If you’re planning to buy a home in 2018, you might spend your days dreaming about décor and drafting your next DIY endeavor without actually advancing toward your home owning goal. So, before the start of the new year, take a moment to consider a few resolutions that will proactively help get you into a home.
1. MANAGE YOUR CREDIT SCORE AND IMPROVE YOUR DEBT-TO-INCOME RATIO
Unless you are planning to pay cash for your next home, your first step to home ownership is rooted in your credit score. If you don’t already know your score, you can check it through one of the three credit reporting bureaus, Experian, Transunion, and Equifax. Find more information about your credit score, and how to improve it over time.
While you’re preparing to buy a home, it is also smart to check your credit report for any inaccurate information that might be negatively impacting your credit score. You can view your credit report for free at annualcreditreport.com.
After reviewing your credit report, you should also calculate your debt-to-income ratio, that is, the amount of money you owe compared to the amount of money you make. If you’re preparing to take out a mortgage, you should bring your debt-to-income ratio down to 36% or less, and keep it there.
2. CALCULATE YOUR HOME BUYING BUDGET – AND GET PREAPPROVAL
Meet with a loan officer to review your credit files and discuss mortgage programs, and get a pre-approval letter to prove your borrowing power to your realtor and home sellers. While a pre-approval letter does not guarantee that you will receive a loan, it does serve as proof that you have the financial viability to complete a home purchase.
3. DRAFT A HYPOTHETICAL BUDGET AS A HOMEOWNER
While, in many cases, a mortgage payment is cheaper than monthly rent, other costs associated with home ownership might shock first time homebuyers.
In addition to the cost of your home, your monthly mortgage payment will often bundle together other costs like property taxes and home insurance. You can find home insurance quotes online and use your county’s website to calculate a property tax estimate for homes in your city and price range, then incorporate those figures into your monthly home costs budget.
On top of that budget, add in averages for utilities, furnishings, and exterior maintenance to get an idea of the true monthly cost of home ownership. If you’re moving from a small rental unit to a single family house, you might be surprised at how quickly gas and electric costs accumulate!
Finally, even with the routine costs of home ownership and maintenance above, ensure that you can still maintain a stable emergency savings fund in case an appliance fails or other unanticipated damage occurs in your home. Experts recommend that you keep about 1-2% of your home’s total value in savings for any unexpected home repairs.
4. RESEARCH MORTGAGE OPTIONS
Unless you’re paying cash, you’ll need to apply for and secure a mortgage to finance your new home. Of course, you’ll want to get the best rate and terms for your mortgage, so it’s vital that you consider as many options as possible and understand all the information about your mortgage. After all, it’s a huge commitment.
Determine how much you will feel comfortable paying for a down payment. Traditional lenders have historically suggested 20% down, but this large an amount down can be staggeringly unattainable for some first time homebuyers. While some low down payment mortgage options have become available in recent years, you might find additional down payment grants or other assistance through websites like downpaymentresource.com.
5. CREATE A SHORT LIST OF “MUST-HAVES”
While you may dream of owning a luxurious lakeside retreat with two saunas and a lanai, that dream might be out of your reach if you don’t have a flawless credit score and a trust fund to back it up.
So, before you start looking for a home, make a list of the features you want in your future home, and decide which features you would be willing to compromise for the right price or neighborhood. That way, when you’re knee deep in your home search, you’ll be able to focus on the homes that meet your priority requirements, rather than wasting time viewing homes that don’t check off the right boxes.
6. PINPOINT YOUR TARGET AREA
Just like you did with home features, determine the attributes you desire in your future neighborhood and city. Do you want to live in a suburb with a great school system, or would you prefer the bustle of a downtown metropolis?
If you aren’t sure what neighborhood you want to live in, consider taking a day trip to visit some residential areas within a commutable distance of your employer. Then, take your search online and see the average price point of homes in those markets. A loft with city views in an urban center is often priced similar to a spacious colonial in a more rural area. Determine which option fits your lifestyle best, and take into consideration where you see yourself in ten years.
7. FIND A REALTOR
While you might initially feel confident finding a desirable home online without a REALTOR, you might feel like a ship without a paddle once you get into contract negotiations, inspection requirements, and closing costs. An experienced, licensed professional can help you negotiate the complexities of a real estate transaction, and even help you pinpoint your home search with community information and market forecasts for particular neighborhoods.
You can find a professional by browsing profiles and reading recommendations through home search sites like REALTOR.com, Zillow.com, or even Google. If you feel more comfortable offline, visit a few open houses in your neighborhood to meet local agents, ask friends or family members who live in your target area, or ask your lender or financial planner if they have a preferred team. Talk to several agents before signing anything—you’ll want to ensure you can communicate well with the agent you choose, not to mention that they have the training and experience to meet your needs.
Buying a home carries more costs than just a down payment and mortgage.
Even if you don’t have to put any money down on your mortgage, you may be required to show proof of cash reserves, basically enough in savings to keep yourself—and your new home—afloat in case of job loss or other financial setback.
So, start saving as soon as possible for your new home. Consider setting up your bank account to automatically move a certain portion of each deposit to a savings account. If you don’t see the money, you’re less likely to spend it, and you’ll be able to quickly accumulate savings without even thinking about it. Additionally, avoid big purchases, especially anything that affects your credit score, such as a new car, while you prepare to buy a home. Any changes in your credit score, even after you’ve been preapproved for a mortgage, could cause your lender to back out of the deal. In fact, financing setbacks are one of the top reasons why real estate transactions get delayed. Protect yourself, and your home purchase, by playing it safe.