Buying a home is usually the single largest purchase most people make in their lifetime. Combined with the high emotions encountered during the process, it's easy to get carried away. By following some simple steps when purchasing a home, you can save significant amounts of money and ensure you make a wise real estate investment with minimal stress.
Here are six things you must do before buying a home:
1. Determine How Much You Can Afford: A great way to determine if you can afford a mortgage payment is to estimate the amount you anticipate it being and then save that amount as if you were actually making the payment. If you pay, for example, $1,000 per month in rent and anticipate a mortgage payment of $1,300, save the extra $300 per month for a few months to see how affordable it really is. This will give you a real sense of the actual affordability of your home purchase and help you determine your comfort level with debt. You can go online and find a mortgage calculator that will give you an accurate estimate of your payment. Don't forget to set aside at least a couple of hundred dollars per month for maintenance because, as any homeowner will tell you, issues will arise.
2. Budget for Closing Costs: Typically, homebuyers will pay between 2% to 5% of the purchase price of their home in closing fees. So, if your home costs $150,000, you might pay between $3,000 and $7,500 in closing costs. On average, buyers pay roughly $3,700 in closing fees. Buyers are often surprised by the amount of closing costs and opt to roll them into the mortgage. If the lender offers this option, you've probably guessed that this is a very expensive way to pay the closing costs, considering you amortize them over the life of the mortgage, either 15 or 30 years. It's much cheaper to save up and pay the closing costs in cash.
3. Save for the Down Payment: The appeal of buying with little or no money down is obvious. You don't need a large sum of money, and you can use your savings for furnishings and home repairs. Plus, you can probably buy sooner rather than later. But there are several drawbacks to borrowing the entire or most of the purchase amount. In the same way that rolling extra costs into your mortgage costs you a lot extra in the long run, it's best to avoid loans that only require a minuscule down payment. The larger your loan, the higher your payments will be, and you'll be stuck with that payment for the life of your loan. When you're stuck with a large payment, you have fewer options in the future. Injuries, job changes, or other surprises may be harder to accommodate. Borrowing more than 80% of your home's value will increase the overall cost of your home. You might not need to write a check today, but you'll pay much more interest on your loan than you would have with a substantial down payment. That difference in interest can amount to tens of thousands of dollars over the life of your loan. When you borrow more than 80% of your home's value, you'll need to pay PMI or private mortgage insurance, which protects your lender and usually costs you about 1% of the entire loan amount each year. The only benefit you get from that payment is the opportunity to buy with little money down. That expense can add thousands more to your total lifetime cost and further increase your monthly payment.
4. Boost Your Credit Score: Ensuring your credit is as high as possible will be beneficial when getting a mortgage. The credit score is the number your bank will use to determine if you're a safe borrower. Always pay your bills on time. In fact, most lenders won't even consider lending unless your credit score is at least 620. If your credit score is below this, consider improving your score before applying for a mortgage. In general, the higher your credit score, the lower your interest rate will be, which will significantly reduce your mortgage payment. A small difference in the interest rate on your loan will make a significant difference, especially during the first several years when your mortgage payment is mostly interest and very little principle. For instance, an interest rate one percentage point higher on a $300,000 mortgage will cost you nearly $200 more per month. You'll want to qualify for the best loan program with the lowest interest rate to keep your housing payment down.
5. Get Pre-approved: Getting pre-approved by your bank will benefit you in more than one way. Firstly, your bank will pre-approve you for a mortgage, taking into account factors such as your income, credit score, the amount available for the down payment, and other factors. Depending on your personal situation, the pre-approval from your bank will tell you the maximum they're willing to lend you based on your repayment ability. So, you'll have a general idea of your price range. Secondly, when you're ready to make an offer on a property, the seller will likely want to see your pre-approval letter, showing you're capable of purchasing the property. A strong pre-approval letter with your offer will show you're a serious buyer with the ability to close the deal.
6. Get to Know the Neighborhood: When buying a home, you're not just buying the property but a piece of the neighborhood too. You need to ensure the neighborhood is a good fit for you with the amenities you're looking for. To improve the likelihood of your property increasing in value, stay away from areas that are dirty, poorly maintained, and ensure the neighbors are keeping up with their properties. Check the crime rates and try talking to someone who actually lives in the neighborhood to see what they have to say. Walking, instead of driving, is a great way to get a feel for the area. Also, touring at night as well as during the daytime can be beneficial. In up-and-coming neighborhoods where new restaurants and stores are opening up, you'll likely see continued growth. The type of businesses opening up will also give you insight into the market trend. For instance, new daycares and family restaurants will likely show it's a popular location for young families. Keep in mind, you're much better off buying a less desirable home in a quality neighborhood than a remodeled home in a bad area.
If you follow these principles when buying a home, you're likely to make a wise financial decision and secure a great property that will provide you with a comfortable lifestyle and a return on your investment.