7 Steps to Take Before You Buy a Home

By: G. M. Filisko

Published: February 10, 2010

By doing your homework before you buy, you’ll feel more content about your new home.

1. Decide how much home you can afford

Generally, you can afford a home priced 2 to 3 times your gross income. Remember to consider costs every homeowner must cover: property taxes, insurance, maintenance, utilities, and community association fees, if applicable, as well as costs specific to your family, such as day care if you plan to have children.

2. Develop your home wish list

Be honest about which features you must have and which you’d like to have. Handicap accessibility for an aging parent or special needs child is a must. Granite countertops and stainless steel appliances are in the bonus category. Come up with your top-five must-haves and top-five wants to help you focus your search and make a logical, rather than emotional, choice when home shopping.

3. Select where you want to live

Make a list of your top-five community priorities, such as commute time, schools, and recreational facilities. Ask your REALTOR® to help you identify three to four target neighborhoods based on your priorities.

4. Start saving

Have you saved enough money to qualify for a mortgage and cover your downpayment? Ideally, you should have 20% of the purchase price set aside for a downpayment, but some lenders allow as little as 5% down. A small downpayment preserves your savings for emergencies.

However, the lower your downpayment, the higher the loan amount you’ll need to qualify for, and if you still qualify, the higher your monthly payment. Your downpayment size can also influence your interest rate and the type of loan you can get.

Finally, if your downpayment is less than 20%, you’ll be required to purchase private mortgage insurance. Depending on the size of your loan, PMI can add hundreds to your monthly payment. Check with your state and local government for mortgage and downpayment assistance programs for first-time buyers.

5. Ask about all the costs before you sign

A downpayment is just one homebuying cost. Your REALTOR® can tell you what other costs buyers commonly pay in your area—including home inspections, attorneys’ fees, and transfer fees of 2% to 7% of the home price. Tally up the extras you’ll also want to buy after you move-in, such as window coverings and patio furniture for your new yard.

6. Get your credit in order

A credit report details your borrowing history, including any late payments and bad debts, and typically includes a credit score. Lenders lean heavily on your credit report and credit score in determining whether, how much, and at what interest rate to lend for a home. Most require a minimum credit score of 620 for a home mortgage.

You’re entitled to free copies of your credit reports annually from the major credit bureaus:Equifax, Experian, and TransUnion. Order and then pore over them to ensure the information is accurate, and try to correct any errors before you buy. If your credit score isn’t up to snuff, the easiest ways to improve it are to pay every bill on time and pay down high credit card debt.

7. Get prequalified

Meet with a lender to get a prequalification letter that says how much house you’re qualified to buy. Start gathering the paperwork your lender says it needs. Most want to see W-2 forms verifying your employment and income, copies of pay stubs, and two to four months of banking statements.

If you’re self-employed, you’ll need your current profit and loss statement, a current balance sheet, and personal and business income tax returns for the previous two years.

Consider your financing options. The longer the loan, the smaller your monthly payment. Fixed-rate mortgages offer payment certainty; an adjustable-rate mortgage offers a lower monthly payment. However, an adjustable-rate mortgage may adjust dramatically. Be sure to calculate your affordability at both the lowest and highest possible ARM rate.

More from HouseLogic

Learn how Fannie Mae and Freddie Mac mortgages can help you save on financing

Learn more about the costs of homeownership

Other web resources

Homebuyer counseling resources

Get a free credit report from each of the three credit reporting bureaus

G.M. Filisko is an attorney and award-winning writer who has thrice survived the homebuying process. A frequent contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.

Avoid Buyer Mistakes!

With a little preparation, finding and purchasing your home can be a positive experience.  But, if you stumble into some common pitfalls, the process can turn into a nightmare.  These tips will help you avoid seven common mistakes buyers make.
 
