan officers about what products match your financial game plan and homeownership timeline.

Get Pre-Approved for a Loan

Rather than loosely being pre-qualified for a certain mortgage amount, go a step further to get definitively pre-approved before house hunting. This shows sellers you can obtain financing and expedites the process later.

Submit Paperwork

Your lender will request extensive documentation including bank statements, tax returns, pay stubs, and a loan application detailing income, assets, debts, and more. Gather everything they require for evaluating if you qualify based on your credit, debt-to-income levels, and down payment savings.

Get Firm Approval

Within a few weeks after you submit your paperwork, the lender will confirm the precise loan amount, interest rate, and terms you are approved for based on your financial background. Shop armed with this concrete proof that your financing is ready to go when you find “the one.”

Act Fast When Bidding

Present your pre-approval letter when making an offer. This evidence that your ducks are neatly in a row can give your bid an edge over competing buyers still needing to secure funding. It shows the seller you’re ready to move quickly.

Let the lender know once your offer is accepted so they can finalize the loan details and paperwork leading up to closing day. With financing locked in ahead of time, smoothly cruise through to an on-time close.
Through careful preparation like budgeting, monitoring your credit, saving up funds, and researching mortgage products, you can feel financially primed for embarking on homeownership. Here at Florida Credit Union, we’re a trusted partner for members seeking guidance through every first-time homebuying step. Our mortgage team offers competitive rates and term options to approved borrowers looking to turn aspirations into keys, as well as guidance on understanding the process. Let’s get you moved in!