Five steps to take before you start looking for a home
Even before you contact a real estate agent or start making a list of homes you’re interested in looking at, there are several tasks you should complete to make the home-buying process smoother.
Here are four steps to take to help you prepare for the process of looking for and buying a home.
1. Have enough money on hand to get through the home-buying process. You will incur several expenses before and immediately after closing and before your first mortgage payment. It’s best to know you have those funds before you begin the process. Otherwise, you may be scrambling to pay expenses before closing.
The largest cost is the down payment. Traditionally, lenders asked for 20 percent of the purchase price upfront. While this is no longer always the case, your lender will most likely want a sizable downpayment, perhaps as much as 10 percent. If you go through the Federal Housing Administration, you can obtain financing for as little as 3 percent down.
There will also be closing costs to pay, ranging from $1,000 to $10,000. Closing costs include attorney fees, title insurance, appraisal fee, home inspection, and property taxes you many need to pay upfront.
Other costs related to buying a home include moving expenses, deposits for utility hookups, and any improvements you want to make before moving in, such as fresh paint, new carpet, or new appliances.
If you’re selling your current house in order to move into a new one, you may be able to use the proceeds from that sale to help cover these costs. If you’re a first-time buyer, the best source of funds is a savings account. You also may have the option of borrowing against your 401(k) plan or a life insurance policy.
2. Decide what you can afford. You need to establish how much in housing expenses your income can handle. Not only will your mortgage payment include principal and interest, but it will also include property taxes and insurance. And the more the house costs, the higher your taxes and insurance. If you don’t put at least 20 percent down, your mortgage will also likely include mortgage insurance.
Keep in mind your housing budget will include more than just your mortgage payment. If you’ve been renting up until now and some utilities have been included in your rent, you will need to account for those new expenses in your housing budget. Repairs and maintenance will be your responsibility, so you’ll need to budget for those costs. If you plan to live in a neighborhood governed by a homeowner’s association, there are dues to pay as well.
3. Check you credit and strengthen it if necessary. A lot of people get seduced by low advertised mortgage rates, but in most cases, those low rates are only available to borrowers with impeccable credit. The lower your credit score, the higher the interest rate you will pay and the higher your mortgage payment.
If you improve your credit score, you’ll be able to either afford more house or lower your monthly payment. In fact, the difference between a minimal credit score and a top-tier score could be as much as $82,000 in additional interest over the life of a $250,000, 30-year mortgage.
4. Get pre-approved for a mortgage by a lender. You will find it’s much easier to get through the home-buying process if you are already approved for a certain amount. Based on your credit score, the amount you have for a downpayment and the current interest rates, a lender can give you an approximate value of home that it will finance.
Having pre-approval also helps you get an offer acceptance faster than not having one. If you’re already pre-approved, you don’t have to worry about writing in a contingency into your offer based on obtaining financing. People who are selling their homes do not want to get mostly through the process, only to have the deal fall through by the buyer’s inability to obtain a mortgage. Therefore, the buyer may decline your offer if it contains a financing contingency.
5. Conduct research on the real estate market. Arm yourself with information about the different neighborhoods you will be considering, such as:
How have market and/or assessed values changed recently?
What is the current property tax rate?
What have homes sold for recently and how did the sales price compare with the list price.
How long are homes staying on the market before they are sold?
Having this information will help you to know whether it’s a buyer’s market or a seller’s market. It can also give you the confidence of knowing you’re getting the best deal when it comes time to make an offer. This type of information is usually accessible through your county assessor’s office or board of Realtors.