September 23, 2020
Buying a Home Checklist — Part 1
What are the steps to buying your first home?
To be best prepared, it's really important to look at an overview of all the steps involved in buying a home as early as possible. As you review the checklist below, something may jump out as an item you need to focus more time and effort on. Early preparation will allow you to be the most efficient with your time and money and may even save you money by making the right choices.
Understand Your Housing Needs and Wants
This is a great way to start as you're about to embark on one of the most exciting times of your life, but also the time when you may be making one of the biggest purchases of your life. By taking the time to fully understand your needs and wants, you can narrow down your house shopping and avoid buying too much or too little home.
As you start thinking about your housing needs, think about how long you plan on being in the home. Is this your forever home, or perhaps a starter home? Do you plan to have children in this home, or do you already have children and need the additional bedrooms? Do you have pets, what is your commute like to work, are your family and friends nearby? Are you close to the places you like to hang out or shop? Are you looking for something rural or more urban? Will you have access to amenities like pools and gyms nearby? What are your schooling needs? It is best to create a detailed checklist of your needs and wants, but also understand that as you start your search, you may adapt this list as you learn more.
Check Your Credit Score
It's very important to check your credit score early in your home buying process. It's not uncommon for there to be potential errors from the credit reporting services. If there are errors, there are simple steps that you can use to have your credit fixed and updated. If your score is not what you'd like it to be, and could use a boost to help you secure a better interest rate, then understanding where you are credit-wise early in your planning will allow time to take action to increase your credit score.
If you start checking your credit early, you can likely start to reduce some outstanding debt, and maybe pay down your credit cards. Anything that you can do early in your home buying process to improve your credit score is time well spent.
Understand What You Can Afford
One of the best and simplest ways to start figuring out how much house you can afford is by using a home affordability calculator. Getting an idea of what you can afford before diving deeper into the homebuying process, will prove to be helpful in the long run.
Understand the True Cost of Home Ownership
It's somehow easy to think that the cost of buying a home is just your mortgage payment. Sure, that’s a large part of the total cost, but there are so many more things to consider.
Here's just a short list of items to consider when thinking about the total cost of homeownership.
1. Property taxes — which vary widely from state to state
2. Home insurance
3. HOA fees
5. Landscaping needs or tools
6. Ongoing maintenance and repairs
Create Your Budget
You will be tempted to increase your budget as you start to search, but the more you can stay on your budget the better. As you start to think about creating your budget, here are some possible costs you would want to consider budgeting for.
1. Closing costs which can typically be between 2-5% of the total loan
2. Down payment — needs vary based on your credit, type of loan, how much house, and more
3. Total cost of the home and monthly mortgage with interest
4. True cost of ownership — including utilities, maintenance, and more
7. Mortgage insurance if necessary
8. HOA fees if necessary, can be a large expense depending on your home, condo, amenities, and more
9. Miscellaneous items such as tools, lawnmower, hoses, furniture, and window coverings, etc.
Save for a Down Payment
While a VA loan can have a down payment as low as $0, most mortgages will require some type of down payment. The rule of thumb to avoid additional costs on a traditional mortgage is 20% down. This will save you from paying some type of mortgage insurance. Many loans today can be found with 3-5% down payment, but the larger your down payment, the smaller your loan, and overall interest over time. Starting to plan early for a home purchase will allow you to save as much as possible, get your credit in order, and pay off as many debts as possible.
Start Shopping and Understanding Different Types of Mortgage Options
There are a lot of different types of mortgage options available because everyone's financial situation is different. Lenders have devised great ways to enable people to get into their first home, but you need to understand your unique financial needs and what's available for you. For example, let's say you’re a veteran and maintain a good salary, low debt, high credit score but have little cash on hand. A VA Loan might be the perfect solution that fits those requirements.
Learning what the different types of home loans will allow you to choose the option that is best for you and your financial situation.
Get Preapproved for a Loan
Getting preapproved for a loan is not a guarantee that you will get a loan, but it is enough to show that you likely have the requirements to obtain a loan pending further review. It also shows sellers that you are a serious buyer with the ability to purchase their home. Additionally, it can help provide you with additional guidance on what you can afford and what you cannot afford.
These are the first steps in buying a home. Be sure to read Buying a Home Checklist — Part 2 to learn more about the following:
1. Finding the best real estate agent
2. Seeing multiple homes to compare and contrast
3. Making an offer
4. Next steps — inspections and possible renegotiating
5. Securing your financing
6. Closing on your home