Let’s face it. Planning to buy a house can be overwhelming. Where do you start? Do you jump online and check out real estate sites? Do you call a real estate agent and drive from one open house to another? You may want to do these things, but it’s better to take a deep breath and use a more systematic approach. After all, you are making one of the largest investments of your life.
Here are five steps to keep you focused on making the best possible investment on a home that you and your family can enjoy for years.
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1. Begin with a budget.
You’ll need to take a close look at your income and expenses to see how much you can afford. A good rule of thumb is not to spend more than two and a half times your annual household income. So if your household income is $100,000 per year, you shouldn’t spend more than $250,000 to buy a home. Of course, everyone’s situation is different—especially if you have a large down payment. Speaking of down payments, lenders typically require 20% down to buy a house and they like to see a generous amount of cash in savings.
Key Takeaway: Strive to have between three and six months’ worth of mortgage payments saved in addition to your down payment. Your savings will not only help you get a loan, they’ll also come in handy if you are ever unemployed or need to make repairs on your home.
2. Check your credit.
Gone are the days before the Great Recession when applicants could qualify for a home loan with low credit scores and no provable income. In today’s market, borrowers need to have a verifiable income and credit score of at least 660 to get any mortgage at all. A score of 720 or higher will garner the best interest rates and lowest payments.
Key Takeaway: Pull your credit reports and check your credit scores before applying for a home loan. You may be able to improve your credit score by getting old or paid debts removed from your credit reports. Also, don’t apply for any new credit three to six months before buying a new home.
3. Know the difference between pre-qualified and pre-approved.
Many homebuyers get tripped up on this step. It’s easy to be pre-qualified for a home loan because you provide the bank with your financial information and the bank takes your word for it. A pre-qualification is helpful to find out how large of a mortgage you can qualify for but—by no means—is it a sure bet. A safer bet is to get pre-approved. A pre-approval involves filling out a complete application and providing the documents necessary to verify your financial information and check your credit. If you get pre-approved, you’ll receive a conditional commitment for an exact loan amount. This process also gives you a better idea of the interest rate you can get.
Key Takeaway: Get pre-approved for a mortgage before you start looking for homes. With a pre-approval, you’ll know exactly how much you can spend and will have an advantage over other buyers. The seller is more likely to choose a buyer who is pre-approved because you’ll be able to get a loan faster and therefore, close the deal sooner.
4. Be specific with your needs.
What do you absolutely need? Do you need three bedrooms or would two suffice? Do you need a family room? Is an island in the kitchen a must-have or would it just be nice? These are the types of questions that you should ask yourself before starting to search for a home.
Key Takeaway: Have a list of specifications that would be the bare minimum that you could accept. That way, if you see a property that tugs at your heart but doesn’t have one of your requirements—such as a family room—you can refer to your list and ask yourself if this property is really for you.
5. Do your homework.
In today’s digital world, it’s easy to do research online. You can find homes, check prices and get pertinent statistics on sites like Zillow, Trulia and Redfin. But once you find a home, it’s important to become familiar with the neighborhood. Drive by in the morning, after school and late at night. You need to know whether the neighborhood is safe, if children live there and anything else you can learn. Talk to the neighbors and research the school district—even if you don’t have children. People are willing to pay $50 more per square foot for a home in a top-rated school district, according to a recent survey.
Key Takeaway: Research the neighborhood before you make an offer. A desirable neighborhood with a good school district can add tens of thousands of dollars to the resale value of your home.
Yes, buying a home is time-consuming. But if you’re going to make one of the biggest investments of your life, why not take the time to do it right? That way, not only will you get to enjoy your home for years to come, but you’ll also be able to build equity and earn a tidy return on your investment.
This article first appeared in the Auction.com Select Resource Guide.
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