Buying a home is an exciting opportunity to fulfill one of your biggest life goals, acquire an asset, and set yourself up for a better financial future. That said, it can be easy to get ahead of yourself when it comes to the home-buying process. While dealing with the details might not be as exciting as skipping straight to house hunting, there are several essential steps you need to take in order to put yourself in the best position as a homeowner.
Make Sure Your Finances Are in Order
The first thing you should do before moving forward with your plans to buy a house is to make sure your finances are in order. This is important for two reasons. First, mortgage lenders will be looking at your financial profile to qualify you for a loan. And secondly, because you need to ensure that you are at a point in your life where you can afford the costs of homeownership, which not only includes your monthly mortgage payment but expenses like homeowners’ association fees, maintenance, and emergency repairs.
There are three specific financial factors that lenders take into consideration that you should understand:
- Credit score: The better your credit score is, the better loan terms you can qualify for, including a lower interest rate that can save you substantially over the lifetime of your loan. If your credit score is at the lower end of the spectrum, research how to improve your credit score before applying for a mortgage.
- Debt-to-income ratio: This is the ratio between how much income you bring in versus your expenses (including debt like loans and credit cards). Mortgage lenders use this ratio to determine how much free income you have to take on another loan.
- Down payment: For most types of loans, a down payment is required. While the traditional standard has been 20% down, there are many loans that now allow you to put forward much less. However, you want to put down as much as possible in order to secure more equity in your house and improve your loan terms.
Research Types of Home Loans
There are many types of home loans available, some of which you may not even realize you qualify for. When researching home loans, consider your unique circumstances and see if there are any special loan types that may apply. While you may have heard of first-time-buyer loans that are more flexible, there are also mortgage benefits for service members and their families. For example, if you’re a veteran, simply comparing the pros and cons of VA and conventional loans will quickly reveal that a VA home loan can help you save substantially.
Get Pre-Approved for a Mortgage
Getting pre-approved for a mortgage provides you with a clear understanding of how much you can afford and what price points to look at once you start your search. With pre-approval and an understanding of how large of a loan you can get from your lender, you’ll be able to avoid the heartbreak of accidentally get your hopes on a home that’s way outside your price range, which can really put a damper on what is supposed to be the fun part of the process.
Having pre-approval also speeds up the timeline on loan qualification, so that when you find the home of your dreams, you don’t have to start the process from scratch. This gives you a leg up on other interested parties who may have skipped this step.
Hire a Reputable Real Estate Agent
Your real estate agent can be your biggest asset in the home-buying process. They will help you find homes that fit your new-home wishlist, negotiate the best price, and walk you through each step, so you don’t miss anything that needs to be done before closing. Before hiring a real estate agent, make sure to vet them. Read reviews to see how the experience with the individual was for other homebuyers. This is a big decision and you don’t want to mess it up by working with someone who doesn’t have your best interests in mind. Take your time to find the right real estate agent. When in doubt, reach out to friends or family for recommendations to find someone you can trust.
By laying the groundwork as you move through the process, you’ll be in a much better position to find the right home and a mortgage you can actually afford.