If it’s your dream to own a home or purchase a second home then there are certain things you need to do. Here are five recommended things to do before you get a real estate agent or search for a home. There are other things you need to do to, but for the most part these five steps will give you a little insight into the pre-purchase process. If you have done all of this and are ready to move to the next phase, then move to the next helpful idea: Interview Your Agent: Questions to Ask A Real Estate Agent Before Signing on the Dotted Line (post coming soon).
Get and know your credit score.
- Credit scores can fluxuate and have a direct impact on qualifying for a mortgage loa.
- Recent problems with a mass leakage of user data from Equifax has people on edge. It’s highly important to monitor your credit score and credit report for changes.
- Find and fix credit report errors or problems.
- Pay down high interest credit cards and debt.
- If you have a low credit score and want a loan, then you need to begin the process of fixing your credit immediately.
- Do you have liens, garnishments, judgments, or student loan issues, or anything that could effect your credit score? all of this has an impact on getting a loan.
Know the financial means of purchasing a home.
- If you do not have the capital to purchase the home with outright cash or other non-conventional financing, then you may have to apply for a mortgage loan. Conventional loans are made through traditional banks or mortgage companies, or credit unions. The Federal Housing Administration offers several types of loans such as the 203(b), 203(k), and rural financing and you will need a lender who specialize in FHA financing. Depending on where the home is located different financing options are available.
- Mortgage rates vary. Not all loans are the same. Not all homes are the same. If a home needs substantial amounts of work, it may not qualify for a traditional mortgage or FHA 203(b) loan. The alternative is cash or find a rehabilitation loan to complete needed repairs. You will need a qualified contractor to assist you with getting the construction completed and finding a general contractor you trust can be a daunting task.
Get a list of must have in a home.
These are just a few ideas of the questions to ask yourself (family), if you are planning to purchase a home. This list is not exhaustive or conclusive, so add your own. Washington D.C., Virginia, and Maryland real estate markets are not the same.
- Do you need a home close to your job?
- What are your current and future needs? Are you planning to have a family in the future or in the next six months? Do you relocate often? Are you getting married?How much space do you need now and for the future?
- Got kids or family conscious? Parks, schools, events, restaurant availability, and events in the area have an impact on your home purchasing decision? Do you want to be close to your family? Consider the kids needs too.
- Got pets? Do you need a park that allows dog walking, accessibility to green space, and pet friendly venues?
- Are you older or enjoy the night scene? Are you into night clubs, theaters, or other events? Or are you looking to down grade your current home? Do you or your family enjoy the free museums located in the Capitol? What about the National Zoo?
- Are you a runner, athletic, or fit conscious? Do you need a gym close by?
- Are you a sports fan? Do you need a location with plenty of sporting activities?
- Potential resale value? Are the home values increasing or decreasing in an area? (You do not want to overspend)
- Do you need certain amenities? A pool, parking garage, fitness center (condo)
- What type of home would suit you better? Want a single family, multi-family, condo, or town home, rural, or tiny home?
- What area, state, or part of town do you want to live in?
- What could you live without?
- What municipal services are offered and what are the cost? Does the home have a Home Owner’s Association?
- Are you or any one living with you disabled, handicapped, or elderly? Do you need a handicap accessible living space or something that can be easily modified?
Know the home values of the houses in the area you want to purchase.
Save or know the source of your down payment and closing cost.
- Do a complete financial self audit. This method requires you to painstakingly look at your own spending and saving habits. You have to do some tough love for yourself and really find out if you will actually be able to afford to purchase a home or not. Most people gloss over this step in the home purchasing process, but the self audit is a way to force you to change old financial habits.
- Pull out your bank statements, bills, and pay check stubs. Know where your money is actually going each month.
- When you apply for a loan, the lender looks at your spending habits. They review pay check stubs (and sometimes during the loan process will send a letter to your employer to verify you are currently employed).
- Set a budget together and stick to it.
- Budgeting allows you to find un-necessary expenses and find alternative methods. For example if you spend $10 per day on lunch, the alternative is bringing your lunch to work. The solution saves you $50-70 per week! That’s possible savings of at least $2,600.
- Part of the budgeting process is also saving money on your expenses,especially at the grocery store or whenever you spend money. Do an online search of “couponing websites” to get started. Yes, this method of saving requires you to do some work such as printing and clipping coupons from a paper, but the difference could save you money each month on your grocery bill. Many big box retailers have amazing coupons on clothing, shoes, appliances, and more. Just research prior to purchasing.
- Sometimes it’s best to leave the debit and credit cards at home. Use cash instead. Cash is an allowance. Once it’s spent, you have to wait for the next allowance to kick in. Yes, this method requires self discipline. For example, if you only take $100 to the grocery store, you will learn quickly to only spend that amount. This will force you to only purchase essential items. Does it work? Yeap and you will begin to see a change in your eating habits and get a better understanding of grocery store prices, which help your budgeting for groceries.
- Debt to Income Ratios (DTI) are a big factor in the lending process. If you have a too high DTI, then it may be difficult to get a loan. Do not go and purchase expensive items before purchasing a home. Ahem, that new car you want, drives up your debt to income ratio. Most lenders cap the DTI at between 28-30%, with FHA a little higher at 36%. (Note:These standards could change at any time.)
- Pay down high debts.
- Try not to change jobs. Mortgage lenders look at time on current job as a factor in the lending process.
- Pay your bills on time if you plan to get a loan.
- Lenders look at your assets and liabilities, retirement accounts, and more to determine mortgage loan eligibility. You should too.
- You may be able to get a loan that overs 103% of the mortgage (100% of the loan 3% closing cost). But with the past housing crisis, this option probably is the hardest obtain. FHA loans require 3-3.5% down payments and allow the seller to pay up to cover up to 7% of closing cost. However, these rules can change at any time.
- If you decide to go the conventional method of financing, most lenders require between 0-25% down payment. Twenty-five percent down payments are usually directed toward’s people who are investing in real estate.
- Down payments and closing cost can be come from a variety of sources including, but not limited to:
- Gifted by family members,
- Come from your own funds, or
- Down payment assistance programs.
Hopefully, over the course of time, you will begin to see that the effort you make now will have a positive effect on your future home purchasing process.