Buying a new home, particularly for first-time buyers, may be a daunting task. It’s a complicated process that can take a long time and is frequently riddled with stumbling blocks. In fact, the house-hunting process begins (or should begin) much before the purchase process begins. Simply told, some crucial planning should take place prior to the actual purchase. With that in mind, we recommend the following three steps to take before purchasing a new home in Chicago.
1. Determine What You Can Afford and Save For the Down Payment
Probably the most important initial step in preparing to buy a new house in Chicago is to figure out your budget, or how much you can realistically spend. “Creating a realistic budget for your new house can help you determine what you can afford and how much everything will cost.”
And that “realistic budget” must account for not only the one-time price of buying a new house, but also the ongoing expenses. Much more than the purchase price and resulting monthly mortgage payments are included in the pricing. You must include the following costs in your budget:
- Property taxes
- Homeowners insurance
- HOA fees
- Maintenance and repairs
- Commutes to/from work
Saving for the down payment is another stage in the process. In general, the greater the down payment, especially if you want to avoid paying private mortgage insurance, the better.
“To avoid private mortgage insurance or PMI, you’ll need to save at least 20 percent of the home’s purchase price for a down payment. Some lenders offer mortgages without PMI with lower down payments, but expect to pay a higher interest rate.”
If you can’t save up 20% for a down payment (which is a common stumbling block for many buyers), you still have options. These include FHA, USDA, and VA loans, as well as Fannie Mae and Freddie Mac-backed conventional loans. To learn more about these lower-down payment options, call a We Buy Houses agent.
2. Get Your Credit in Order and Calculate DTI
The next step in preparing for a new home purchase in Chicago is to check your credit, get it in order or improve it, and calculate your DTI.
“”You’ll need… to verify your credit history whenever you decide to buy a new property,” industry experts say. To better understand your credit score, you must obtain credit reports from each of the three credit reporting bureaus (Experian, TransUnion, and Equifax).”
This is significant since your credit score has an impact on your mortgage eligibility and rate. “Most mortgage program’s necessitate a credit score of 580 to 620.” However, the higher your credit score, the better off you’ll be since you’ll get a reduced interest rate, which can save you thousands of dollars over the course of your loan.
You should start this process as soon as possible. “Before applying for a mortgage loan, you should verify your credit history for at least 6-12 months.” This gives you time to fix a bad credit score if necessary.” It also provides you time to look for and correct any inaccuracies on your credit report that could affect your credit score.
Your debt-to-income (DTI) ratio is another key factor to consider. This is the percentage of your monthly income that is used to pay down debt. This proportion is used by mortgage lenders to determine your affordability.” Lenders typically prefer a DTI ratio of no more than 36 percent to 43 percent (though this does depend on the specific mortgage program).
Here’s an example . . .
Suppose your monthly gross income is $4,000. With that income, a lender wouldn’t want “your monthly debt payments (including a future mortgage payment) [to] exceed $1,720. In this scenario, your DTI ratio would be “43% ($1,720/$4,000 = ).43).
Do be aware, though, that when certain “compensating factors” such as a high credit score or large cash reserves are in place, some lenders may be willing to accept a higher DTI ratio.
In any event, it’s a good idea to calculate your DTI ratio ahead of time when planning to buy a new home in Chicago so you have time to increase it if necessary. “Pay off as much debt as possible before applying for a mortgage to enhance your DTI ratio. Credit cards, vehicle loans, school loans, and other debts fall into this category. You don’t have to be debt-free to buy a house, but having less debt can help you get a better deal.”
3. Get Pre-approved for a Mortgage
Pre-approval for a mortgage loan is the third key step Chicago home buyers should take to prepare before purchasing a new property. This will provide you an advantage and “kick-start the home-buying process.” The primary benefits of getting pre-approved are that you’ll know exactly how much you can borrow, that you’ll be seen as a serious buyer, and that you’ll have more negotiating power.
It’s important to note that pre-qualification and pre-approval are not the same thing. Pre-qualification is merely “a first phase in the mortgage lending process in which you furnish the mortgage lender with basic information about your financial condition… This information isn’t verified by the lender, but it is used to see if you qualify for a loan. ” Pre-qualification “doesn’t have the same weight as a letter of pre-approval.”
Pre-approval, on the other hand, entails “submitting a mortgage application and presenting supporting papers to your lender.” Tax returns, pay stubs, W2s, financial statements, and a credit check are all included. This information is reviewed by the underwriter, who evaluates how much you can afford to spend on a home. A pre-approval letter isn’t a promise of funding, but it’s a means for a lender to suggest they’ll probably approve you if you meet other loan requirements.”
You’ll know precisely how much you can borrow once you’ve been pre-approved, which can save you a lot of time when house looking. Furthermore, as previously stated, buyers will regard you as a serious buyer, giving you additional bargaining power.
And Find a Local Chicago Agent
Finally, finding and engaging the services of an experienced local Sell My House Fast agent may be the best thing you can do in preparation for buying a new home. Your Chicago agent might be a significant asset due to her extensive understanding of the local market. If you’re thinking about buying a new home in Chicago, give us a call.