You’ve caught home fever! You have decided you want to purchase a home. All you can think about is how many bedrooms you want, the color of the kitchen appliances, and the style of blinds in your living room. Zillow is your most frequently visited website and NFL Sunday is replaced with Open-House Sunday.
Before you buy, here are some things to think about and some steps to take before signing on the bottom line:
Step #1 – Develop a plan:
A dream without a plan is just a wish. You need to put in the time and effort to make purchasing your dream home a reality. Before starting the buying process, you need to ask yourself some questions. Should you even buy? Maybe renting is a better option at this point in your life. Your advisor can help you come up with how much home you can afford. You always want to buy less home than you can afford. If you spend every penny you have on a down payment and then every nickel out of your paycheck goes towards the home, you may be setting yourself up for disaster. Take your time, think about the options, and don’t jump into a decision that you aren’t ready for.
Step #2 – Utilize Professionals:
Review your plan with your advisor. Odds are he/she has gone through this process before and knows how to avoid the traps and pitfalls that many wide-eyed home buyers don’t know of. Use a realtor that knows the area. Realtors that specialize in a region know the details and minutia that other realtors may not know. They can prevent you from overpaying for a property or purchasing a home that doesn’t fit your profile. Find a mortgage lender that is on your team. Someone who you can trust and is willing to work for you, not the commission. This may be the biggest purchase you ever make, you might as well do it the right way.
Step #3 – Know the Costs:
Buying a home is more than just the down payment and mortgage payment.
- Down Payment: Amount you put down to purchase the house
- Closing Costs: Additional Fees that can cost an extra 2-5% of the price of the home
- Mortgage Payment: Consists of principal and interest. The lower the down payment you put down, the higher the mortgage payment
- HomeOwner’s Association (HOA) Fees: Many areas require to you to contribute to the neighborhood, helping pay for upkeep or improvement of common areas
- Property Tax: In California, it costs around 1% of the property value, but can vary by state
- Homeowner’s Insurance: To help protect you from damage or personal liability on your home.
- Extra Insurance: Depending on the property, you may need to purchase additional fire, earthquake, or flood insurance
- Utilities: Homes don’t run for free. You have to pay for things like water, sewer, gas, electric and garbage
These costs can quickly add up and are often overlooked by prospective homebuyers. Don’t be blind-sided by these expenses and realize you can’t afford to live there after purchasing.
Step #4 – Don’t Buy a House, Buy the House you Want:
Before making a decision, go to the neighborhood. Take a walk or a bike ride in the area at different times to make sure you can envision your life there. Breathe it in. If you have children, make sure the house is in a good school district. If you have a dog, does that house have a backyard or dog park close by? How close is your home to your job? Studies show the easier your commute the higher your job satisfaction and productivity. If you hate traffic, don’t buy a home in a traffic infested area. Your home should be a haven, not a regret.
Step #5 – Learn About Your Home:
Do the due diligence that is necessary before purchasing a home. A good realtor can help you avoid purchasing a mistake rather than your home. Look for deal breakers. Has the home recently been in a fire? If it is in a flood zone? Is there water damage or mold? How old is the roof? Are there cracks in the foundation? Are there electrical or plumbing issues? If you don’t know these things, your dream home might actually be a nightmare.
Step #6 – Save, Save, Save:
The more you put towards a down payment, the lower your mortgage payment will be. Usually putting at least 20% down, allows you to avoid paying Primary Mortgage Insurance (additional fee). The more you put down, the more likely you are to qualify for a loan as well as receive better rates on that loan. Not putting much down, leaves you in a riskier situation as you are highly leveraged. If the market turns down you may end up owing more than the house is worth and could lose the home. The millions of people who lost their homes during the 2008 Financial Crisis can attest to this.
Step #7 – Credit is Key:
You’ll want to have an optimal credit score before purchasing your mortgage. The difference between a credit score of 650 and 750 can cost you thousands if not tens of thousands over the duration of the loan. Keep your credit score high. Maintain a low credit utilization ratio. Don’t have any hard credit pulls for 6 months to a year before getting the loan. Do not miss any payments! All of these things can ding your credit score which can cost you.
Purchasing a home can be a complicated, time consuming, and emotional process. Your advisor can help you develop a game plan. Make sure you buying a home that is right for you. Take your time and think before you ink.