Trying to buy a home this year? That’s great to hear! Your home is likely the largest purchase you’ll ever make, so, you’ll want to avoid any big mistakes.
When most of us think of buying a new home, we first think of our dream kitchen or the spa-like bathroom we’ve always wanted. Or the architectural style and the design aesthetic. We get excited for the kids, human or otherwise, playing in the yard. But there are much more pragmatic considerations to think of first, so daydreaming doesn’t become a nightmare.
Hopefully, you already…
If you Googled “buy a home in 2019” and landed here, you probably plan on buying a home this year. If you’ve committed to this timeline, hopefully, you already did the following.
Earned a good credit score
A bad credit score can cost a consumer tens of thousands of dollars over a lifetime due to the higher interest rates that come with bad credit scores. Much of that is related to homeowner costs. Here are four easy ways to find your credit score.
If you didn’t have a good credit score before you decided to buy a new home, ideally, you’ve improved it. There are many ways to improve your credit score, but three big ways are to pay all your bills on time and in full, lower your credit utilization and ensure your credit report doesn’t contain any errors.
The first tip is self-explanatory. The second may require more information. Your credit utilization is the amount of debt you’ve assumed relative to the amount of debt you have available to use.
For example, if you have no other debt except $500 on a credit card with a credit limit of $1,000, you’re credit utilization is 50%. That’s because you’re using 50% of the amount of debt available to you. It’s ideal to keep your credit utilization below 30%, and certainly below 40%.
The third tip requires more work. Contact a credit rating agency, like TransUnion and ask for copies of your free, annual credit report.
Review the credit report thoroughly once it’s arrived. Then, contact the agency to have errors corrected and outdated information removed.
Saved your money
Most of us can’t buy a home without a mortgage loan. However, even though no down payment loans are en vogue after the 2008 housing crisis, do yourself and your family a favor. Save enough money to use as a down payment.
Ideally, save enough money to pay 20% of the cost of your new home. A 20% down payment isn’t required, even with conservative lenders or requirements, but without it, you will be required to purchase Private Mortgage Insurance (PMI).
PMI is insurance that you pay, wrapped in your monthly mortgage payment, to ensure your lender against the risk of you defaulting on your mortgage. This will make your new home costlier. If a 20% down payment isn’t possible, here are some solutions.
Let’s talk about what to do starting now.
First, do the pre-work
Typically, the best time to buy a home is when you’re financially and personally ready. However, don’t turn a blind eye to the current economic conditions broadly and the housing market specifically. My husband and I bought our first home at the peak of the 2007 housing market. We all know what happened next, and we were underwater for several years.
It’s good to have a general idea of how the economy is doing. Is the unemployment rate headed up or down? How’s the Gross Domestic Product or GDP? How secure is your job? If any of these are negative or are causes for concern, this is helpful to know before making your big purchase.
Next, find out how the housing markets are doing. How is the national housing market performing? How are the markets performing in the neighborhoods in which you want to buy? It’s a whole different experience being in a seller’s market that doesn’t require you write a letter that promotes yourself as the best buyer than it is a buyer’s market where the competition isn’t fierce. Then, decide if you’re prepared for the competition and experience that lay ahead?
Finally, what are home prices doing? If they’re rising fast, could you get priced out of the market? If they’re dropping, will your competition increase? Where are mortgage interest rates, and have you factored that into your budget? Traditional advice says to not let your housing costs – all housing costs, not just the purchase price – exceed three times your household income. How will current and projected rates affect your housing budget?
Researching this information isn’t the fun part of buying a home, but they’re important facts to know so that the fun of buying a home isn’t ruined by this information.
Tip: Without signing up for their services, sign up for the newsletters of several real estate agents in the area in which you want to buy. Agents often email monthly data of the markets they serve.
Second, do your homework
Estimate your budget
You probably know the amenities, style, and location you’d like your home to have. Before these become concrete, though, know your budget for buying a home. This way, you know how big you can dream.
As we said, traditional advice suggests not spending more than three times your annual household income on housing costs. This includes the purchase price and closing costs of your home, maintenance costs (an annual expense, typically 1% to 2% of your home’s purchase price), homeowner’s insurance, possible Home Owner’s Association (HOA) fees and PMI. Therefore, you’ll need to know your annual household income, your net worth, the amount of money you saved for your new home and your current cost of living.
Decide what you want in a home
If you don’t already know, now’s the time to decide what you’re looking for in a home. Consider the type of home that’s ideal for you, such as a single-family, multi-family, townhome or condominium. Consider how much work and money you’re willing to put into maintaining your home.
For example, many people buy a condo because without the yard work, snow removal, exterior painting, and other work, they’re low-maintenance. However, there’s a financial trade-off. A condo can end up costing you more over time because of the Homeowners Association (HOA) fees you will likely have to pay for building maintenance or amenities.
How many bedrooms and bathrooms do you need? Do you want a family room or office? Do you want a small or large yard or no yard at all? What kind of architecture would you like? Do you want move-in ready or a fixer-upper? Cataloging these questions and answers will help you prepare and estimate your overall costs.
Finally, it’s best to have no more than two or three “must-haves.” Having more will make it hard to find a home, especially in a tight housing market.
Get your pre-approval letter
Before you engage with a real estate agent, find a mortgage lender and get your pre-approval letter (note: this is different from a pre-qualification letter). It’s a real estate agent’s job to help you find a home and they don’t want to waste their time with someone just considering buying a home or window shopping.
Obtaining a pre-approval shows that you’re a serious buyer. It also helps in case you find the perfect home and need to move fast. Here’s what you or you and your partner will need:
- Proof of income for the previous two years (use your W-2s)
- Proof of assets (bank statements, retirement account statements, titles to land or other large items)
- Proof of employment (most recent pay stubs, typically two months’ worth)
- Proof of creditworthiness (your lender will pull this, and it will typically cause a slight dip in your score)
Hire your buyer’s agent
Once you’ve completed the above, it’s time to hire your real estate agent. You probably have friends or friends of friends who are agents. While they’re good sources for recommendations, this is a big transaction. Don’t be flippant about who you hire, and don’t risk losing friends.
Make sure whoever you hire has their real estate license and experience you need. For example, there are agents who specialize in modern homes. If you want a modern home, they’d be the ideal agent. Lastly, check with previous clients of the agent about their experience and verify that your possible agent hasn’t received disciplinary actions or lawsuits.
Tip: Many states have state-sponsored websites listing agents’ disciplinary and legal charges. Google “(real estate agent’s name) + disciplinary actions + (your state).”
Finally, once you’ve done all the above, enjoy the ride. Most of us don’t buy lots of homes in our lives. Savor the experience of something this big. No doubt there will be stressful times and possible disappointments. But the fewer of these, the better.