Buying a home is likely the biggest financial transaction of your life. With so much on the line, it is important to take the right steps to prepare for the home search and buying process. From figuring out how much home you can afford to signing your closing documents, follow these steps to prepare to buy a home and avoid unpleasant surprises.
Calculating your Home Purchase Budget
Before you start looking for homes, it is important to understand how much home you can afford. There is nothing worse than going house hunting, finding a dream home and figuring out you cant afford it. Rather than set yourself up for disappointment, do the math to figure out what you can afford as the first step of your home buying process.
There are two main factors that determine what you can afford, the down payment and the monthly payment. The two are intertwined, as a larger down payment leads to a lower monthly payment. Keep the following guidelines in mind when doing the math for a home purchase:
Down payment – To avoid expensive private mortgage insurance (PMI) and improve your approval odds, plan on at least a 20 percent down payment.
Monthly payment – Experts suggest no more than 30 percent of your gross income for a monthly mortgage payment.
Check out this handy calculator at Financial Mentor to figure out what you can afford based on those two inputs. If you cant afford as much as youd like, its time to boost your savings.
Getting Pre-Approved for a Loan
Many potential home buyers think they know what they can afford, but have not actually done the math or spoken to a banker about their loan prospects. Working with a banker before you start looking at homes improves your likelihood of approval. Plus, a pre-approval letter from a bank makes your offer stronger in a competitive market. This is particularly valuable when competing against all-cash offers
Shop around for the best interest rates and choose your favorite lender. Go through the pre-approval process to find out what loan size you would be approved for. And get the lender to write a pre-approval letter explaining that if you find a house that meets the lenders requirements, your loan will be approved.
Be careful to get pre-approved and not pre-qualified. Pre-qualified is like pre-approval light. It does not carry the same weight as a full pre-approval. Pre-qualification typically looks at credit score only, while pre-approval includes a full credit score and financial review.
Finding the Right Agent
Before you starting looking for the right home, you need the right agent. While it is possible to buy a home without a real estate agent, working with an experienced, trustworthy, patient real estate agent can ultimately save you money on the purchase price and save you time hunting around.
A great agent can help you quickly find homes based on your criteria and can help you make a strong, reasonable offer without getting a bad deal from the seller. The list price is always negotiable. Having a skilled agent on your team can save you tens of thousands of dollars. That might be enough to make up for their entire fee. Like with a financial advisor, make sure to interview a few potential agents before choosing the right one for you.
If you dont know where to start, check for reviews of local agents on sites like Yelp and ask around to see if any local friends or family have an agent they can refer that they were happy with. Before making it official, make sure your agents experience and expertise align with your needs.
Picking the Best Neighborhoods
One of the most famous sayings in real estate: location, location, location!
There is no perfect neighborhood for everyone. Some people want urban, walkable convenience. Others want sprawling, suburban style homes with a large yard for their kids and dogs to run around. Things like school ratings, parks, crime rates, HOAs, and other local amenities can make or break your enjoyment of your neighborhood, so dont buy in the wrong location.
Keep a long-term mindset anticipating your future needs is important too. Also, dont forget that while you may not care about some things like schools, future buyers may. There is a lot that goes into property values and you dont want to buy a home to find out a year or two later you have already outgrown it or would be happier elsewhere. Be thoughtful on choosing your favorite neighborhoods before you go house hunting.
A Smooth Closing
The last part of the home buying process is closing. Closing is going into the office of a real estate agent, bank or title company to sign lots and lots of papers to make the sale official. It may feel like signing your life away as you sign your name and initials over 100 times in one sitting.
To make sure your closing goes smoothly, review what you can ahead of time and ensure your funds are ready for the wire transfer to put your down payment in the right place. Make sure you bring a government photo ID for the notary (bring two if you want to be safe) and have your bank account number and routing number handy for a transfer of any excess funds after closing.
If you have everything you need, closing can take less than an hour and you might leave with they keys to your new home. But if anything goes wrong, it can derail the purchase or delay closing.
Preparation Leads to Success
Going in blind is a sure path to a stressful real estate experience. Instead, take plenty of time to prepare, plan and understand everything that goes into buying a home well ahead of time. When you have the right team, the right preparation and know what you want in a home, it is much easier to find the perfect place to call home in a place you can afford. Thats what its all about!