Prepare yourself for one of life's most demanding experiences.
Bereavement is the number one cause of stress, but moving home and increased financial obligations aren't far behind.
However, you can ease the pressure by asking all the right questions via a robust first time home buyer checklist. Here's everything you need to ask yourself before looking for your dream home.
6. Finally, are you doing this for the right reasons?
1. Do you have enough saved up for a down payment?
Unless you have been planning for this for many years, the answer is probably no. This means that you need to start saving up your money with a goal of making an offer in a year or two.
It also helps to make sure that you have a good idea of the market and the amount of money you need to save. Make sure you have 10 percent saved for a down payment” 20 percent if you want to avoid private mortgage insurance (PMI), which can run several hundred a month.
2. Do you have a substantial budget in place?
If you don't have enough money saved up right now, you need to create a plan to generate that cash. The sooner you start managing your money and saving, the better the chance of reaching your goal. Be disciplined and strict with your incoming and outgoing finances and make sure you are on top of everything.
We at Money Under 30 advocate for a percentage-based budget scheme, such as the 50-20-30 system. This may sound complicated at first, but our in-depth guide walks through it step-by-step so you can create a simple-to-use budget in no time.
3. Is your credit ready?
This might be the scariest part of this first time home buyerâ€™s checklist. Once you have signed the right documents and finally moved into your new home, the mortgage stays with you. There is a good chance that the parents nagging you to buy a house still have a mortgage hanging over them.
This is where all that effort of saving and planning starts to pay off. Your mortgage advisor will take lots of factors into account before they can determine a suitable rate. These factors include the following:
- The amount of savings available for a down payment
- Any potential threats to your income, or that of your partner
- Your current credit score
Speaking of credit, for every point your credit score is below 800 youâ€™re going to pay more in interest.
And while the difference between 3.9 percent and 4.9 percent may not seem like much, that one point will cost you about $32,000 on a $150,000 30-year fixed-rate mortgage.
Check your credit report
Make sure you know all the details about your credit report before you apply for a loan (because they will ask). You can quickly get a free copy of your credit report and/or score in about ten minutes. We recommend using Credit Sesame, a service that offers your free credit score and analysis.
Your target should be 700 or above. Though you can buy a house with lesser credit, you wonâ€™t qualify for competitive mortgage rates.
Pay off debt
You can increase your credit score by paying off fixed-term loans, correcting any erroneous information, and reducing your credit card balances.
If possible, donâ€™t open or close any credit accounts two years before applying for a mortgage. Closing credit cards can actually hurt your credit.
Consider mortgage points
You may also want to ask them about mortgage points. There are pros and cons to both origination and discount points. Talk with mortgage providers about the availability of these systems and ways they can help you save a little money in the future.
Don't worry, lenders ask for other information besides your credit
And though your credit may be in order, itâ€™s not the only factor in qualifying for a mortgage.
Lenders are also going to scrutinize:
- Your income and monthly expenses.
- Bank statements.
The bottom line?
The best-prepared first time home buyers will have very few fixed monthly expenses other than rent.
4. Where do you want to live, and what can you afford?
So far we have spent a lot of time discussing the financial side of buying a home.
Ideally, a bank wouldnâ€™t write a loan you couldnâ€™t afford. Realistically, they can, and they will.
You are the only one who can prevent this.
Your mortgage payment, including all insurance, taxes, and fees, should not exceed 30 percent of your take-home pay. Understand that local tax rates, condo fees, and whether youâ€™ll need PMI will all eat away at how much house you can actually buy.
Work backward to determine the price range you can afford. Then be prepared to do battle. Real estate agents will show you houses above your range and more than likely, you will be approved for a loan that is well above your range. Stick to how much house you can afford, and you wonâ€™t live to regret it later.
After that, figure out where you want to live and start scouting out some excellent properties. There are two key factors to keep in mind here:
- The property itself. Create a little home buyer checklist of all the things you want from a new homeâ€”the number of bedrooms, outdoor space, man-cave capabilities, etc. You can then use this list to start narrowing down your searches on realty websites.
- The neighborhood. Donâ€™t overlook the surrounding area for the sake of a dream property. The last thing you want is to find that street is actually right in the heart of the cityâ€™s seedy underbelly, or some creepy neighborhood association. Research crime stats, transport links, amenities, and more.
Also, consider the time of year you want to buy. For instance, did you know that house prices tend to drop around fall, just as the kids go back to school? Deborah Kearns from CNBC talks about the potential benefits for home buyers. This trend means that it might be a good idea to hold off that search until later in the year.
5. Finally, are you doing this for the right reasons?
This is a question that will catch quite a few people off-guard. What exactly are the â€œrightâ€ reasons to buy your first home? There are some clear positive and negative approaches here.
- The positive reasonsâ€”If you a looking to provide a stable home for your family and have found a perfect property then that is a good start. You have to want to be a homeowner to put yourself through all this stress and planning. The problem is that many people arenâ€™t buying a home for the right reasons.
- The negative reasonsâ€”Some people rush into home ownership because they are under pressure to be a â€œproper adult.â€ They hit thirty, realize they are in a long-term relationship and rush into this commitment. Others think that the smartest thing to do is escape the rental system, even though this may not be true.
Take the time to make sure that this is what you want to d0â€”not what your family says you should have done by now. This is a big decision with significant financial implications. Figure out what you really want, work through this first-time buyer checklist and seal the perfect deal.
Once you have several financing options, itâ€™s time to go find your house. Only after you have your loan lined up should you go out and house hunt. Why? Sooner or later youâ€™re going to fall in love with a house, and your real estate agent will be there to tell you that you deserve to live there, even if itâ€™s way above your price range. Stick to your well-planned house buying strategy, and live wealthfully ever after.