1. Can you afford to buy a new home? Do a budget. Check mortgage interest rates. There are plenty of mortgage calculators on the web. Mortgage principal, interest, taxes, insurance (PITI) and any HOA fees should be no more than 30% of monthly net income. PITI, HOA and other long-term debt (like credit card and student loan debt) should total no more than 36% of monthly net income. check out this free mortgage calculator
What are your expenses? If you don’t know, review your checkbook or bank statements over the last couple years to see what you actually spend. You might be surprised. Touch base with an accountant about tax benefits of ownership. You may find that homeowner tax breaks mean a projected increase in your net income.
2. Now that you’ve figured your budget, you should have a price range. As a rule of thumb, you could estimate two and one half times your annual income as your housing budget. It’s better to hone the numbers. Take another close look at your budget. What happens if you lose your job, or, if you’re self-employed, your business declines? You may be young and healthy, but what if you get sick or injured? Do you have disability insurance at work? How’s your health insurance coverage? You should have a three-month cushion at a minimum for emergencies. Finally, are you contributing to a pension or IRA? Do it while you’re young. It will make your life a lot easier later.
Don’t forget to add estimated housing expenses beyond the mortgage. Even new homes may need some repairs. You’ll likely want to do some decorating, maybe gardening. These things are fun, but they cost money.
3. Think about your lifestyle. How settled do you want to be? Are you likely to move within the next couple years? Will you be having children? If so, go back and refigure your budget. It costs about $235,000 to raise a child to maturity according to the U.S. Department of Agriculture (housing being the largest portion of that expense). Is your employer likely to ask you to relocate or to condition promotions on relocation? If that happens, maybe you could rent your home.
4. Okay. You’ve done all the budgeting. You know your price range. It’s time to check your credit. You can get free credit reports online. Most mortgage companies want a minimum credit (FICO) score of 500. The better your FICO, the better deal you’re likely to get on a mortgage. One point in your interest rate can make a big difference in the monthly house payment. Sit down with a loan officer at your local bank and talk about it. Credit unions are also worth checking. There are plenty of mortgage brokers who probably want your business, and it’s their job to know (for a relatively small fee) how to get the financing you need. You’re almost ready to seek a preapproval letter (a letter which states how much you can borrow).
5. By the way, do you have the down payment? Probably at least 5% is required, but lenders’ requirements for income/debt ratios will be more stringent with lower down payments. Think about it. The lender bears more risk with a lower down payment. Risk is related to return. You’ll pay more for a loan with a lower down payment.
6. There’s help. Before you despair of getting all the financial pieces in place, remember that real estate brokers make money when they sell, housing developers make profits when new homes are sold, even existing homeowners often just want to move on. They are all potential helpers in making your homeownership dreams come true.
7. Where do you find a house? Realtor.com is a great resource for searching the market, but don’t forget Craigslist and even Google. In the current market, foreclosures can be a source of lower priced homes. Drive through neighborhoods at different times of day before you commit to living in them. If you start talking to realtors, you’ll probably find they are quick to offer to be your “buyer’s broker.” Be sure you understand those terms before you agree to any exclusive agency arrangement. You’re not obligated to commit to such an arrangement or pay any fee to a broker to buy a home.
8. If you buy an existing structure, be sure to get a good home inspection. Many buyers will condition their offer on a home inspection and use the results to renegotiate the price. If you buy a new home, review the builder’s warranty. See how many homes have already been sold and talk to some of the owners to see if they are satisfied with the construction and with the response to any warranty claims they’ve had to make. You can learn a lot about companies by simply googling their names.
9. Before you sign a purchase and sale agreement, you will want to get information from your realtor about actual recent sale prices on comparable homes. Before you enter any negotiation, know your top price and be ready to walk away if the price goes above that limit. This will help make you an effective negotiator and a more comfortable homeowner when you close.
There are many joys of homeownership. Having done your homework, you can feel secure knowing that you haven’t exceeded your budget and that you made a “good deal” on a purchase price. Then, when it’s time to sell, you won’t feel pressured, and you should get a reasonable return on your investment as well as many happy years in between.