Thinking About Buying a House? Get your finances prepared first!
Updated: Jul 9, 2022
There are several things you will want to consider before you start actually looking at homes. Home buying is exciting, but it is also a very involved process.
Get Your Financial Ducks in a Row.
First, you will want to start with checking your credit score, figuring out your budget, and how much you can afford to spend on a house. Most mortgage lenders will also want to verify your income for two years, so you will need to be sure you have been making about the same amount of money over that period of time.
Credit score is important, because you will need to have at least a 650 credit score to be able to qualify for a mortgage, and if your credit needs a little bit of attention, it is better to know before you fall in love with a house only to find out you can't buy it after all.
If you don't know how to check your credit score, here are step by step instructions: Checking Your Credit Report and Score
Once you have checked your credit report, you will want to work on any items that are marked as being negative, such as late payments, collections, or credit cards with a high balance. You can work with your creditors to pay down your balances and bring up your credit score.
Depending on what is on your credit report, it could take 6 months to a year to bring your score up into the 650 range. On the other hand, you could be one of those lucky people who already has a 700 credit score and skip that part altogether.
Then, you will start to figure out how much you can afford in monthly house payments. Typically, it is recommended that your house payment should be 1/3 of your take-home income or less. You can estimate using your rent payment, and put those numbers into your budget spreadsheet.
You will also want to make sure that you are budgeting extra for utilities, if that is not something you are already accustomed to doing while renting.
How Much House Can You Afford?
If you go to your banking website, you can usually find what is called a "mortgage calculator." (Here is an example from US Bank.) By using this form, you can type in how much you can spend per month, as well as how much you have for a down payment. The site will perform a calculation using the current average interest rates to determine the maximum home price you can afford.
Once you have an idea, you will want to get Pre-Approved for a mortgage. This is an important step that many people will skip over in excitement to start looking at homes. Pre-Approval is a process where you apply for a loan without knowing the property information, so that you can put an offer on a home more quickly when you find one that you like.
Choosing a Mortgage Lender.
There are many different options to choose from when it comes to mortgage lenders. You can go through a bank or credit union, or to a mortgage company that has access to loans from multiple banks.
Typically, you will need to have a higher credit score to go through a bank or credit union. Most will also have their current interest rates posted on their website so you can check them without having to speak with someone first. If you have a good relationship with your banking institution this may be an easier way to go.
A Mortgage Broker will have access to more different types of loans, so it gives you more options to choose from. Also, they only specialize in doing mortgages, so they will have a deeper level of expertise. The only thing to keep in mind though, is that mortgage brokers only make money off of commission, so they might try to sell you something even if it isn't a good fit.
Also, there are fully online mortgage companies, which allow you to access quotes from multiple institutions at once.
It is important to keep in mind, whichever route you go, to check reviews on the lender before signing up for a contract with them. You can do this on websites such as Yelp.com, or the Better Business Bureau. This way, you can make sure you are dealing with a reputable company for what will be one of the biggest purchases you will make.
Also, when you talk to a potential lender, make sure you have the answers that you want from them before allowing them to pull your credit score. Every additional pull on your credit can lower your score by about 10 points, so having it pull too many times can actually hurt your changes at securing financing. If someone starts to pressure you, hold your ground. Chances are, anyone pushing too hard might not have your best interests in mind.
Time to Start Looking!
Once you have your Pre-Approval from your lender, you will be able to start looking at homes! You can use a traditional in-person realtor, or with an online realty company such as Zillow or Redfin. What you choose will likely depend on how much help you will want to have at looking at homes. Also keep in mind that a realtor charges a commission for their services, so that you factor those charges into your decision on choosing a realty company.
Putting an Offer on a House.
Once you find a house you like, you can put down an offer to purchase. Your realtor and mortgage broker can help you with advice through this process. Typically, there may be some negotiations on the price, and what is included.
After that, there will be an appraisal, and property inspection. This determines if the home is worth the potential purchase price, and if there is anything wrong with the home. If something is wrong, not to worry! You may be able to have the seller pay for repairs, or be released from the contract to look for a different house.
Then, you will finalize the purchase agreement, and wait for the mortgage to go through. Some states may also require you to hire a lawyer to assist with the mortgage closing process. If that is the case, your realtor and broker can assist you with choosing a lawyer as well.
Once this is complete, there is a wait while all of the paperwork is taken care of by the mortgage and the title company. During this time, you may be repeatedly asked for additional documents. This can happen up to the morning of the closing. That happened to me with both of my home purchases.
Buying a house is really stressful.
It's important to keep the emotional stress and the amount of effort that goes into home buying as well when you decide to buy a home. If you are already dealing with other stressors, it may be better to postpone until a later time, so that you will be able to focus attention on your purchase.
Congratulations, You're a Homeowner!
Once the paperwork is all complete, you will go to what is called a Closing, where you sign everything and get the keys to your new home!
Hopefully this information can help you to decide if you are ready to buy a house. Let me know in the comments if you have any more advice for other readers, or if you have questions you would like me to answer in the future!
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If you want to learn more about personal finance, check out my Personal Finance Basics video series on YouTube.