You are tired of renting and have decided to join the ranks of homeowners. Congratulations! You have a long but rewarding journey ahead of you.
As with any long journey, planning and research will make the trip much smoother and help you to avoid common pitfalls.
Top Six Considerations to begin your Home-Buying Journey
1. Define Your Needs and Wants – It is fine to look at houses and find inspiration, but go into your housing search with a basic idea of the requirements for you and your family. Consider your future needs as well. For example, are you expanding your family and will you need more rooms in the future? Are you handy enough to look at fixer-uppers or do you need a move-in ready home?
Consider location factors as well – define what is important to you in a neighborhood, local school districts, commuting distances, noise, views, and similar concerns. The perfect house sitting in the wrong location is really not the perfect house after all.
Classify these realistically as needs and wants, just as you would with any budget. This will keep you from falling in love with a house that meets all your wants but not enough of your needs.
2. Realistically Assess Your Finances – Most first-time homeowners underestimate the costs of homeownership. Make a mock budget considering not just your monthly home payments, but also how much you will need to put aside for maintenance, property taxes, insurance, homeowner’s association fees, and any other local expenses. Do some research to find out what values are realistic for your area.
Do not forget to include some monthly savings and an emergency fund to cover unexpected expenses.
Next, move on to the home buying expenses such as down payment money, closing costs and fees, and private mortgage insurance if required. Leave yourself some percentage as an emergency fund and assess the remainder.
A higher down payment will increase your chances of approval, but limits the value of home you can afford. Lower down payments allow you to buy a more expensive hone but long-term costs will be considerably higher. You will have to determine the level of risk you can handle, but if you go through this exercise, you are less likely to buy a larger house than you can truly afford.
3. Check Your Credit Score – You probably have not had much reason to check your credit score prior to this point. Credit scores can be inaccurate and contain nasty surprises that scuttle your ability to get a mortgage, especially in times of tight credit.
You can get one free credit report from each main reporting agency (Equifax, TransUnion, and Experian) every year at www.annualcreditreport.com. Since there are three of them, you can get a free report every 4 months, or get them simultaneously to compare them. Start early, because repairing a poor credit report takes time.
4. Get a Loan Pre-Approval – Pre-approval by a lender could be a revelation as to what you can realistically afford. Do not confuse this with pre-qualification, which is just a cursory check on the mortgage amount for which you qualify. With pre-approval, lenders will go in depth to evaluate your creditworthiness, calculating such values as your debt-to-income ratio.
Do some research to shop around for lenders before you seek pre-approval. You want a lender that you feel comfortable with as well as providing a competitive interest rate.
5. Find an Agent – As a first time homeowner, you can benefit from the experience of a real estate agent with the experience in your market. They can help steer you clear of novice mistakes and help you with realistic assessments.
It is important to find an agent who is readily accessible and whom you trust. Check local references, and shop around for the agent that best fits your needs.
6. Have a Checklist for Closing – The closing process can be a swirl of endless paperwork to understand and sign. It can be overwhelming if this is your first home purchase, and you could end up signing things that you don’t fully understand – always a bad idea.
In addition to your online research that brought you to MoneyTips, your lender should provide you with a closing checklist that explains the purpose of all the ensuing paperwork prior to closing. Reviewing it all in advance will give you more confidence during closing and help you to spot any problems to be addressed.
Good luck on your home-buying journey! We look forward to your future housewarming party.