So you’ve decided to buy a new home. Whether it’s a first home or an upgrade, it’s obviously not something you should jump into without any preparation or planning. Buying a home is probably the largest purchase you will ever make, and it will have financial implications for a long time, possibly in the next 30 years. To avoid making an enormous mistake you’ll regret for many years, consider these 5 things you need to do before buying a home in Baltimore.
1. Work on Credit Score
Today, your credit score plays a huge role in determining how much house you can buy and whether you can get financing at all. So one of the first things you should do before buying a home in Baltimore – actually, before you even begin house hunting – is to work on cleaning up your credit score or getting it even higher (whichever applies to your situation).
Your credit score “is the number that mortgage lenders will look at to determine whether you are ‘creditworthy,’ and thus dictates whether you’ll qualify for a home loan, and the rates you will get.” In general, the better/higher your credit score is, the better rate you’ll get on your mortgage – which translates to lower monthly payments and significant savings over the long haul.
Most lenders want to see a minimum score of around 620. But higher is always better. Typically, you’ll need around six to eight months to improve your credit score – so begin now. (If, however, your score is low and you don’t have time to get it up, contact your local agent for other options. Call 443-595-9251 to find out more.)
2. Determine What You Can Really Afford
Another of the very first things you need to do before buying a home in Baltimore is to determine exactly how much home you can actually afford. “One of the biggest mistakes first-time home-buyers make,” according to real estate and financial experts, “is buying more than they can afford. To avoid falling into that trap, [these experts] recommend spending no more than 30% of your take-home pay on housing.”
But that 30% isn’t just the sale price of the home alone. It will also include a host of “related costs, like mortgage interest, taxes, insurance, maintenance and any renovations you might want to make.”
A good way to proceed here is by using the 28/36 rule. This rule says that “you should spend no more 28% of your gross monthly income on housing costs and no more than 36% on total debt, which includes housing and other debt like student loans or car loans.” In fact, many lenders will use this 28/36 rule to assess how much you can borrow and at what rate. Your agent can be a great resource in figuring out how much home you can actually afford.
3. Get Pre-Approved
Another thing you should do before shopping for and before buying a home in Baltimore is to get pre-approved for a mortgage loan. Your pre-approval letter will state how much your lender is willing to lend you. Besides proving that you can actually borrow a certain amount, pre-approval also positions you as a serious buyer and so can help your bid be the winning bid. “In hot markets, mortgage pre-approval is almost required for a seller to take your offer seriously . . . Tha;’s because it spells out exactly how much a lender has agreed to loan you, thus assuring the seller that you’re both willing and able.”
Pre-approval, however, is not the same thing as pre-qualifying. To pre-qualify, you just have to provide a lender your financial information without producing any documentation to back it up. Pre-qualification gives you an idea of what you can afford and whether the lender might be willing to lend you the amount you need. But it doesn’t guarantee you can actually get the loan.
4. Factor in Closing Costs
Another thing you must do – and many people neglect to do – before buying a Baltimore home is to budget for the closing costs. Besides the 10% to 20% down payment in the upfront costs, you will also have closing costs.
These closing costs will vary from area to area and according to the kind of loan you have, but, typically, they add about 2% to 7% to the cost of the home – which can amount to a substantial chunk of change. Typical closing costs include:
- Property taxes
- Title insurance
- Prepaid loan interest
- Fees for various services such as application, inspection, appraisal, and pulling a credit score
To make sure you have properly calculated and factored the closing costs into your total cost, you can use one of the online calculators or ask your agent to help you figure this out.
5. Save for Down Payment
Then, of course, there’s the down payment, which most people will need to save for before buying a home in Baltimore. There are several first-time buyer programs that offer low (and even no) down payment options. But, remember, the less you pay down, the more you will have to borrow, and the more you will pay in interest over the life of the loan.
Money pros advise trying to save up enough to pay 20% down. “If you go lower than that you will likely have to pay for private mortgage insurance. That is a safety net for the bank in case you fail to make your payments and can cost between 1-2% of the amount of the loan.” In short, it pays to pay more down.
Lean on Your Local Agent
These are the major things you need to do before buying a home in Baltimore, but this is by no means an exhaustive list. The difficulty lies in the fact that local markets vary so widely and, as a result, require different approaches. Your local real estate agent, though, knows the local market and can provide the guidance you need.