Whether you’re a first-time buyer or an experienced homeowner, buying a new home is always stressful. Here’s a handy checklist of six things you can do upfront to make the process a lot easier. Before you start packing, here’s what you need to do.
STEP 1: Prepare/update your budget
You need a clear picture of your family’s finances before you even think about buying a home. If you already have a budget, review it to make sure it’s current and accurate. Otherwise, list all your monthly fixed expenses, such as car payments, current rent or mortgage, utilities, school tuition, and loan payments. Add categories for other expenses such as food and entertainment. Next, list your debts. If you have existing credit card debts, student loans, or other debts that require regular monthly payments, get them down in black and white, so you know exactly how much you owe.
STEP 2: Make a list
Consider your needs vs. wants. Be sure you know the difference! You need three bedrooms. You want a swimming pool. It’s crucial that you are upfront with your Realtor about exactly what constitutes a deal-breaker in your purchasing process. When more than one person is involved in making the final decision, be sure that you are more or less in agreement about needs and wants. If one spouse wants a short commute and the other has visions of a country estate, you could have a problem. Try to resolve these issues ahead of time.
STEP 3: Find a REALTOR
Chemistry is important. You want to find a Realtor who represents you and puts your interests first. Your Realtor should be committed to meeting your needs, and also know the area and price range you’re looking in.
STEP 4: Ask the right questions
When you are talking to prospective Realtors, don’t be afraid to ask probing questions. And expect to get frank, straightforward answers. Here are a few to get you started:
- How long have you been in real estate?
- Do you represent both buyers and sellers?
- What is the number of buyers you’re currently working with?
- And the number of sellers?
- How many homes did you sell last year?
- What is your level of experience in the neighborhoods we are considering?
STEP 5: Figure out your debt ratio
There are plenty of online calculators that will do this for you. There are two ratios you need to know. The first is your housing debt expenses (including taxes and insurance) as a percentage of your gross monthly income, which should be 25-28%. The second is your installment debt ratio (credit cards and other consumer debt), which should be around 10-15%. Your total debt to income ratio should not be more than 40%.
STEP 6: Get pre-approved
#1 and #2 above are important because you want to get pre-approved for a loan before you start shopping. This is an important safeguard, to keep you from falling in love with something you can’t afford or can’t get a mortgage for. Getting pre-qualified means that you give a lender your overall financial picture, including your debt, income, and assets. The lender evaluates this information and gives you a ballpark figure of the mortgage amount for which you could qualify. Pre-qualification can be done over the phone or online, usually at no cost. Pre-approved, on the other hand, means that a lender evaluates your debt ratios, your credit report, and your overall ability to repay a loan and says, “Yes, I would loan this buyer X number of dollars to buy a home.”
The Bottom Line
Buying a home could well be the single most important decision you will ever make, both financially and emotionally. However, if you do your homework and prepare thoughtfully for the process, it can also be a fun and rewarding experience. Happy hunting!
