Are you planning to buy a house this year? Whether you’re a first time buyer or just haven’t been looking for a home in a while, there’s a lot to do before you’re ready to start going on showings.
Even when the market is on the slow side, it’s important to be ready to move when you find the house. If you haven’t bought property before, there are some things you may not know to do. If it’s been a while since you bought your last home, there may be some things you forgot! This guide will give you the rundown on saving up to buy a house, getting lender-ready, and what to look for when buying a home.
Here are five things to do before you start looking for a home this year:
1. Find out where you’re at financially
Before you dive into listing photos and bedroom counts, it’s important to know how your current finances could affect the home buying process.
Know your credit situation
Knowing your credit score is the first step to understanding your home buying budget—and looking for the right loan. Although it’s possible to get an FHA loan with a score in the five hundreds, you’ll have a lot more options with a score of 620 or above. The higher, the better! If your score isn’t where you want it to be, take a good look at the report first to be sure everything is accurate. Then you can try to build credit by paying all of your bills on time or by keeping a credit card open, using less than 30 percent of its limit at any given time, and paying those purchases off quickly.
Calculate your DTI
In addition to your credit, lenders will look at your debt-to-income (DTI) ratio to assess what kind of loan you can afford. This number compares your monthly earnings to your debt, and unlike your credit score, you want it to be on the low side. To lower your DTI, avoid taking on new debt and work toward paying off any debt you already have. Aim for 35 percent or less, but some mortgage programs are fine with a DTI in the high thirties or even forties.
Come up with a budget
Taking all these things into consideration, look at your financials as a whole to decide what you’ll be able to spend on a house. An online mortgage calculator will give you a rough idea of your monthly payment based on the total mortgage amount, the interest rate, and the mortgage period. You may not know all of these factors right now, so play around with the numbers and look at your options.
You can also use the “maximum loan” option on many of these calculators to put your desired monthly payment, interest rate, and mortgage period in and learn what mortgage you could afford based on those criteria.
2. Start saving
Once you have a clear idea of your current financial situation, it’s time to start saving up to buy a house! There are a lot of costs hiding in plain sight when it comes to looking for a home, so you should plan ahead for things like:
- The earnest money deposit—around one to three percent of the purchase price
- Your down payment—probably between 3.5 and twenty percent of the purchase price
- Home Insurance
- HOA fees
- Property taxes
- Overlap between your existing rent or mortgage payment and the new one
- Unexpected repairs and maintenance after you move in
3. Consider signing up for a homebuyer education course
If all this information is making your head spin, you don’t have to muddle through it alone. Homebuyer education courses are available both in person and online, and they will walk you through the whole thing step by step. Some lenders may even require a course like this for first time homebuyers. But even if they don’t, it’s a useful way to familiarize yourself with the first steps to buying a home.
4. Decide what you really want
Let’s fast forward now and pretend you’re all saved up and ready to take the plunge. It’s time to take a long look at your priorities.
This sounds like the “fun” step, but it’s actually a very important one. No two areas are exactly alike, so if you want a central, downtown location and a two-car garage, for example, you might have to choose which is the most important. Now is the time to start checking out listings online to see what things are going for in your area and what features you can reasonably expect.
A REALTOR® can help you with this part, and they can also show you the bigger picture. Do you care what school system you land in? Are you willing to live in a flood zone? They’ll help you ask the right questions.
5. Work on a mortgage plan
Congratulations! You’ve got your savings squared away and you know what you’re looking for in a home. The next step is to research your loan options. Here’s what you need to know:
There’s more than one option—a lot more
There are many different types of home loans and different lenders may handle some of them in their own ways, so don’t stop with the first option you see—there may be a better one out there!
Visit more than one lender and look through the final fees and costs of each one. There may be appraisal fees, background and credit check fees, or fees for document preparation included. This is not necessarily a red flag (The appraiser does have to get paid, after all!) but it’s something to be aware of as you compare your options.
Don’t skip preapproval
We’ll say it again: don’t skip preapproval. It isn’t necessarily a loan guarantee, but it does give you a leg up over other buyers who don’t have one. The application process involves showing your preferred lender documentation that supports your ability to pay the loan you’re asking for. Think payment histories, W-2 forms, and tax returns.
Don’t confuse this with a prequalification, which is an estimate of your loan eligibility based on your word; it’s not always verified the way a preapproval is.
Now go check out some listings!
Having your ducks in a row means you can sit back and enjoy the best part: looking at houses! When you find the one that’s right for you, your REALTOR® will be able to put together a stronger offer and do it more quickly because of all the legwork you did early on. Happy house hunting!