The first stage is to figure out what your long-term objectives are and how home ownership fits into them. Perhaps all you want to do is convert all those “wasted” rent payments into mortgage payments that provide you with something tangible: equity. Perhaps you regard home ownership as a symbol of freedom, and you like the prospect of being your own landlord. Purchasing a home can be a wise investment. You’ll be on the right track if you narrow down your big-picture homeownership ambitions. Here are six things to think about.
1. How’s your financial health?
Do a thorough financial analysis before scrolling through pages of internet listings or falling in love with your dream home. You must be financially prepared for both the purchase and ongoing costs of a property. This audit will inform you whether you’re ready to take this significant step or if you still need to prepare more. Take the following steps:
Take a look at your money. Don’t even think about buying a house until you have three to six months’ worth of living expenses in an emergency savings account. There will be significant upfront fees when purchasing a property, including the down payment and closing charges. Not only for those expenses, but also for an emergency fund, you’ll need money set aside. It will be required by lenders.
One of the most difficult tasks is to preserve your investments in an accessible, somewhat safe vehicle that yet pays a return, allowing you to stay up with inflation.
- A certificate of deposit may be an excellent alternative if you have one to three years to achieve your goal. It won’t make you rich, but it won’t make you lose money either (unless you get hit with a penalty for cashing out early). The same logic may be extended to buying a short-term bond or fixed-income portfolio that will provide you with some gain while also protecting you from the ups and downs of the stock market.
- Keep the money liquid if you have six months to a year. The greatest solution might be a high-yield savings account. Check to see if it’s FDIC insured (most banks are), which means you’ll still have access to your money up to $250,000.
Examine your purchasing habits. You must know exactly how much money you spend each month and where it goes. This calculation will tell you how much money you have available to put toward a mortgage payment. Make sure you account for everything, including electricity, food, auto upkeep and payments, student loans, clothing, children’s activities, entertainment, retirement savings, regular savings, and any other miscellaneous expenses.
Examine your credit report. To qualify for a home loan, you’ll need good credit, a track record of timely bill payment, and a debt-to-income (DTI) ratio of no more than 43%. 2 These days, most lenders aim to keep housing costs (principal, interest, taxes, and homeowners insurance) to around 30% of borrowers’ monthly gross income, though this amount varies greatly depending on the local real estate market.
2. Which type of home will best suit your needs?
A classic single-family home, a duplex, a townhouse, a condo, a co-operative, or a multi-family complex with two to four units are all alternatives when purchasing a residential property. Depending on your homeownership goals, each choice has advantages and disadvantages, so you must decide which sort of property will best help you achieve them. A fixer-upper can save you money in any area, but be warned: the amount of time, sweat equity, and money required to transform a fixer-upper into your ideal house may be much more than you paid for.
3. Which specific features do you want your ideal home to have?
While it’s important to include some wiggle room in your list, you’re making what may be the most important purchase of your life, and you deserve to have it meet both your necessities and desires as precisely as possible. Your wish list should contain everything from the basics, such as size and location, to smaller things, such as bathroom layout and a kitchen with long-lasting appliances. Scanning real estate websites can help you obtain a feel of the pricing and availability of properties that have the attributes you want.
4. How much mortgage do you qualify for?
Before you go house hunting, you need figure out how much a lender will loan you for your first home. You may believe you can afford a $300,000 property, but lenders may only consider you eligible for a $200,000 loan based on variables such as other debt, monthly salary, and how long you’ve worked at your present employment. Furthermore, many realtors will not spend time with clients who haven’t determined how much money they have to spend.
Before making an offer on a house, be sure you’re preapproved for a loan: In many cases, sellers will reject any offer that isn’t backed by a mortgage preapproval letter. This is accomplished by submitting an application for a mortgage and completing the relevant documents. Shopping around for a lender and comparing interest rates and costs with a tool like a mortgage calculator or Google searches is advantageous.
Discrimination in mortgage lending is against the law. There are actions you can take if you believe you’ve been discriminated against because of your color, religion, sex, marital status, use of public assistance, national origin, disability, or age. A report to the Consumer Financial Protection Bureau and/or the US Department of Housing and Urban Development is one such step (HUD).
5. How much home can you actually afford?
A bank may grant you a loan for a larger home than you truly want to pay for. Simply because a bank says it will lend you $300,000 does not mean you should borrow that amount. Many first-time homebuyers make this error and end up “house poor,” with little money left over after paying their monthly mortgage payment to meet other expenses like clothing, electricity, vacations, entertainment, or even food.
You should consider the whole cost of the house, not simply the monthly payment, when considering how large a loan to take. Consider how much property taxes will cost in your chosen community, how much homeowners insurance will cost, how much you expect to spend on maintenance and improvements, and how much your closing fees will cost.
6. Who will help you find a home and guide you through the purchase?
A real estate agent will assist you in locating properties that fit your requirements and are within your budget, and then meet with you to view those properties. These pros can help you negotiate the entire acquisition process, including making an offer, receiving a financing, and filling out paperwork, once you’ve decided on a home to buy. The experience of a good real estate agent can safeguard you from any traps that may arise during the process. The majority of agents are paid a commission on the revenues of the sale.