1. Pleading financial ignorance
A little preparation goes a long way.  Be a smart consumer.  Learn financing basics before you start shopping.  Explore your options.  Ask questions.  Know how to shop for a home loan that’s right for you.
And it’s always a good idea to get pre-approved by a lending institution.  This simple step takes very little time and lets you know the price range that fits your lifestyle.

2. Buying on impulse
The last thing you need is to close a deal and realize you bought a house you don't want or like.  Ask yourself what you're looking for in a home, before you shop.  Think about size, commute time and necessary repairs.

3. Running up high debt
Don't make major purchases until after you buy your home.  Pay down credit cards and don't apply for new ones.  Remember, financial institutions evaluate your financial situation on your gross monthly income.  Your total monthly house costs shouldn’t exceed 28 percent of your gross monthly income.

4. Taking too much time
Sometimes homes sell quickly, so be ready to make fast decisions (this is why you prepare before you start your search).  Be accessible to change terms and have easy access to your real estate agent.  Instant communication can mean the difference in purchasing the property of your choice.

5. Submitting a weak offer
Sellers want a fair price, and they want to know a potential buyer is serious.  Submit a strong offer and include a substantial earnest money deposit.  Sometimes offers are accepted based on the amount of the deposit.

6. Being too picky
Fewer contingencies mean a stronger offer.

7. Neglecting the homework
Skipping a few easy steps in the buying process can be disastrous in the long run.  Make sure you know what you’re getting – before you buy.  Here are some things to do:
• Hire a professional building inspector or appraiser. Makesure the house is in satisfactory condition.
• Check zoning regulations and covenants. Good residential neighborhoods are zoned to keep out commercial and industrial users. Read any restrictive covenants; make sure they fit your lifestyle.
• Request an updated property survey. Be sure it clearly marks boundaries. Check for problems.
• Make sure you know what stays or goes.
• Your contract should be very specific about which items (appliances, etc) are included in the sale.
• Get agreements in writing. Make certain verbal agreements are written into the final contract to avoid any stressful and expensive issues later.

Stop Paying Rent!

Tired of paying rent for an apartment or house that doesn’t feel like home?  Dreaming of your own place but short money for the down payment?

You’re not alone.  For many renters, buying that first home seems like an impossible task.  They feel trapped in the renting cycle.

Fortunately, you can break free.  Armed with professional information, you can make owning your own home a reality.

Buying your first home is a huge hurdle, especially coming up with the down payment.  This report features professional tips and facts to help you in the process.  Learn about new financing options.  Look at your assets in a new way.  This information may solve your financing dilemma.

Explore low down payment options
You know you can make the monthly payments (you already do that), but where will you get the down payment for your home?  How can you possibly save enough money when you’re pouring your money into rent each month?

Fortunately, you may not need as much as you think.  There are many low-down payment, even zero-down, programs available.  Ask your real estate agent for information and get referrals to lending institutions.  Call all the banks and mortgage companies listed in your phone book’s yellow pages and ask about options.

Research home loans on the Internet.  You may be surprised at what you find.

There are also local and federal government programs designed to help renters become homeowners.  Again, ask your real estate about these programs.  A little homework may make the difference in financing your first home.

Work with the sellers
Ask the sellers if they’re willing to act as your lender and carry the loan.  Sometimes, if you commit to pay more than the asking price – or pay a higher interest rate – sellers carrying the loan won’t require a down payment.  Use the assets you already have.

If you don’t have debt and own an asset (like a car or boat) free and clear, you may be in better shape than you thought.  Ask your lending institution if they’ll lend you the down payment using your asset as collateral.  While this option may come with a high interest rate, it might work for you.

Ask Friends or Family Members for Help
Most lending institutions allow borrowers to use gifts for their down payment.  Perhaps a friends or family member is in the financial position to help you purchase your first home.  It’s worth considering.

Keep Saving
While you explore your options, continue to save on a regular basis, even if it’s only $25 a month.  Not only will this will take you closer to your goal, it will show lending institutions you have a record of responsible saving.