How to Prepare Your Finances Before Buying a House
Buying a home is a milestone in anyone’s life, whether you’re a first-time homebuyer or a seasoned buyer or a real estate investor. These tips are for those who are entering the housing market for the first time...congratulations. Many homebuyers begin their journey looking through Zillow, Redfin, Trulia, magazines or just noticing a home for sale while driving around. This is a great first step to spark your interest in assessing buying a home. Now, let’s take the second step that will keep you on the right path for your future home purchase.
It’s important to get your financial house in order before you spot the home of your dreams. Here’s what you need to do.
1. Write out a budget to determine your monthly income and expenses. Are you comfortable with your rent payment? Ask yourself, how much more would you feel comfortable paying if you bought a home? It’s important to have a budget that shows you the truth of your recurring and non-recurring spending habits and patterns.
2. Find a reputable Mortgage Broker who can help you shop for a loan from many different banks. This is paramount. If you shop directly with your own local bank, you may be missing out on a better deal that you're unaware of. You also want to get pre-approved -- not pre-qualified! Anyone can pre-qualify you for a loan, but it is not a strong commitment. If you are serious about buying a home, pre-approval status is a must-do step to obtain.
3. Pre-qualification or pre-approval? A pre-qualification will give you an estimate of what you can afford, but it is subject to change based upon the facts that you have yet to submit for verification. The pre-approval status directly examines your credit score, bank statements and tax returns. Pre-approval status is such a strong document to have when submitting an offer to buy a home. Your credit score is the gold standard used for rating your credit. Credit scores range from 300 to 850; a credit score of 700 or above is generally considered good and will enable you to get a better interest rate when securing a mortgage loan.
4. You must have a steady job. This means demonstrating a continuous employment record of usually 2 years with tax returns to prove your annual income. Also, be prepared to have at least 3 months of current bank statements to show your income, savings and recurring payments you make. If you are self-employed, you may also have to provide profit and loss statements.
5. Reduce your debt. While you are shopping for a home, watch your debts closely and continue to pay off as much of your credit card(s) and debt as possible. The more you pay off, the more the Lender/Bank allows you to qualify for a home.
6. Save, save, save. Continue to save money during this entire process, even if it is $100 per month; it all adds up in the end.
7. Family support. Ask relatives if they can help you with a ‘gift’ of funds to help you buy a home. Remember that a ‘gift’ is not a ‘loan.’ Your family will have to write a letter to the Mortgage Broker that specifically states that it is a gift that does not require repayment. It’s important to get the gift money into your checking or savings account as soon as possible -- especially once the escrow process begins. Time-is-of-essence!
8. Find a good, reputable Realtor. You’ll want to do this once you’ve been pre-approved. A reputable Realtor (called a Buyer’s Agent) will help you navigate the process of finding a home, negotiating on your behalf to buy a home, and guiding you through the tedious and complicated paperwork involved to finalize your home purchase. This includes reviewing and understanding all the required disclosures, interacting with the Mortgage Broker, Title Company, Listing Agent, Contractors, Inspectors and Appraiser. This process does not stop from when you first see the home to the moment you get the keys to your new home.
How much will the services of a Buyer’s agent cost you anyway? Good question! Did you know that it does not cost you, the Buyer, a single dime to get this invaluable representation? The Seller pays the service fees to both Real Estate Brokerage Houses. These service fees come out of the Seller’s proceeds and not yours!
Don’t use the same agent that the Seller employs (called the Listing Agent or Seller’s Agent). This scenario is considered a ‘dual agency’ when both parties (Buyer and Seller) use the same agent. The Seller hires their own agent to get the Seller the most money possible and the best terms. Now, how can the Listing Agent do that for you as well? It’s a conflict of interest for the Listing Agent to represent both. This is still practiced today, but I would not recommend it. It is in your best interest to get separate representation apart from the Seller. Remember, it does not cost you to get this service when you are a Buyer.
9. Ready, set, find your dream home! Now, it’s time to have some fun and go shopping for a home. But the Realtor also has to inform you about the MARKET TRENDS. Is it a Buyer’s Market or a Seller’s Market? It is a SELLER'S MARKET with historically low-interest rates and a meager inventory of homes for sale. This means you’ll be competing against many other home buyers who also want the same home you are considering. Unfortunately, in a seller’s market, be prepared to pay 4-10% (sometimes higher) above the asking price for the home you want.
10. Don’t shop for homes priced at the exact amount that you’re pre-approved. Instead, look 10% below the amount you’ve been pre-approved, so you’ll have a budget to negotiate successfully. Be patient and stay on top of the market to see what new home listings are available. Many of the homes will sell in a single day. The sellers may decide to schedule a window of time when they will look at all offers and that time frame is approximately one week.
I hope this helps you. If I can be of further service, feel free to contact me at firstname.lastname@example.org.