We may be very soon start looking for a home of our own. So, I thought this was the perfect time to research on home buying and document that in my blog. It’s not like buying home is the best financial decision for us at this moment. My post should I buy or should I rent, reflects that renting is the better financial decision for us. But, owning home has certain other psychological advantages, which we have ignored so far.
Like most these days, we will start looking for properties over the net. But, before start short listing properties, we should do all the necessary groundwork. This post is recap of the things I learned so far as part of my ground work.
Buying your first home is normally the biggest financial transaction a person will ever make in life. So, it’s very important that this decision is reached at with a lot of caution, deliberation, taking expert advice and thoughts. In the past we talked about tips for first time home buyers, this article talks about financial and non-financial essential things we should do.
(Related – 6 Financial must dos before buying first home)
It is essential that you do right amount of researchbefore the decision is made and that all required preparations are made in time. At the end of the day, we all know that home buying transaction is unique in its own way. Still I can lay some ground rules which is mostly applicable to any home buyers
10 Things to do before buying your first home
The order of tips wasn’t necessarily arranged as per priority or importance, you can start from any point you’d like.
1. Learn the Process of Home Buying
Choosing to go into the closing blindly will be to your own peril. It is very important that you take time out to learn each and everything that is involved in the process of buying a home. This will give you a chance to make wise and confident decision.
Here’s one good resource from US department of housing on the process of home buying.
2. Get your credit report
Do note that whatever mortgage lender or bank you approach at any time will first look at your credit report before they accept to give you the mortgage. This then goes to say that it is vital that you ensure that your credit report is in order.
Obtain a copy of your credit report and look through it to see if there are any errors; you can get it form the internet. It would be highly advisable for you to review your credit report before the mortgage lenders do so.
Click here to learn how to obtain your free annual credit report.
(Related – Tips to improve credit score)
3. Immediately deal with all your credit errors
The moment you notice an error on your credit report contact the Company that gave you the report and have them fix it. Fixing errors on a credit report could take quite some time, it is thus better to get started as early as possible.
Please do everything possible to ensure that all your credit errors are fixed well before your meeting with the mortgage lender.
I can tell from my experience that all credit reporting agencies provided online dispute management tool, using which you can file your complain. I successfully removed a wrong address record from my Experian credit file within 2 weeks of applying through their portal.
It’s not surprising that people find out problems with credit, such as – unreported medical bill payment at the last moment. If you are looking for your home, better first look in to your credit report instead.
4. Check your debt to income ratio
Mortgage lenders usually favor borrowers whose debt stands at a maximum of 20% of their net income. In the event that your current debt stands at above this 20%, make all possible attempts to pay it down before your meeting with the mortgage lenders. This will increase your chances of getting the mortgage with lower rate.
5. Decide on your budget
There are mortgage calculators online. You can use these calculators to determine the amount that you can comfortably pay every month and how much this totals up to in terms of the price of a home.
This will help you come up with a budget that you are comfortable with and that will not negatively affect your finances. It will also help you as you are out shopping for homes; you will be able to cross out the homes that do not fall within your budget.
6. Begin saving your money
I could have placed this one at the top. No matter whether you buy with cash or with nominal down payment, you need to have sufficient cash to cover initial deposit, closing cost and some extra cash for sudden home repair bills.
If you’re cash strapped, I’d say hold off buying till you accumulate enough cash. Some lenders do prefer higher down payment. Mortgage insurance and mortgage rates can also work in your favor once you’re ready to pay a higher down payment.
(Related – True cost of home buying)
7. Obtain pre-approval for a loan
For pre-approval, a mortgage lender will go through your debts, finances, credit etc. and will then conditionally qualify you for a specific mortgage amount. A pre-approval letter makes sellers take you more seriously.
The process will also allow you to deal with any credit problems you may have or any other existing problems with your qualifying factors. This will definitely increase your chances of obtaining a mortgage.
8. Stay Away from New Lines of Credit
Ensure that you do everything possible to have your financial status remain favorable and stable. It would be advisable for you to pay down a debt or two to provide you with cash reserves. The fact remains that the worst thing you could do at this point is to obtain a new line of credit or loan. ‘
At best, this could serve to lengthen your qualification process. At worst, your debt scales will go beyond 20% making it harder for you to get the mortgage.
9. Hire a real estate agent
There is no home price that is definite; everything in real estate can be negotiated. Only accept an asking price after you have conducted enough research to confirm it. You could get a Comparative Market Analysis from your real estate agent to aid you with this.
Even the homes we rented so far, Realtor played a crucial role and the best thing is, when you’re the buyer, agent works for you for free, as the commission and fees are paid by the seller.
You’ll need an agent who knows the entire process, who can guide you, who can negotiate for you. If that help is available to you for free, then why not?
10. Have a home inspection done
It has never been and never will be a good idea to not do a home inspection! Choosing to invest in a house is a very big decision and you really do not want to have things falling apart after you have obtained ownership of the hone. Home inspections are not expensive and the peace of mind that you will get from it is simply priceless.
Buying a home may be a good decision. However, if you fail to do things right, it could be the beginning of all your troubles. Unless you have a lump sum of cash on the ready somewhere, you will need to take a mortgage to finance the home.
And when you take a mortgage, failure to adequately prepare yourself will leave you with a huge amount of debt that you are not able to comfortably pay. This will greatly impact your finances for years to come, and, you could even end up losing the home altogether.
That said, ensure that you conduct sufficient research, have all your financial facts straight and carefully follow all the steps above to ensure that the home you will buy will be a source of pleasure and not pain.
Readers, if you’re a home owner do share your thoughts, what you could have done to make things better or what you did to make it better? If you’re not a home owner but looking for your new home, tell us what are you doing to prepare yourself.