Buying a house isn’t all fun and games. A good portion of the process is strictly business, especially when it comes to securing a loan. If you’re a “numbers junky,” you might actually enjoy the financial part of preparing for the purchase. However, most people find it to be the least exciting part. Either way, getting your financial house in order before you buy is a necessary evil and worth the legwork. Here’s how to get your act together.
Step 1: Examine your overall financial situation and goals
Before you do anything, take the time to map out your long-term financial goals. You don’t want to be looking at your home purchase in a vacuum: The type of property that you buy should fit into your overall strategy. For instance, getting into your dream house may be your top priority, but at what cost? It’s okay to max out your budget as long as you’re prepared if you need to sacrifice on other aspects in your life — cutting back on vacations, dinners out, etc. On the other hand, you may decide to prioritize other things, meaning you’ll have to compromise on your living situation.
After all the research, you’ll feel well-informed and ready to shop smart! Or, you may learn that you have some work to do on the financial front before you’re ready to put in an offer.
For younger buyers, there can be several competing financial goals: Paying off student loans or planning a wedding. There are many ways for homeownership to fit into your lifestyle, but you have to figure out the best way to approach it for your situation.
Step 2: Put together your budget
The next step is to determine what you actually want to spend. Know that what you can afford and what you feel you should spend can be two entirely different things. While you may be in a financial position to buy a $500k house, after coming up with an overall plan, you may decide that spending $300k is much more practical.
There are several tactical steps that you can take to come up with a budget. The first step is to get a handle on home prices in your preferred neighborhood. You can check out the inventory on RealEstate.com to get a rough idea of pricing. From there you can start to put together your budget.
The good news is that there are many loan options available to first time buyers. The bad news is that it’s up to you to wade through all of the options to figure out what’s best for you.
First consider the costs associated with buying property. At a minimum, you’ll need to come up with enough money to cover the down payment and closing costs. By putting down at least 20 percent of the purchase price, you can avoid paying the private mortgage insurance (PMI) fees that are typically associated with lower down payment programs.
Next, you’ll want to determine the cost of ownership on a monthly basis. Use RealEstate.com's All-In Pricing tool see monthly cost per home. Bear in mind that these estimages may not include some of the additional charges that can come with owning a house or condo (think trash pick up, landscaping and more). It’s best to use conservative numbers and play it safe.
You can also speak to your friends and family who already own property to help you fill in holes in your budget and to ensure that you have a comprehensive tally of the overall costs involved. If you need help with the math, check out this article to determine your ideal home price.
Step 3: Prepare your financial documents
At this point, you’ve made some great headway in the process. Now it’s time to really get organized. No matter what lending institution you choose for a mortgage, the lender will require some basic info. The typical laundry list of documentation that will be essential for your loan pre-approval includes bank statements, W-2s, paystubs and tax returns. If you are self-employed, the lender may require two years of tax returns. If you’re not someone who has all this information readily available, then you’ll want to take the time to track everything down.
Your credit score will also come into play and you may want to pull a report from the credit bureaus (Experian, TransUnion and Equifax) to make sure you’re in good standing. Don’t panic if your score comes back lower than expected. There are ways to give it a boost before you start your house hunt, and a good lender can provide you with guidance.
Step 4: Get informed about your lending options
There are countless lending institutions and programs at your disposal. The good news is that there are many options available to first time buyers. The bad news is that it’s up to you to wade through all of the options to figure out what’s best for you.
You can start by reading about different types of mortgages and loan providers. There are a variety of products that are especially appealing to buyers who are light on cash and need a low down payment or low monthly cost. If you’re a first time buyer, one of these may be your best bet.
Next, you’ll want to speak with a few lenders to see what they have to offer and to get pre-approved for a mortgage. It’s never too early to start the discussion. Lenders will be able to give you a strong sense of where you’re at and the steps you may want to take to obtain a loan with favorable terms.
Step 5: Get yourself ready to buy
Hopefully, after all the research, you’ll feel well-informed and ready to shop smart! Or, you may learn that you have some work to do on the financial front before you’re ready to put in an offer. Don’t be discouraged. Ask your lender for specific directions on how to put yourself in a better position and come up with plan of attack on how to overcome common mortgage problems. Don’t buy until you feel ready.