If you’re hoping to buy a house, townhome, condo, or other property within the next year or so, it can feel overwhelming. How do you know where to start? What needs to happen before you’ll be able to make it happen? The home buying experience is different for everyone. Everyone has different tastes in homes, different finances, and different priorities. And outside of that, every housing market can vary widely.
Even still, there are certain steps that everyone should take if they are aspiring to purchase a home. These aren’t just some little suggestions, either – these are things that absolutely have to happen to make the buying process go smoothly.
Figure Out Your End Goal
Not everyone buys a home for the same reasons. But those reasons are going to affect literally every step of the purchase process. Being honest with yourself about why you are purchasing a property will help you figure out exactly what you need to do and how much money you need to save. It will even affect what kind of mortgage is right for your purchase!
Are you buying a house or condo because you plan on fixing it up and selling it a few years later? Will you be moving in the next five years, or, are you looking for your “forever home” that you plan on staying in? Do you need something move-in ready for your family, or are you hoping to save money on a fixer-upper? Do you feel like doing the work on a fixer-upper?
Be honest about where you see yourself in the next year, the next five years, or more – and what you might be doing with the property once you are done living there. For instance, wanting to keep a property as a rental after you’ve moved could impact where you buy in the first place.
Save More Than a Down Payment
When you’ve got your eye on the prize – purchasing a home, that is – it’s easy to get tunnel vision. You just need to save up that big chunk of change for a down payment, and you will soon be the proud owner of a home, right? Well, sort of.
It is always wise to save up more than just the down payment. Especially if this is your first home purchase, it is easy to forget that purchasing the home is just the beginning. When you are no longer renting, there isn’t a landlord to call when something breaks! And trust me, something will break… and perhaps some of those things might break right after you move in. Trust me, I experienced it firsthand with a very, very old HVAC that decided to kick the bucket right in time for summer.
You will now be responsible for everything, so it is wise to plan for those new expenses. Plumbing repairs, broken appliances, failing HVAC, or a roof leak could pop up at any time. Plus, you might wind up falling head over heels for a home with outdated countertops, worn-out carpet, or peeling paint. Having extra cash saved up for those home upgrades will save you frustration later.
Most importantly, though, you can’t forget about all the other costs that go into buying your home. To purchase a home, you’re looking at appraisal fees, title search, title insurance, attorney fees, a home inspection, and more. In certain situations, you could negotiate for the seller to pay your closing costs. But, it is probably best to be prepared to cover these yourself. Especially right now, with extremely competitive housing markets that favor the seller, you might be hard-pressed to find one that wants to pay closing costs.
Improve Your Debt-to-Income Ratio
It’s not all about credit score! That’s important and all, but it is not the only thing that a loan officer will look at. When you sit down with a lender to convince them to give you a mortgage, your debt-to-income (aka DTI) ratio is something they will look at. It is a way to measure your ability to manage monthly payments, and your ability to pay them back for that loan.
What is it, exactly? It’s how much money you have leftover, after you pay all your monthly expenses. Essentially, you want to add up all of your monthly debts – this includes rent/mortgage, student loans, car payments, credit card payments, child support, and the like – and then divide that by your monthly income.
Your DTI ratio is expressed as a percentage, but the exact percentage you are aiming for changes depending on your lender. Regardless, it’s important to remember that keeping this percentage as low as possible is best. Many lenders are looking for something around 36 percent or lower. Consumers with higher DTI ratios are seen by lenders as more of a risk. That’s because they might not be able to pay that monthly mortgage payment in the event of financial hardship.
Improving your DTI can include paying off credit cards and loans, and this is what most people think to focus on. But, it can also be helped by increasing your income. I don’t necessarily mean finding a new job (more on that in a minute), but you can certainly ask your boss for a raise!
No New Loans!
As you improve your debt-to-income ratio, you start looking really nice to other lenders, too. You will likely start seeing personal loan and credit card offers start rolling in. They want you to finance a brand new car, and they want you to experience all those special rewards that come with a store card. It’s tempting, but you absolutely have to resist if you want to purchase a home in the near future. Please wait until after closing to purchase that new car to put in your new garage!
Here’s something that everyone needs to hear: you can still be denied a mortgage, even after being pre-approved for one.
Opening new lines of credit, or even closing existing ones, can change your credit score or that DTI ratio we just talked about. Lenders don’t like change. If your credit score goes down or your DTI goes up, you could find yourself without a loan when it comes time to sit down at the closing table.
Don’t Change Jobs, Either
Remember what I just said? You can still be denied a mortgage, even after being pre-approved for one, right? This also means that you should stay at your current job until after everything is official.
Changing jobs might be good for your career, and it may even improve your DTI ratio. However, it can also complicate your mortgage approval. This is because most lenders require at least two consecutive years of steady employment. Changing jobs disrupts that continuous record.
There are some exceptions here, like if you have taken a similar job with a new employer, but that’s something you should talk to your lender about. In most cases, it’s best to stay where you’re at until after closing.
Shop Around for Mortgages
Before you ever start looking at homes, before you hire a real estate agent, and even before you get your finances in order, talk to a lender! And then, talk to some more lenders!
First of all, you need to shop around to get the very best offer possible. Not all lenders are the same, and likewise, not all of them are going to offer the same rates and terms, either. A slight difference could wind up costing you a ton over the years.
A loan officer will also be able to tell you exactly what you need to do to secure a mortgage. It will give you a clear picture of what you need to take care of, how much money you need to save up, and what you can afford to purchase. They can also get you pre-approved, which is just about required in a competitive housing market.
Choose the Right Real Estate Agent
If your friend just got a real estate license, you should ask them to help you find a home, right? What about the lady you sit next to at church? Can you just walk up to any agent sitting at the front desk and ask them to show you houses?
Technically, all of these are options for finding a real estate agent. However, it might not always be the best way to go about it. Look, I have nothing against your best friend Jessica. But is Jessica going to be the absolute best choice here? A home purchase is a big deal. In order to do it right, you need to find a professional real estate agent that really knows your future neighborhood.
Meet with different agents that specialize in your market. Think of it like dating. You will want to meet with several different agents before you sign any contracts. You want to find someone who is not only an expert in the area, but someone that you like, that you trust, and that you feel good about working with.
Once you find the perfect fit, you’ll be on a path to homeownership in no time!