Spring Is Home Buying Season, and Here's How to Be Ready to Buy

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Spring is the prime season to shop for a home. But if you're thinking about buying, it's important to make sure you don't jump into the market before you're really ready.

Too many people purchase homes without having their finances fully in order, which can lead to problems down the line because your mortgage costs more than it should or you can't really afford all the costs of homeownership.

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To ensure that buying your home turns out to be a good decision instead of a financial disaster, complete the items on this list before you look at real estate.

1. Make sure you have a good credit score

When you buy your home, it's likely going to come with a mortgage you'll be paying for decades. Since your mortgage is a huge debt to repay, don't borrow until you've built up your credit.

Your credit score makes a huge difference in terms of interest, monthly payments, and total cost. If you put 20% down on a home costing around $376,700 -- the average price of a new home in February 2018, according to Census data -- you'd need to borrow around $300,000. The chart below shows what you'd pay for that 30-year fixed rate loan, based on interest rates current as of April 2018.

Credit Score

APR

Monthly Payment

Total Mortgage Cost

760-850

4.141%

$1,457

$524,426

700-759

4.363%

$1,496

$538,464

680-699

4.540%

$1,527

$549,790

660-679

4.754%

$1,566

$563,640

640-659

5.184%

$1,644

$591,973

620-639

5.730%

$1,747

$628,887

The difference in cost is over $100,000 and the difference in monthly payments is around $3,480 annually if you have a great score versus a score below 639. You don't want to waste more than $100,000, so don't buy if your score is too low.

You can raise your credit score by making on-time payments, paying down debt to reduce your credit utilization rate, and fixing mistakes on your credit report. If your score is being dragged down by one or two late payments but you've been a good customer, ask your creditor if it would be willing to remove the record of the late payment as a goodwill gesture.

2. Save a 20% down payment

You can technically buy a home with less than a 20% down payment, and many people do. In fact, the average down payment for new home purchases in 2016 was just 11%.

But just because you can do something doesn't mean you should. If you put down less than 20%, you'll have to buy private mortgage insurance (PMI). Lenders make you buy PMI to protect them in case you get foreclosed on, because PMI repays the lender any costs it doesn't recoup.

You don't benefit from PMI at all, but you'll have to pay for it, and it costs 0.5% to 1% of the loan amount on an annual basis. On a $300,000 loan, that could be as much as $3,000 per year, or $250 monthly, assuming a 1% fee.

Even if you don't mind wasting money on PMI, there's still a risk to not putting 20% down. If your home's value drops and you don't have enough equity, you might owe more than your house is worth. This is called being underwater, and it can make it impossible to refinance to a lower-rate loan or move if you need to -- unless you bring cash to the closing.

You don't want to be trapped in a home you can't sell, so make sure you have a big enough down payment to avoid PMI and have plenty of equity.

3. Save some cash for an emergency

Being a homeowner often comes with sudden unexpected expenses. When the water heater breaks or the roof leaks, you can't just call a landlord. Unfortunately, you may find yourself getting into debt if you don't have an emergency fund.

Ideally, you should have three to six months of living expenses saved in an emergency fund before buying a home. This will give you the cash cushion you need not only to deal with an unexpected home repair but also to cover costs of your mortgage in the event of a job loss.

If you can't save this much while also saving for a 20% down payment, make sure you have at least $1,000 to cover minor emergencies that arise -- and that your mortgage payments are low enough that you can afford to save for an emergency fund after moving in.

4. Ensure you have the necessary income

Buying a home is a really bad idea if you don't have reliable income. While there's no way to guarantee you won't become unemployed, mortgage lenders typically like to see that you've been at your current place of work or had the same steady income for at least two years. If you can't show this, getting a loan may be a challenge.

Mortgage lenders also want to confirm that your mortgage won't eat up too large a portion of monthly income. Typically, to qualify for a loan, the total amount of debt you can have -- including your mortgage, property taxes, student loans, credit cards, and other monthly obligations -- can't exceed 43% of gross monthly income.

Try to keep costs lower than that if you can. If you're a two-income household and want to be especially cautious, consider trying to buy a home you can afford on just one income. If a job loss occurs, you won't be in trouble -- and if everything goes right, you'll have lots of spare cash to save.

5. Know your plans for the next few years

A home is a really illiquid asset because it can be difficult and costly to sell. You'll have to pay closing costs, transfer fees, and a commission to real estate agents.

Because of the difficulty of getting out of a home once you're in one, don't purchase unless you'll be staying put for a while. In fact, most experts recommend that you not buy a home unless you'll stay in it for at least five years.

This should give the house time to appreciate in value enough that you won't lose a fortune when you sell it.

Buying a home can be a great investment

Homeowners typically have a higher net worth than renters -- but a foreclosure can destroy your financial life for years to come.

By completing the items on this list and making sure you're financially ready to buy a home, you can reduce the chances that serious financial problems in the future will put your house at risk.

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