Buying a House? Here Are the First Things You Should Know
by Andrea Kornstein
Buying a house is a major life goal for most people. But making the leap from casually browsing properties on Zillow (and gleefully judging any poor design decisions) to legitimately hunting for homes can be overwhelming. After all, beyond being an incredibly expensive purchase, there are many complicated steps to crossing the ownership threshold. And don’t forget about the paperwork. There’s. So. Much. Paperwork.
Thankfully, as with most big events, the process is much more manageable when you know what to expect and how to prep. And that’s precisely why we’ve compiled these tips:
It’s important to know your credit score well before you’re ready to begin your search. This is because having enough cash on hand to purchase a home outright is a rare privilege. Most of us require a loan from a bank (or other financial institution). And you can rest assured that the bank will check your credit score when considering your application.
A strong score (a minimum of 670 or higher) can help secure approval and allow you to lock in a loan with a low-interest rate. A poor score can prevent you from getting the loan at all. The earlier you check, the more time you’ll have to improve your credit and ensure you’ll be in good standing when you are ready to hunt.
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Despite the aforementioned loan, you’ll still need to pay some money upfront. This is otherwise known as your down payment. These typically range anywhere from 3% to 20% of the total sale price. As you might expect, the more money you’re able to put down, the easier it will be to get a loan. And the better the terms will be.
Related article: How much should I save for a house down payment?
According to financial advisor Kristy Runzer, CFP®, “It’s best…to get approved for a loan before you begin house hunting.” While she acknowledges it is not a requirement, Runzer notes that pre-approval allows you to “know what your budget is and [provides peace of mind] that you’ll be able to get a mortgage.”
Even better, it makes you a more attractive buyer as you can demonstrate to sellers that you’re qualified to close the deal. Of course, you’ll want to spend some time shopping around for lenders. This will enable you to get the best deal and the lowest possible rates.
“Compare your vision for a home to your budget and see if your current finances can support your dream home, or if you may need to compromise on some of the things you’re looking for.” – Kristy Runzer, CFP®
Once you’ve been pre-approved for your loan, do your best to maintain your current financial state. Obviously, you can’t totally guarantee that you won’t lose your job or experience a medical emergency. But don’t start spending lavishly or take a new gig that comes with a pay cut. Your loan is based upon the information you provided the bank and if there’s a substantial shift in your finances, they may retroactively deny you when it comes time to actually purchase.
Some people are reluctant to work with realtors when buying a house. They view them as unnecessary middlemen who only increase their costs. But a respected and knowledgeable professional is well worth your time. They can offer insight into the neighborhood and surrounding area. Additionally, good realtors help you to understand market value and avoid overpaying for any property. They have your interests at hand as opposed to the sellers.
Too many first-time home buyers only consider the short-term when hunting for their home. It’s essential to think about where you’ll be several years down the line. Do you plan on getting married? Do you want kids? Do you anticipate a new job? You don’t want to buy a house only to realize it’s not going to be compatible with your changing lifestyle. And having to sell after only a year or two will limit any significant growth in equity.
We realize this sounds obvious, but Runzer cautions that “oftentimes people get approved for loans higher than they can really afford.” She recommends that before buying a house, you take a hard look at your income and expenses and think about how much you truly spend. After doing so, Runzer says fully weigh “how much of a mortgage payment would be comfortable for you.” And she emphasizes that you should always leave some room in your budget for saving and investing as well.
When you’re buying a house, it’s easy to fixate on the purchase price. But don’t forget that you’ll have additional expenses like property taxes, insurance, potential condo or homeowner’s association fees and overall maintenance costs. Make sure you also consider these factors before you put in an offer. As Runzer concludes, “Compare your vision for a home to your budget and see if your current finances can support your dream home, or if you may need to compromise on some of the things you’re looking for.”
Hoping to get your finances in order in preparation for a house hunt? My Financial Counsel can pair you with fiduciary advisors who are required to act in your best interest. To get started, take our free, confidential survey here.
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