Determine how much house you can afford, save for a down payment, and ease the home buying process.
Purchasing a home is a major life milestone and the largest financial transaction many people will need to navigate in their career, so it is understandable that the home buying process can feel overwhelming—especially if you have never bought property before. With a purchase this big, there can be a lot of work involved, including researching neighborhoods, building a team of advisors, understanding mortgage basics, and getting your finances in order.
1. Set Your Budget
Using a Mortgage Affordability Calculator, you can get a sense of how much home you can afford. You can then tweak that number based on your personal money situation and other financial goals. If you’re planning to retire or take time off from work soon, you might want to be more conservative with your budget, for example, but if you’re expecting a promotion or salary increase, you might want to look for homes at the higher end of your affordability range.
Your monthly payments are just one factor to consider when thinking about the cost of buying a home. You will also need to start setting aside money for a down payment and closing costs, move-in expenses, and an emergency fund for any home-related repairs or issues that arise once you move in.
If you expect your monthly expenses like utilities or homeowners insurance to increase once you move, take that into account as well. Finally, if you’re looking at homes that need a lot of work, think carefully about how much such improvements could cost and whether you will be able to live without them if money is tight immediately after the move.
2. Decide What Kind of House Fits Your Needs
Once you start seriously thinking about buying a home, do some research to narrow down the type of home you want. This might include checking out open houses and scouring listings online to get a sense of what type of homes are available in your area, the neighborhoods that appeal to you, and the ballpark cost of houses in those areas.
It is important that this step comes after you have identified a budget. You can use the budget to filter your house search and save yourself the heartache of falling in love with a house you simply cannot afford.
3. Work On Your Finances
No matter what your budget is, you can stretch your home-buying dollars further by saving for a larger down payment and working on your credit score. If you can afford a down payment of 20% of the home price, you can also avoid the cost of private mortgage insurance. While many first-time homebuyers are not able to save enough for a 20% down payment, the more you can save, the less you will need to borrow (and the lower your monthly payments will be).
At the same time, raising your credit score may enable you to secure a lower interest rate on your mortgage, which can be critical now that the Federal Reserve has begun aggressively raising interest rates to combat inflation, which results in higher mortgage rates. Even a small difference in interest rates can save you thousands of dollars over the course of a 30-year mortgage.
4. Get Prequalified for a Mortgage
Once you have put your finances in order, you need to work with a lender to get prequalified for a mortgage. While this doesn’t guarantee you will eventually be approved for a loan, it does show future sellers and their agents that you are a legitimate buyer and that you have worked with a lender who has checked your credit and verified other information to determine that you can qualify for a loan.
During the prequalification process, you can also work with your lender to determine whether there are any special mortgage programs for which you might qualify. Some states have incentives for first-time homebuyers, for example, and veterans may qualify for low-down-payment VA loan, which are issued by private banks and guaranteed by the U.S. Department of Veterans Affairs.
5. Start Your Home Search
Ask friends and family to recommend a real estate agent who has experience in the neighborhoods in which you’re looking and with buyers who have similar income and home preferences. Once your real estate agent starts showing you properties, you will be able to further refine your desired home qualities based on the available inventory and your budget. For example, you may need to choose between a home that is closer to the train station or one with a larger backyard. The more homes you see, the more you will be able to decide how you feel about such trade-offs.
6. Prepare to Move Quickly
If you’re in a hot housing market, making an offer as soon as you see a house that you like can give you a better shot at getting it accepted. This is another benefit to being pre-approved for a mortgage, since you likely already have your finances in order.
Work with your agent to determine a reasonable starting bid for properties you like. This will depend on several factors, including the competitiveness of your local housing market, the asking price on the property, and how long it has been on the market. While you want to make your offer as attractive as possible, be careful about waiving contingencies, especially for the home inspection, which should reveal any expensive repairs that need to be made.
7. Expect to Negotiate On Price
It is common for home sellers to come back to buyers with a counteroffer. That is often a sign that they are taking your offer seriously. Do your best to consider their proposal objectively and keep your emotions out of the process. If you and the seller are not too far apart on price, there may be other ways to sweeten the deal, such as being flexible on the timing for the move, negotiating on repairs needed, or increasing your money deposit.
Look for areas where you are able to make concessions, but keep in mind the ultimate market value of the house along with your budget to ensure that the final agreed price remains within a reasonable range. If the seller or the agents are pushing you to go higher than you feel you can afford, you should probably keep looking.
8. Apply for a Mortgage
Once you have a final offer, you’ll need to secure the financing for which you’ve already been preapproved. For this, you’ll need to provide additional documentation (for you and your partner if you’re not buying the house on your own), including pay stubs, tax returns, and a copy of the signed purchase agreement. You can make this process go more smoothly by having all documentation ready and by not taking on any new credit between preapproval and the home purchase.
If you expect interest rates to rise before you close on the sale, you might consider locking in your interest rate at the time of application.
9. Prepare for Closing On Your Home
Closing is the final step in the home buying process, in which you and the sellers sign paperwork and finalize the transaction, and you finally get the keys to your new home. Before the closing, your lender will give you a final closing disclosure form, which clearly outlines your mortgage fees and the terms of your loan.
There are also several closing costs that homebuyers typically are required to pay, including taxes, loan-related fees, and fees for a title search, which ensures the house is not encumbered by debt. These can amount to about 3%-6% of the cost of your house, but some programs allow you to roll the cost into the loan amount.
Buying a home is a huge decision and one that you shouldn’t rush—three-quarters of recent homebuyers have at least one regret about the home they bought, according to Zillow. By following the steps above, you can avoid such a fate and be confident in realizing your own dream of homeownership.
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