Nobody wakes up one morning and suddenly decide they’re going to buy a house. Most of us require weeks and months of preparation to put ourselves in a position where we can follow through on such a vital financial decision.
If you’re considering it, the longer you give yourself to prepare, the better off you’re apt to be.
Five Recommended Steps
Six months is perhaps an acceptable amount of time to plan for a home purchase. It’s just long enough that you should have enough breathing room to get your finances in order and iron out any wrinkles that could lead to trouble, but not so long that it feels like your purchase is far off in the distance.
Based on how much money you have to spend, what the real estate market is like in your region, how you plan to finance the purchase, and such personal factors as your job and family life, you’ll determine the best course of action. But we can provide a helpful overview of some of the major steps you should take … and in which order to approach them. Take a look.
Determine What You Can Afford
The first step is to identify what you can afford. You don’t have to settle on a specific dollar figure, but it’s wise to come up with a ballpark range.
“Affordable” can mean different things to different people. It’s best if you look at it through the lens of both the overall purchase price and the monthly payment. If you study only the latter, you might end up with a mortgage that costs you tens of thousands of dollars in unnecessary interest payments over the life of the loan.
Run some quick Google searches to locate a variety of handy formulas to help you determine how much house you can buy. One of the simplest and best rules says you should spend no more than 25 percent of your monthly take-home pay on a 30-year mortgage.
In other words, if you bring home $7,000 a month, your maximum mortgage payment — including premium, interest, insurance, taxes, HOA, and all — should be no more than $1,750. If you bring home $4,000 per month, your maximum payment should be just $1,000.
Get Your Finances in Order
The next step is to get your finances in order. Six months before you put an offer in on a house gives you plenty of time to correct issues and build momentum. Here are some suggestions:
- Pull your credit score and do your best to get it above the 740 mark. Doing so will increase your chances of landing competitive loans from several lenders.
- Pay down any bad debt — such as credit cards or medical bills — and don’t take on any new debt (including cars or student loans).
- Develop a budget and cut any superfluous expenses. The goal is to have a cash surplus you can pile high at the end of each month. Remember that in addition to the down payment, you’ll also have to cover closing costs. Typically, homebuyers pay between 2 and 5 percent of the purchase price on closing fees. For a $300,000 house, this amounts to $6,000 to $15,000. The more you save ahead of time, the easier it’ll be to cover these costs.
- Go ahead and organize all the documentation you’ll need to apply for a mortgage. This will include W-2 forms, bank statements, photo IDs, tax returns, credit history, and other financial forms.
For most people, this may be the longest and most strenuous step in the process. Try not to get too overwhelmed by it. Do a little every day or week, and you’ll find it becomes much more manageable.
Determine Wants and Needs
When buying a house, you need a clear grasp of what you’re looking for. It’s also imperative to differentiate between wants and needs.
A “want” is something that you’d like to have, but isn’t critical for you and yours to be safe, happy, or healthy in your home. For example, you might want a pool or want quartz countertops in the kitchen, but these don’t qualify as needs.
A “need” would be something like three bedrooms to fit your growing family, or a garage that’s large enough to house or serve your home business.
Shop for a Mortgage
“The No. 1 reason for not rate shopping is that buyers wait to the last minute,” industry insider David Edmondson says.
“Buyers often don’t think about the terms of the mortgage until they have signed a purchase agreement. Once that happens, they are dealing with deadlines and often end up going with whomever their realtor recommends. While this can be quick and convenient, it could be costly as well.”
When you’re 30 to 45 days out from buying a house, you can start the process of shopping for a mortgage. You may obtain estimates for interest rates and fees from multiple companies at no charge.
However, once you actually begin applying, you’ll probably have to pay a fee for the loan. It’s also worthwhile to note that interest rates and closing fees are always negotiable.
Start early and don’t be afraid to dig in a bit and use different offers as leverage for lowering the cost.
Find a Real Estate Agent
Once you’re a few weeks out and you’ve been pre-approved for a home loan, you’re ready to find a real estate agent. As a buyer, you won’t pay your agent directly; the seller will pay the commission at closing.
Still, you should try to engage the best agent you can find. You want someone who is experienced, has been operating in the local market for at least three years, and approaches the task hands-on. (If you call, for example, a proper agent should answer right away or call you back within the hour.)
Buy With Green Residential
There’s nothing casual about buying a house. Whether it’s a $200,000 home or a $2 million estate, it’s crucial to approach the decision with purpose and clarity of mind.
At Green Residential, we’d love to come alongside and partner with you in this exciting process. For additional information about how we help home buyers and sellers, don’t hesitate to contact us today!