Deciding to become a homeowner is an important, exciting first step. But to buy a home and move in, there are many steps to take that can take much more time than picking the home of your dreams.
Here are nine steps from financial professionals to take before you buy a home so that you can come out with the best deal. Give yourself a year to get through all of them before you buy a home:
1. Check your credit reports
Check all three nationwide companies, Equifax, Experian, and TransUnion. They can hold surprises from the past that should be cleared up before you talk to a bank.
Your credit score should be above 700 to get a good loan rate to buy a home. Each person who will be listed as buyer/owner of the property will need good credit numbers.
2. Have a credit history
Having a credit history is good, and is better than never having debt. Banks like to see your financial responsibility — that you pay bills on time, don’t overdraw your checking account, and that your debt-to-credit ratio stays in a reasonable range.
It’s better if they aren’t all credit cards, but if you don’t have multiple trade lines, get a card. Your credit score will probably go down when you get the card, but you should try to have a year’s history with it before you go for your loan. After a year of on-time payments or low debt, your rate will go back up.
3. Lower your debt before you buy a home
Don’t worry if you have more than three accounts — unless your credit information shows your debt-to-credit ratio is unbalanced.
Although it might be the way to go, be careful about closing accounts too quickly. Dropping major credit cards with larger limits can actually negatively affect the ratio. Consider getting financial counseling to determine the best debt-fixing moves.
4. Have a reliable source of income
If you’re relying on the income from your job and not a trust fund, you need to have a history with your employer. If you’re in a new job, wait to apply for a loan.
If you’re thinking of changing jobs, do that within this year of preparation. Also, long-term employment shows the stability of the company as well as your job.
5. Save, save, save
Prepare to have 20% of the home cost for a down payment. If you have more, the bank will be happy and so will you as you pay less monthly. If you have less, lenders will still work with you, but consider waiting longer.
It’s a good idea to start a separate savings for the house in preparation for home ownership as well. This will show that you’re thinking about those other expenses — closing costs, taxes, insurance, appraisals and inspections, and incidentals.
6. How much house you can afford?
Sure, the bank will run some numbers and give you an amount of a loan you qualify for before you buy a home, but what can you really afford?
There’s a formula — actually several of them. The most basic suggests that your mortgage should be 2.5% or less of your gross income.
Another one is based on what the principal, interest, taxes and insurance combined will be; that total should not exceed 28% of your gross income.
With your mortgage and other debts (credit cards, etc.), your payments should not exceed 36% of your gross income.
Multiple mortgage calculators are available online. Use one that explains how it is calculating the number.
When considering how much you can afford before you buy a home, begin to consider how much you need. Take into account your lifestyle and personality. Do you travel a lot and are never home? Will you need a yard you can dig up? Do you always dine out? Do you expect a barrage of visitors? Will your family be growing?
Answers to questions such as these will help you determine what you need in a house and therefore how much you should spend. This is a long-term commitment and your life will change.
7. Shop for loans and get preapproved
Multiple types of mortgage loans are available, and rates can vary from lender to lender. Check the conditions and requirements of loan packages. FHA loans require less money down and have stricter requirements on home inspections.
Know whether you are getting numbers pertaining to a fixed-rate, adjustable rate, with points or not, with a balloon payment or not, or any of the other possibilities available.
After you decide, get preapproved, not just prequalified. Getting preapproval lets you know if you and the bank are on the same page regarding the potential amount, your credit report, and the interest-rate range.
Some sellers won’t negotiate with potential buyers who aren’t preapproved. Having that preapproval in your hand when you’re making an offer could be the difference in you winning a bid in a tight market.
8. Find a real estate agent
Don’t forego your own real estate agent just because everything seems available online. Get yourself a buyer’s agent who will take you from searching to closing so you can buy a home you want to live in.
Clarify with your potential agent that you want someone who is working exclusively for you, not a seller as well. While the seller’s agent is trying to get the best deal for the seller, which gets him/her a better commission, the buyer’s agent will watch out for you.
Many will seek houses that may not be traditionally listed but fit your needs, check neighborhoods that fit your needs and recent homes sold in those neighborhoods. And they will write offers and negotiate for you to avoid contractual surprises. By the way, this doesn’t cost you extra; buyer’s agents get paid via the seller and seller’s agent.
9. Get an inspection before you buy a home
Don’t let liking a house stop you from getting a home inspection before you sign all those papers and buy a home.
Houses hide secrets. Let an inspector try to ferret those out to save you money possibly right away — it could lower purchasing price. Or, it could cost you down the road — how much life is left in the roof or are there foundation issues?
Homebuyers, what have you learned from your big, life-changing purchase?