Financial guide to purchasing a home

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Financially preparing for your first home can seem like an overwhelming process. 

According to the National Association of Realtors, of the 5.2 million existing homes and half-million newly constructed homes that were sold in 2015, 32 percent of buyers purchased a home for the first time. The average starter home price for these buyers rang in at $189,300. Financially preparing for your first home can seem like an overwhelming process. However, there are steps you can take to help make your dream of home ownership a reality. 

1. Weigh the decision carefully.

There may be financial benefits to the long-term investment of purchasing a home compared with renting each month. However, as any homeowner will tell you, the process of buying a home involves upfront expenses and a new set of long-term responsibilities. For example, home ownership means you’ll be doing or paying for your home’s maintenance and repairs yourself, which would be the responsibility of a landlord in a rental property. Owning a condominium instead of a home can keep some of that maintenance off your plate but involves a monthly association fee. Assess your current needs to make sure you choose the best option for you and your family.

“Home ownership is today, as it has always been, the cornerstone of a strong community,” says Lenny McNeill, senior vice president and managing director, National Strategic Markets and Diversity at U.S. Bank.

2. Know your credit score — and your co-borrower’s.

The better your credit score is, the lower your monthly payment could be on your mortgage loan. Pull your credit report early to make sure your debts are in good standing and that there is no unauthorized activity happening in your name. If you and your spouse or significant other are buying a home together (you do not need to be married or domestic partners to co-purchase a home), both of your credit scores will be taken into account. If you are a U.S. Bank customer you may check your credit scores for free through U.S. Bank.

Higher credit score may result in a better interest rate, which determines the loan portion of your monthly mortgage payment. While you may qualify for a loan with a lower credit score, you may be able to save money in the long run by taking steps to improve your credit score. 

3. Save for a down payment and closing costs.

A number of fees will come up while buying a home and during the closing process, which includes fees for inspections, taxes, appraisals, government recording charges and more. You will need to prepare for these expenses in addition to saving for a down payment. According to independent comparison site Bankrate, closing costs for a $200,000 mortgage can range from $2,300 to $4,000. 

Your down payment will be discussed as a percentage in relation to the overall cost of the home. If possible, if you shoot for a higher down payment you may pay less interest over time and may avoid being required to purchase mortgage insurance.

4. Calculate your mortgage payment.

As a general rule of thumb, your home expenses should not be more than 28 percent of your gross monthly income. Before you consider buying, understand the mortgage payment (including taxes and insurance) for a home in your price range, as well as additional expenses such as utilities and maintenance. 

Estimate your mortgage payment based on the price of the home you want to buy with U.S. Bank’s mortgage payment calculator. Your total monthly payment may vary due to your ZIP code and insurance and interest rates, but an estimate can get you started. Consider whether the estimate differs from the monthly expenses you pay currently. If it’s going to cost more, an effective way to prepare for the expense is to practice setting aside the higher value each month, and saving the difference after you pay for your current living expenses. Also, take into consideration that your home will need maintenance and repairs. 

You don’t have to create a savings plan alone. Find resources that can help you create the plan that’s best for your situation and goals.

5. Understand your titling options.

When closing on your home, you will need to sign title documentation. Common titling options include sole ownership, joint tenancy and ‘tenants in common.’ A real estate lawyer is the best resource to consult for advice on the right titling approach for your situation and location. Also make sure to talk to your tax professional as title and taxation issues differ from situation to situation.

6. Find out about pre-approval.

Pre-approval for a mortgage helps you understand your budget and confirms that you have the resources available to purchase a home. This allows you to act more quickly when you find your dream home. 

After being pre-approved, you will receive commitment from your lender for a specific loan amount. Having this commitment in writing makes you more attractive to sellers than a potential buyer who says they can buy the house but doesn’t have their bank’s backing to support the offer. Because of this, a mortgage pre-approval could help your offer win against multiple bids.

The process for pre-approval is similar to that of a mortgage loan application. Pre-approval will show as an inquiry on your credit report, and is only good for a certain amount of time. It’s wise to apply for a pre-approval only when you’re fairly certain you will want to buy a home in the next 90 days. You will need to provide personal information and financial documents. You can start today with our pre-approval checklist

7. Prepare to get your mortgage loan.

Loan approval depends on a number of factors, including your credit score, debt-to-income ratio, employment history and assets. For example, first-time homebuyers may qualify for loans with added benefits:

a. Federal Housing Administration (FHA) loans usually require a lower minimum credit score and allow a higher debt ratio than conventional and Veterans Affairs (VA) loans.

b. Fixed-rate conventional loans are appropriate for those with high credit scores and the ability to make a higher down payment, minimum.

c. VA loans are available to qualified veterans, active military personnel or spouses of military members who died while on active duty or as a result of a service-connected disability may also be eligible. Credit score requirements are usually lower for a VA loan than for a conventional mortgage.

8. Find a real estate agent and a home.

U.S. Bank has a long and proud history of working with homebuyers, and agents, and is a sponsor of the National LGBT Real Estate Conference, which brings together 700 LGBT and allied industry leaders to share insights and innovations. 

Real estate agents are experts in the process of buying a home. The right agent could help you find your dream home without wasting your money or time. Knowing what type of home you want, where you want it and your price range will help your real estate agent find the best options for you more efficiently. In turn, they should be open about the process and help you understand what you can do to ensure a successful home-buying experience. 

Even in the best of circumstances, choosing the right home takes time. Depending on your financial situation, relocating can be very expensive. Take the time early on to choose the right home and ensure that your investment will last.

Although purchasing a home can be both exciting and daunting, getting a handle on your financial situation and creating a plan will help everything go smoothly. Enlisting experts such as financial advisors and real estate agents will also help guide you along the way. 

“Most people don’t have the time to do extensive research and become home-buying experts,” says McNeill. “That’s where we come in. We assign you a mortgage loan originator who can guide you through the origination process so you can focus on finding the home you love.” 

Don’t rush! Feeling happy with your choice, as well as financially comfortable, will ensure your house feels like home.


Have more questions? Find personalized help, or read more financial advice for same-sex couples.