Purchasing a home is an exciting milestone that can be both exhilarating and overwhelming. It is important to know what actions to take before making such a large and consequential decision. By doing your research and taking the proper steps, you can ensure that you make the best possible purchase for your budget and needs. Let’s look at what you should do before buying a home.
Determine how much house you can afford.
Before you can buy a house, figure out how much you can afford to pay. Several factors go into this calculation, including your income, debts, and cash reserves. Start by reviewing your budget to determine how much money you have available to put towards a down payment. Consider the cost of insurance, taxes, closing costs, and any other additional costs associated with buying a home.
Take into account other factors, such as the time you plan to stay in the home, the maintenance needed for the home, and any additional costs associated with the purchase. At this point, you should know how much you can afford and what price range will work best for you, so you can further refine your home search.
Research your housing market.
Prior to shopping for a home, understand the housing market in your area. Before investing in something as large and expensive as a home, research the housing market in your area to get an idea of the current trends and future projections. By researching the market, you can get a better idea of the expected return on your investment.
Consider factors such as the overall health of the economy, the average housing prices, and the recent rate of appreciation. Additionally, take note of unemployment, job growth in the area, and the number of homes for sale. Understanding the market will help you make an informed decision and get the best return on your investment. You should also know about the crime rate in your neighborhood, so you know what dangers may exist there.
Build your savings.
The most important step to buying a home is saving for a down payment. Your savings will help you avoid the hefty mortgage insurance premium and also give you some flexibility in terms of the type of house you can afford. If you have no money saved up and aren’t planning on contributing to a down payment, it’s going to be difficult (if not impossible) to qualify for financing from a bank or lender.
Reduce your debt.
Having excessive debt, such as credit card balances, car loans, student loans, etc., can make qualifying for a mortgage challenging because lenders look at your monthly payments rather than looking at what’s due on the house itself each month (the “debt ratio”).
If possible, pay off any high-interest-rate debts before applying for a mortgage, so they aren’t factored into this ratio calculation when determining whether they’ll lend you money.
However, paying off all debt isn’t required to get approved since many lenders offer other types of programs where borrowers could still qualify even if they have some debt. Many of these are designed specifically for first-time homebuyers who might not otherwise meet traditional criteria but still want homeownership opportunities despite having less-than-perfect financial profiles.
Improve your credit.
Make sure you’re using the right credit card. A good one can help you build your credit score and improve your chances of getting approved for a mortgage loan, while a bad one can hurt it. If you haven’t already, find out where your credit stands by checking with the three major credit reporting bureaus (Equifax, Experian, and TransUnion). Then pick a card that reports to all three so that they have an accurate picture of your payments.
Pay all bills on time–and pay more than the minimum balance due if possible. This will help raise your score and show lenders that you’re responsible enough to handle larger debt obligations like mortgages.
Keep track of any changes in income or expenses so they don’t throw off your budget too much when applying for a loan down the line–and make sure there are no surprises! If something changes during this process (like marriage or a career change), consider applying sooner rather than later so these things don’t negatively affect future loans.
Get pre-approved for a mortgage loan.
You may have heard that getting pre-approved for a mortgage loan is a good idea, and it is. Whether you are buying your first home or moving up to something larger, having your credit checked and proof of income in hand can put you ahead of the pack. A pre-approval letter tells the seller that you’re serious about buying their house–and can act as leverage when negotiating with them on price.
Unlike an application for traditional financing, which requires several weeks (often months) to process, a mortgage broker can often accomplish this in just two to three days. This allows you to start looking at homes right away and gives you an idea of how much house you can afford.
Shop for a home and make an offer.
Once you’ve found the home of your dreams, it’s time to look at all the facts and make an offer. Make an offer on the house within 24 hours of seeing it in person. Offer less than the asking price, but don’t go too far below what other similar houses are going for in the area; otherwise, no one will accept your offer.
It’s important to remember that while it may seem like a good idea to throw yourself headlong into the home-buying process, you don’t want to be like the thousands of people who find themselves unable to pay their mortgages! Before doing so, make sure you have enough money set aside for such an endeavor. These steps may seem like a lot to keep track of, but they’re all crucial if you want to make sure you can afford a home.