Are you in the market for buying a home? Recently, my husband and I decided to start looking for our first home. Of course, we initially thought about the fun things we want to do with our new home, such as decorating and making sure there is room for our dogs. What we did not think about was all the additional factors that come with buying a home like the real estate market and getting approved for a mortgage. Now that we are ready to start looking, we are thinking of all the ways we need to be prepared when getting ready to buy a home.
What should I do before buying a home?
Once you decide you are ready to purchase a home there is much to consider: finances, credit, FICO score, where to move, good neighborhoods, good schools, etc. Don’t let it overwhelm you as you begin this journey of home buying. You can check out the Comfort Zone where Charles and Kevin discuss tax and financial home buying tips, https://youtu.be/ziR_QgrtOMc, and keep on reading
Here are some ways to prepare for looking when buying a home.
- Figure out how much of a home you can afford – It is recommended to keep your mortgage payment around 25% of your monthly income (remember to check property taxes in your area and home owners insurance rates)
- Know your credit score – while each state has a different minimum your credit score can be, you want to at least have a 620 in most states to be approved for a mortgage.
- Get Prequalified – You want to make sure you can get prequalified for a mortgage. This will help your realtor and sellers know that you are ready to buy.
- Having a down payment – remember – the more you pay with your down payment, the lower the monthly mortgage costs will be.
- Choose a Realtor – check reviews, ask family/friends/coworkers if they have a realtor they can recommend.
- Check out home buying websites. It is easier now more than ever to search for homes with your criteria by checking out HAR, Zillow, Trulia and many more. You can get an idea of layouts you like, neighborhoods, check out the area around them for shopping needs, and use the mortgage calculator to estimate your costs with property tax and estimated home insurance.
You can read all the wise steps for buying a home here: https://www.cfinancialfreedom.com/12-steps-to-buying-a-home/
The price of your home
Let’s look into this a little deeper. When you are looking for a house, you want to make sure that you are comfortable with the cost. It will hurt more in the long run if you purchase a home that is more than you can afford to pay each month. This happens so often there is even a term – ‘house poor’. Don’t purchase too much house that you can’t afford to do anything else except live in your house. Make sure to look and ask about the tax rates in the area you are looking to purchase and if there are any HOA fees that need to be considered when you are starting your home buying process.
Your credit score is checked numerous times during your home buying journey. Check with your mortgage company as to what the requirements are to be approved for the mortgage you will be able to afford. Once approved for a mortgage, make sure you are not making any large purchases before you close on your new home. This includes cars, electronics, appliances, etc. These purchases can and will affect your credit score and may cause you to lose your mortgage or be charged a higher interest rate. Make sure to work very closely with your lender because paying off all debt prior to buying a new home while sounds great can actually hurt you when getting approved too.
Once you know your credit score, you can work with your mortgage company to get prequalified for a mortgage. I will go more in depth about the difference between pre-qualified and pre-approved below. However, once you are pre-qualified for a mortgage, you can start your home buying journey because you are one step closer to being approved for a mortgage.
It is recommended to have a down payment of at least 20% of the cost of the home. If you are looking at a house that costs $250,000, the down payment should be around $50,000. It is not a requirement to pay this much for your down payment, but the more you pay, the less your monthly mortgage payments will be. It shows lenders that you are ready for a house payment and will avoid having to take out Private Mortgage Insurance which will increase your cost. PMI rates are different with each lender. If you end up paying PMI remember that once you have 20% paid off you can ask to remove the PMI from your mortgage. Keep in mind that most states have a down payment assistance programs, as well as other programs for veterans, first time buyers and other. Make sure you look and see if you qualify for any assistance as well.
Your realtor becomes your best friend
When it comes to choosing your realtor, you want to make sure that you are working with someone who will be there to assist you, rather than just looking for that large commission they can get from your home purchase. Check reviews, ask friends/family/coworkers for any recommendations that they may have. It is best to be sure that you keep in contact with your realtor through your whole home buying journey. There will be early and late night phone calls as you eagerly wait next to your phone through the entire process and your realtor is someone you really need to trust to be your advocate in this process. Your realtor needs to be knowledgeable and able to answer any questions you have along with handling difficult sellers. They are your go-between and having an experienced realtor will make the process go much smoother.
What is the difference between pre-qualify and pre-approved?
Prequalifying is providing you with an estimate of what you might be able to borrow, based on your finances and your credit score.
Preapproval is as close as you can get to saying that you received a mortgage without the contract signed. Once preapproved, you will receive a preapproval letter that you need to provide to your realtor and should be valid for around 90 days.
Here is a great chart from ally.com that explains the difference.
What age is too late to purchase a home?
In reality, there is no age that will prevent you from purchasing a home, however there are some outstanding factors that do need to be considered. Look into when you are planning to retire and if your financials are in order to be able to afford a mortgage payment on your retirement savings. Also remember to keep in mind if there are any health declines, or if there is a premature death. If you’re retired check out this website for some great information on getting a loan – https://themortgagereports.com/60184/senior-home-buying-programs-and-mortgages-for-retirees.
When should I buy a house?
Just like wedding season, there is a home buying season. Traditionally, spring is the start of home buying season. The weather is warming up, and people are ready to be outside. Of course, with Covid, this has caused some delays and new ways to purchase homes. My husband and I have virtually toured homes that we were not able to see in person. Having a carpenter for a husband, he is very hands on, so he prefers to wait to see a house in person so he can make sure it is up to code.
While it may be scary to purchase your first home, it is also a very exciting time. Remember that it is not all going to be an easy journey. If you have any questions regarding home buying and what it can mean for the upcoming tax year, please give Molen and Associates a call at 281-440-6279. Our tax advisors are ready to answer any and all questions that you may have on any stage of your home buying journey.