Money Girl’s easy step-by-step guide to hack the home buying process so you save money and time.
If you’re ready to become a homeowner, now’s the time to get a great deal and finance it with an inexpensive mortgage. Though making such a big purchase can seem daunting, I’ll show you how to buy a home in 10 simple steps. We’ll cover the first 5 today and the next 5 in Part 2 of this series..
How to Buy a Home
Five years after the real estate market collapse of 2007, the vast majority of consumers still believe that home ownership is just as important as it was before the crash. Following the 10 steps in this 2-part series will help you save money and time when you’re ready to buy a home.
Step #1: Build Your Credit
Unless you can pay all cash for a home, you’ll need to finance a portion of the purchase price with a mortgage. How do you qualify for a mortgage? Well, home lenders take several factors into consideration, like:
whether you have enough steady income to afford a monthly payment,
the amount of debt you already have,
how much cash you can put down,
the market value of the property, and
your credit score
Related Content: 9 Things That Can’t Hurt Your Credit Score
Without a good credit score you’ll either be turned down for a mortgage or charged a high interest rate. Paying just 1% more interest than you absolutely have to can cost you over $45,000 on a $200,000, 30-year mortgage!
If you invested that money instead of paying it to a lender, you could parlay the savings into over $150,000 with just a moderate rate of return. So, remember that if your credit isn’t in good shape, you’re not ready to buy a home.
As soon as you get the itch to become a homeowner, get copies of your free credit reports and review them—before a lender does. Most consumers have errors on their credit reports. That’s a problem because your credit scores are calculated using the information in your credit reports.
So visit annualcreditreport.com and get free reports from each of the 3 nationwide credit agencies (Equifax, Experian, and TransUnion). Review them carefully and dispute any errors you find—like accounts that aren’t yours, incorrect loan balances, or invalid late payments—and get them corrected right away.
Related Content: 7 Steps to Check and Correct Your Credit Report
Step #2: Decide What You Can Afford
Once your credit is in tip-top shape, decide how much you can afford to pay for a home.
Most lenders require a minimum down payment of 5% to 10%. You may qualify for less depending on your situation; however, if you can put at least 20% down you’ll get some extra benefits—like a very competitive interest rate and avoiding the added expense of private mortgage insurance (PMI).
The general rule of thumb for many years has been that you can afford a mortgage up to 3 times the amount of your annual household income. But that guideline is way too general to be taken as a firm rule because every home buyer has unique financial circumstances.
You have to evaluate how the cost of a home fits into your overall financial goals. For instance, if buying a home means that you’d be left with zero savings or that you couldn’t save for retirement, consider waiting or perhaps buying a less expensive property.
In addition to the mortgage payment, money down, and maintenance, many first time home buyers don’t think about expenses like property taxes and homeowners insurance. There are also a variety of closing costs you typically have to cover as well, like the appraisal, inspections, title search, attorney’s fees, and anything else that’s customary in your area. All of these expenses have to be considered in your budget.
Step #3: Get a Mortgage Preapproval
If you’re ready to start home shopping, don’t get sidetracked with online searches, open houses, or tours with real estate agents, until you’ve set a price range for what you can afford—and have a mortgage preapproval.
A mortgage preapproval is a written commitment from a lender to give you a loan for up to a certain amount. But remember: Just because a lender wants to give you a big fat loan doesn’t mean that it’s wise to take the full amount. Go back to what you decided you can afford and stick with that number.
Getting preapproved is really important because it saves you the disappointment of falling in love with a home that isn’t in your price range. Plus, it gives you a leg up when you find the perfect place and make an offer. That’s because a seller will know that you’re serious—maybe more serious than a competing buyer who isn’t preapproved to buy.
Step #4: Meet With a Real Estate Professional
Now that you have a mortgage preapproval in hand and know your price range, it’s time to meet with a real estate professional. Find out if your friends or family can recommend an agent for you, or search sites like:
In a nutshell, here’s how the real estate industry works: Most agents earn commissions that are paid by sellers. That’s great when you’re a buyer because you can work with a professional for free. However, remember that an agent generally represents and must protect the best interests of the party who pays them.
If you want representation as a buyer, you have to work with an exclusive buyer’s agent. They could charge you directly, or they may split a commission with the agent who’s paid by the seller. A buyer’s agent has the same access to homes listed for sale that a seller’s agent does—but they represent your best interests in negotiations.
Find a few agents who specialize in the area where you want to live and arrange to interview them face-to-face or by video chat. Ask questions about:
how they’re paid
whether they represent buyers or sellers
how they research available properties
how long they’ve been in the business
whether they work with For Sale By Owner properties
what they think about the local real estate market
Choose an agent that’s knowledgeable, personable, and seems like the best fit for you. A good agent acts like a project manager and a psychologist in one. They help you navigate through a myriad of tasks and negotiations that have to be completed before the seller hands you the keys. You’ll find out more about these in Part 2 of this series.
Step #5: Tour Listings for Sale
When it comes to buying real estate, you’ve heard the mantra: Location, location, location. If you don’t know exactly what neighborhood you want to live in, your agent can recommend the best places for your budget.
Web sites like trulia.com and neighborhoodscout.com are excellent resources for information about demographics, crime, and the best schools. Even if you don’t care about things like living in the best school district or being close to public transportation, they make all the difference in the price you get when you sell the property down the road.
As you tour properties, take pictures and notes so you remember all the details. Your real estate can give you information about property taxes, association dues, sales history of the property, and anything else you need to know. Finally, remember that the listing price is just a starting point for negotiations.
In Part 2 of this series, we’ll cover steps 6 through 10 so you know the right way to make an offer, get it accepted, and end up smiling at the closing table.
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Credit Score Survival Kit – a free video tutorial to correct credit reports and raise your scores!
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